The Development of Modern Growth Theory — A Preview

Abstract

The implication of the Harrod-Domar models was that the automatic maintenance of equilibrium steady-state growth, with full employment, was unlikely to be one of the virtues of a free-market capitalist economy. Other economists responded by suggesting that this pessimism — at least as far as the Existence Problem was concerned — was overdone, and that it was merely due to the excessively and unrealistically rigid assumptions on which the models had been built. If the assumptions could be relaxed, so that (in Harrod’s terms) one or more of the four parameters involved (s, v, λ and t) could adjust in some way so as to tend to lead to equality of the warranted and natural growth rates, then the prospect for the real world would be less dismal. Attention was soon drawn to such possibilities.