Fixed versus Variable Coefficients — The Neo-classical Approach

Abstract

Two characteristic features of most neo-classical growth models are some form of production function relating output to factor inputs and the absence of an investment function so that investment is determined passively by saving. Harrod’s model — set out in Chapter 1 — possesses neither of these features (though it could be argued that a production function of the kind we are about to introduce is implicit in the investment behaviour he assumes). But a model with these characteristics can be constructed having the same formal equilibrium properties as Harrod’s model proper, and it is this model which we shall explore in this section. It may seem more akin to Domar’s model, since that does have a kind of production function (equation (1.27) above) and since it does not possess an investment function; but the new model is not the same as that either. It may be regarded as the ‘neo-classical’ version of the Harrod-Domar models; it is what is called ‘the Harrod-Domar model’ in many textbooks.