Chapter 2: Growth theory: old and ‘new’
Now let us turn to the theory of economic growth. Modern growth theory started with Sir Roy Harrod’s famous ‘Essay in Dynamic Theory’ published in the Economic Journal, March 1939. For 60 or 70 years prior to this essay there had been virtually no discussion of the process of growth and development in the economics literature. Economics was dominated by the static equilibrium theory of Marshall (1890), and the general equilibrium theory of Walras (1874–77). At the macro level, Say’s law (Ricardian economics) prevailed that ‘[aggregate] supply creates its own demand’. As Keynes (1936) put it in his General Theory: ‘Ricardo conquered England as the Holy Inquisition conquered Spain’. Growth was regarded, more or less, as an evolutionary process, not requiring serious independent study. The post-classical economics of the late 19th and early 20th centuries had forgotten the writings of Adam Smith, Thomas Malthus, David Ricardo, John Stuart Mill and Karl Marx – the greatest of the classical economists – who all had pro-found insights into the growth and development process, some optimistic and some pessimistic.
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