The Nature of Economic Growth

The Nature of Economic Growth

An Alternative Framework for Understanding the Performance of Nations

A. P. Thirlwall

This concise book, by one of the leading scholars in development economics, has been developed from a series of lectures given to masters students and will serve as an excellent introduction to the principles of growth and development theory.

Chapter 6: The Endogeneity of the Natural Rate of Growth

A. P. Thirlwall

Subjects: development studies, development economics, economics and finance, development economics, post-keynesian economics


It was Harrod who first formally introduced the concept of the natural rate of growth into economic theory in his paper, ‘An Essay in Dynamic Theory’ (Harrod, 1939), which was discussed in Chapter 1. The natural rate of growth refers to the rate of growth of productive potential of an economy, or the ‘social optimum’ rate of growth, as Harrod called it. In all of mainstream growth theory, the natural rate of growth (composed of labour force growth and labour productivity growth) is treated as exogenously determined, unresponsive to the actual rate of growth or the pressure of demand in an economy. It is exogenous in Harrod’s original model, which is why Harrod’s growth model is not really a growth model at all, but a trade cycle model, because it does not explain growth. It is treated as exogenous in the neoclassical response to Harrod, as in the original model of Solow (1956), for example, as discussed in Chapter 2. It is treated as exogenous (by and large) in the post-Keynesian response to the neoclassicals, as in the original models of Kaldor (1957) and Joan Robinson (1956). Paradoxically, it is even treated 79 Thirlwall 02 chaps rprnt 79 28/6/07 15:02:07 80 The nature of economic growth as exogenous in ‘new’ endogenous growth theory. In ‘new’ growth theory, growth is endogenous in the sense that investment matters for growth, because the assumption of diminishing returns to capital is relaxed, not in the sense that labour force growth and productivity...

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