Neo-Neoclassical Value and Growth

Abstract

Economists who viewed Keynes’s theory as only a special case in a generalised Neoclassical theory pursued a different approach to economic growth. They accepted Harrod’s ‘fundamental relation’ in a truistic sense, but looked to orthodox Neoclassical theory for a long-run framework to explain the determinants of the variables in the Harrod relation. The primary disagreement was with Harrodian productive relations. Harrod’s broad-based capital coefficient (C _r ) must be free to respond to factor supply and demand to be consistent with Neoclassical theory. Thus Harrod’s constant C _r was replaced by a production function with aggregate ‘factors’ capital and labour as inputs. With substitution between capital and labour in production, more capital can be combined with a given amount of labour, but with diminishing returns each additional dose of capital increases output in a smaller proportion. Thus as the ratio of capital to labour rises, the capital-output ratio, K/Q, rises (or in Harrod’s terms C _r rises), but less than proportionately. Harrod’s constant C _r becomes flexible and will respond to relative factor supply. With the value of C _r free to vary, any number of values of G will be potentially compatible with a given exogenous value of s _w and there is no longer one unique value of G that will produce steady growth.