Financial Markets, Money and the Real World
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Financial Markets, Money and the Real World

Paul Davidson

Paul Davidson investigates why the 1990s was a decade of financial crises that almost precipitated a global market crash. He explores the reasons why the global economy still struggles with the aftermath of these crises and discusses the possibility that volatile financial markets in the future will have real impacts on whole industries and national economic systems.
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Chapter 7: Planned Investment, Planned Savings, Liquidity and Economic Growth

Paul Davidson


7. Planned investment, planned savings, liquidity and economic growth 7.1 HARROD’S ACTUAL, WARRANTED AND NATURAL RATES OF GROWTH Drawing on Keynes’s General Theory, Sir Roy Harrod developed formulations that appeared to demonstrate that to maintain a stable (equilibrium) rate of economic growth there was a necessary equality between the proportion of planned savings out of income and the proportion of current output devoted to the production of investment goods. Although Harrod recognized that economic ‘growth is the aggregated effect of a great number of individual decisions . . . based on trial and error’,1 he failed to see that the liquidity preference of the public can alter the rate of economic growth even if the public’s planned savings ratio is equal to the ratio of planned investment production to total output. In this chapter we shall demonstrate why the existence of liquid financial markets creates many a slip between the planned savings cup and the planned investment lip. But first we should review Harrod’s taxonomic approach to the theory of economic growth. Harrod developed three concepts of economic growth of output: 1. the warranted rate of growth occurs when growth would be in an ‘equilibrium of steady advance’2 as entrepreneurs’ expectations of sales growth are just being met by contractual purchases (realized demand) of buyers; the actual rate of growth at any point of time may not be an equilibrium rate. Instead the growth rate may be changing as entrepreneurs revise their investment plans if they discover that realized demands of...

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