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This chapter examines theories of economic development and growth and asks how these can help in our understanding of the dynamics of changing individual circumstances in Palanpur. The core ideas of the Palanpur study, namely of non-farm diversification, evolving mobility and inequality, the responsiveness of institutions to change, sluggish progress in human development, and the critical role of entrepreneurship and initiative, are explored through the lens of conventional theories of development. Deficiencies in our conceptual understanding are identified (ways forward are suggested in Chapter 13). The chapter notes, however, that the rapidly growing fields of institutional and behavioural economics are particularly relevant to the Palanpur study and may come to offer important insights.

The final chapter of Part II highlights Schumpeter's seminal theory of economic development as a deliberate monetary conception and its genuine account of the nexus between finance and the real economy. Innovation and creative destruction critically depend on the creation and reallocation of purchasing power through finance. The chapter offers a brief reconstruction, which assimilates Schumpeter's further elaborations on selected themes in his later publications along several basic premises, such as open opportunity sets, entrepreneurship and innovation, temporary monopoly profits, or discontinuous change. Furthermore, venture investors must trust the entrepreneurs' vision and provide them with the purchasing power needed to control the means of production in advance. Successful innovations induce imitation and their progressive diffusion annihilates the temporary monopoly surplus, thereby decreasing prices, raising demand and fostering the overall growth of real income. Moreover, innovations do not occur independently, but are clustered, generating overlapping waves of business fluctuations.

We provide the economic and political context for Denmark in the first decades of the period we consider. Denmark was a relatively poor country before the mid-nineteenth century, based on most GDP/capita and real wage estimates. We summarize economic theories pertinent to understanding and contextualizing Denmark’s economic performance over this period, specifically those relating to geography, demography and the disease environment, institutions and politics, human capital, and culture. Finally, we present a historical overview of the Danish experience. We find that Denmark was a poor country which had suffered immensely through various military defeats, but which nevertheless enjoyed a fortuitous geography (aided by various investments in infrastructure) and was in the process of undertaking an ambitious institutional reform program. This included reforms of both central and local administration, the establishment of scientific societies, a scientific press, and institutions for higher education, schools, and a gradual (but sometimes interrupted) embrace of enlightenment thought.