Erik S. Reinert
Erik S. Reinert (born 1949) is a Norwegian economist and economic historian who has spent his career developing an alternative to mainstream neoclassical economics for understanding development, wealth creation, and poverty. He is currently a professor at the Tallinn University of Technology and a senior researcher at The Other Canon Foundation, which he founded to promote what he calls “Other Canon” economics — the tradition of economic thought based on production, technology, and increasing returns rather than exchange, equilibrium, and comparative advantage.
How Rich Countries Got Rich… and Why Poor Countries Stay Poor (2007) is his most accessible work, presenting his heterodox development economics framework in a form aimed at general readers, policymakers, and development practitioners.
How Rich Countries Got Rich… and Why Poor Countries Stay Poor (2007)
The Core Argument
Reinert’s central claim is historically subversive: every currently rich country became rich through policies that are now prohibited or discouraged for poor countries. The rich nations industrialized behind tariff walls, with active state support for manufacturing, and only opened their economies to free trade after they had developed competitive industrial sectors. They now advise poor countries to do the opposite — to liberalize immediately, embrace comparative advantage in raw materials, and trust the market.
“If you take anything from this book, let it be this: if you want to understand the causes of American and European prosperity, study the policies of those who created it.” — Erik Reinert, How Rich Countries Got Rich
“rich countries got rich because for decades, often centuries, their states and ruling elites set up, subsidized and protected…” — Erik Reinert, How Rich Countries Got Rich
“Both these audiences must appreciate that the main difference between rich and poor countries is that rich countries have all moved through a stage without free trade, which — when successful — subsequently made free trade desirable.” — Erik Reinert, How Rich Countries Got Rich
Increasing vs. Diminishing Returns: The Structural Divide
Reinert’s analytical framework hinges on the distinction between activities subject to increasing returns (manufacturing, advanced services) and diminishing returns (agriculture, raw material extraction):
“When production is expanded in manufacturing industry, cost developments go in the opposite direction — down rather than up. Once mechanized production has been set up, the larger the volume of output, the lower the cost per unit produced.” — Erik Reinert, How Rich Countries Got Rich
Manufacturing exhibits increasing returns to scale: as volume increases, unit cost falls. This creates market power (the ability to influence price), economies of learning, and the capacity to innovate further. Agriculture and raw material extraction exhibit diminishing returns: the most productive fields are farmed first, so expansion means declining productivity.
“Rich countries display generalized imperfect competition, activities subject to increasing returns.” — Erik Reinert, How Rich Countries Got Rich
“Poor countries specialize in activities that have one or more of the following three characteristics: (a) they are subject to diminishing rather than increasing returns, (b) they are either devoid of learning potential; and/or (c) the fruits of learning — rather than producing local wealth — are passed on to their customers in the rich countries in the form of lower prices.” — Erik Reinert, How Rich Countries Got Rich
This last point is crucial: even when poor countries get better at producing raw materials, the productivity gains flow to consumers in rich countries as lower prices — not to workers or firms in the producing countries as higher wages or profits. This is a structural trap.
The Critique of Comparative Advantage
Reinert’s most direct attack is on Ricardo’s theory of comparative advantage — the foundation of free trade advocacy:
“That a nation specializes according to its ‘comparative advantage’ means that it specializes where it is relatively most…” — Erik Reinert, How Rich Countries Got Rich
Comparative advantage theory says: even if Country A is absolutely better at producing everything, it still gains from trade by specializing in what it does relatively best. Reinert’s objection: this theory abstracts away precisely the factors — increasing returns, technological change, learning spillovers, sector-specific synergies — that determine whether a country grows rich or stays poor. Free trade between an advanced industrial nation and a raw material exporter is not mutually beneficial when the manufacturer captures all the gains from increasing returns.
“Free trade between a Neolithic tribe and Silicon Valley will tend to make both trading partners equally rich… Other Canon trade theory, on the other hand, insists that free trade is beneficial to both parties only when they have both reached the same stage of development.” — Erik Reinert, How Rich Countries Got Rich
The Physics Metaphor Problem
Reinert diagnoses mainstream economics as captured by inappropriate metaphors from physics — specifically, equilibrium models that assume the economy tends toward a stable, optimal state:
“Standard textbook economics is created as an abstraction from an economic scenario in the same way that the game of chess is created as an abstraction of a war scenario. But just as the war in Iraq is not solved by referring to the rules of chess, the problems of world poverty are not solved by referring to an economic theory that does not contain key variables from factual knowledge.” — Erik Reinert, How Rich Countries Got Rich
“The physics-based models that have virtually monopolized the discourse tend to exclude precisely those factors that create wealth, factors that are present in wealthy countries but not in poor ones: imperfect competition, innovations, synergies between economic sectors, economies of scale and scope.” — Erik Reinert, How Rich Countries Got Rich
Hamilton vs. Jefferson: The American Precedent
Reinert argues that the United States provides the best historical model for poor countries today — precisely because it industrialized against the advice of free trade advocates:
“There is an important pattern here: since its founding fathers, the United States has always been torn between two traditions, the activist policies of Alexander Hamilton and Thomas Jefferson’s maxim that ‘the government that governs least, governs best’… This rivalry has been resolved by putting the Jeffersonians in charge of the rhetoric and the Hamiltonians in charge of policy.” — Erik Reinert, How Rich Countries Got Rich
Hamilton’s industrial policy — tariffs to protect infant industries, state-supported banking, internal improvements — is what actually drove American industrialization. The Jeffersonian rhetoric of free markets was the ideological cover; the Hamiltonian policies were the actual practice.
The Washington Consensus Critique
Reinert’s most politically pointed argument targets the IMF/World Bank policy prescriptions that dominated development economics from the 1980s through the 2000s:
“The economic policies of the Washington Consensus — the basis for the economic policies imposed by the World Bank and the International Monetary Fund — are exclusively built on the type of theory which is represented by Paul Samuelson.” — Erik Reinert, How Rich Countries Got Rich
“Just as cancer patients are given palliative treatment — treatment that relieves the pain without attempting to cure the disease — we are witnessing an increasing focus on palliative economics as a substitute for development economics.” — Erik Reinert, How Rich Countries Got Rich
Aid, debt relief, and humanitarian assistance address symptoms of poverty; they do not address the structural causes (the absence of industrial sectors with increasing returns). Reinert calls the international development community’s focus on palliative measures without structural change “welfare colonialism.”
Intellectual Position
Reinert explicitly locates himself in the “Other Canon” tradition of economics — the tradition represented by Antonio Serra (1613), Friedrich List (1841), Alexander Hamilton (1791), and later by Gunnar Myrdal, Raúl Prebisch, and Albert Hirschman. This tradition emphasizes production, technology, and increasing returns rather than the exchange-based equilibrium model of Smith, Ricardo, and their descendants.
His work has had significant influence on heterodox economists, development practitioners, and some policymakers, particularly in Asia (where countries like South Korea and Taiwan followed industrial policy approaches closer to Reinert’s framework than to Washington Consensus prescriptions, and achieved remarkable development outcomes).
Ideological Positioning
Reinert’s framework is explicitly political as well as analytical. His critique of free trade, the World Bank, and the IMF aligns with left-heterodox development economics. His positive case for industrial policy has been used to support both social democratic and nationalist economic programs. Readers should be aware that his empirical claims (which are often well-supported historically) are embedded in a policy framework that is contested.
Related Concepts
- incentives-and-information-asymmetry — Reinert’s analysis of how economic theory serves the interests of rich nations at the expense of poor ones is a structural information asymmetry argument
- leverage-and-specific-knowledge — Increasing returns in manufacturing are the national-economy equivalent of Naval Ravikant’s leverage at the individual level