Maximal Growth with Wage-Dependent Production Function

Abstract

Does consumption conflict with growth? Most recent studies on development strategy appear to presume that it does. In some of these studies the rate of consumption (more broadly, the consumption function) is regarded as a constraint derived from historical data. The task of development strategy is then defined as one of utilising efficiently the resulting volume of saving available out of given income (plus foreign aid, if any) every period of time. In other studies the rate of consumption is treated as a control variable whose magnitude is to be optimised, along with those of some others. Most such optimising studies come out with prescriptions which no one can really take seriously. Some studies actually suggest that consumption should be pushed to and kept at zero in the initial stage of economic development. An arbitrary constraint on the extent to which consumption can fall is then imposed to make the prescription saleable. Other results do not push consumption down quite that far, but far down enough nevertheless to induce pressing the same button to salvage the credibility of the prescription. An arbitrary lower bound on consumption is resorted to again, a lower bound that is often fashionably called the minimum ‘subsistence level’ of consumption.