Abstract
Early developments of growth theory are seen widely as the result of a two-step process—the first represented by Harrod’s Essay in Dynamic Theory, and the second by Solow’s 1956 model. Harrod is considered to be the first to highlight the pervasive instability in macrodynamics, which Solow showed disappeared with the inclusion of flexible-coefficient production functions. It has been recognized since that this is a misreading (Besomi 1995, 1998; Bruno and Dal-Pont Legrand 2014). Hoover and Halsmayer (2016) examined how this “culture of misunderstanding” guided both Solow’s modeling work and his reading of Harrod. Our paper pays attention to the specific issue of the introduction of an (independent) investment function in those early growth models. Using new archival material, we examine this complex issue and show how macroeconomists of that period dealt with problems related to incorporating expectations, an a priori unavoidable step in order to build robust investment functions. Those elements were indeed discussed at length, in the early 1960s, by economists such as Sen, Samuelson and Solow as shown in his correspondence with Hahn. Our paper sheds light on some hidden foundations of growth models and examines the nature of the break Solow’s model introduced in the growth research program as initially defined by Harrod.
A first version of this paper was presented at the IVth CNRS GREDEG, Guggenheim Conference on the History of Economic Thought, Ben-Gurion University of the Negev, December 18–19, 2017. A second version was presented at the HES annual conference, Chicago, 2018. The authors thank Arie Arnon, Mauro Boianovsky, Robert Dimand, Harald Hagemann, Esteban Perez and Anwar Shaikh for useful comments. The usual disclaimers apply.
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- 1.
In fact, many textbooks, although making some efforts to present Harrod’s view correctly, adopt “a linear” interpretation of the connection between Harrod and Solow.
- 2.
Young (1989) provides an analysis of Harrod’s Trade cycle group. He then investigates how Harrod went from The Trade Cycle to the ‘Essay.’ Investigating this long period, Young identifies (p. 174) three distinct stages in the growth research program: a formative period (1924–1939), a ‘take off’ or ‘progressive’ period (1948–1963) and finally, ‘degenerative’ period from 1964 onwards.
- 3.
Besomi (2000) explains that influenced by Keynes, Harrod revised his seminal 1939 paper to focus on the stability of his proposed equilibrium and moving away gradually from business cycles analysis.
- 4.
Recall that Harrod’s instability principle was used also to build business cycles models (Hicks 1950). We deliberately restrict the scope of this paper to the analysis of early growth models.
- 5.
In Chapter “Expectations and its Variants: The Nuanced Role of Expectations in Classical Economics.”
- 6.
- 7.
- 8.
In fact, in line with Harrod’s own comments, the model (Bruno and Dal Pont Legrand 2014) shows that different types of dynamics patterns, including cyclical convergence to the steady state, growth cycle and corridor of stability can emerge.
- 9.
Note that at that time, many economists interpreted Harrodian instability very ‘negatively’ and were always keen to dampen it (cf. Bruno and Dal Pont Legrand 2014: 467–468).
- 10.
He found the razor edge interpretation unpalatable; it was spread not only by neoclassical economists but also by Joan Robinson. Harrod never ceased to contest this interpretation, and in 1973, when he published his Economic Dynamics, he referred to the corridor concept proposed that same year by Axel Leijonhufvud in an article on effective demand failures, as being more appropriate. Bruno and Dal Pont Legrand (2014) follow this line of research and show that Harrod’s dynamics was indeed compatible with the corridor concept in the context of growth cycles dynamics.
- 11.
More precisely, the instability was interpreted as an obstacle to growth and as a possible opportunity for business cycles; however, in both cases, it was considered excessive and requiring of dampening. The (only) person who seems properly to have understood Harrod’s project was Jacob Marschak who made a clever comment in his 1939 article. For a more detailed analysis, see Sember (2010).
- 12.
In a private conversation with Muriel Dal Pont Legrand in 2009, Solow said that the real challenge was the investment function, and unfortunately, no one so far had come up with a satisfactory answer to this issue.
- 13.
Cf. Bruno and Dal Pont Legrand (2014).
- 14.
Boianovsky and Hoover (2009) quote a letter from Solow to Ernst Helmstädter, dated February 11, 1966, from the Duke University Rare Book, Manuscript and Special Collections Library, Durham, N.C.
- 15.
This view was shared by Solow as evidence in his insistence on the fact that the absence of short-run disequilibria should not be interpreted as his willingness to neglect these issues: “It is not my contention that these problems don’t exist, nor that they are of no significance in the long run” (Solow 1956: 91) but rather as an unavoidable distinction to clarify complex (and related) issues.
- 16.
The line of steady advance (i.e., the warranted rate of growth) appears in Harrod’s 1936 book when he defines the line of steady advance as the growth path compatible with producer long-run equilibrium. However, at that time the “Harrodian cycle oscillates around the line of steady advance, it would appear that Harrod uses the steady growth path as a dynamic reference for his analytical framework and not as a medium which might formally link cycles and growth” (Bruno and Dal Pont Legrand 2014: 471). It was not until 1939 that the warranted rate of growth played a more active (dynamic) role.
- 17.
On this specific point, see Sen (1970: 21).
- 18.
1959.
- 19.
Sen (1963b) had observed that: “(…) anything that makes Gw move towards Gn will itself raise some questions about the equality of the actual rate of growth with Gw” (ibid. 280).
- 20.
See Assous et al. (2018).
- 21.
Arrows’ comments (1967) were written at the occasion of the publications of Samuelson collected papers edited by Joseph Stiglitz.
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Assous, M., Dal Pont Legrand, M. (2020). Growth Without Expectations: The Original Sin of Neoclassical Growth Models. In: Arnon, A., Young, W., van der Beek, K. (eds) Expectations. Springer Studies in the History of Economic Thought. Springer, Cham. https://doi.org/10.1007/978-3-030-41357-6_7
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