New Directions in Theory and Policy
Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie
4. Is the natural rate of growth exogenous?* Miguel Leon-Ledesma and A.P. Thirlwall INTRODUCTION It was Sir Roy Harrod who ﬁrst formally introduced the concept of the natural rate of growth into economic theory in his famous paper ‘An Essay in Dynamic Theory’ (Harrod, 1939). The paper was essentially a dynamisation of Keynes’s General Theory and asked the question: if the condition for a static equilibrium is that plans to invest equal plans to save, what must be the growth of income in a growing economy for plans to invest to equal plans to save to give a moving equilibrium through time? Moreover, is there any guarantee that this required rate of growth (which Harrod called the warranted growth rate) will prevail, and, if not, what will happen? The answer was that there is no guarantee, and if the two growth rates diverge there will be dynamic instability. If the actual growth rate exceeds the warranted rate there will be overcapacity utilisation and producers will feel they have done too little investment for steady growth. They will invest more, pushing the actual growth rate further above the warranted rate. Contrawise, if the actual growth rate is below the warranted rate there will be excess capacity. Producers will revise their investment plans downwards, pushing the actual growth rate further below the warranted rate. Within this framework, Harrod’s natural rate of growth fulﬁlled two functions. First, it set a ceiling to explosive growth, turning cyclical booms into slumps. Secondly, it was...
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