A New Perspective
- New Directions in Modern Economics series
Chapter 5: Warranted Growth and the Role of the State
INTRODUCTION Conventional discussions of Harrod’s (and Domar’s) growth framework generally emphasize their Keynesian features and tend to focus on the modeling of instability. While these aspects of the Harrod–Domar model are important, this secondary literature generally does not deal with the policy aspects of these authors’ framework, especially the fact that the so-called paradox of thrift is overturned in the long run, although this is a feature of their models which both authors emphasized. As shown analytically in the previous chapter, Harrod’s position was that a change in the savings rate has opposite effects on the cyclical and trend components of growth. It is worth quoting at length from an undated letter that Harrod wrote to Joan Robinson regarding the relationship between savings, investment and growth (Besomi, 2006, p. 29): Your letter continues to ignore the vital distinction between movements in actual growth and movements in warranted growth – both being quite different from natural growth, which is the essence of my theory. An increase at a point of time in the ‘desire of firms to accumulate’ is a depressant of actual growth. This is Keynes, and I remain a Keynesian in this respect. An increase in the desire of firms to accumulate, to the extent that this is not ephemeral and shortly to be reversed, raises the warranted rate. This is neither Keynesian nor anti-Keynesian, because it is a dynamic principle, and there is no dynamics in Keynes. I explained that there is no dynamics in Keynes in my...
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