The instability principle revisited: an essay in Harrodian dynamics

Abstract

Harrod's contribution to economic dynamics is very often reduced to the dynamic equation whose character is unstable. Growth theory and cycle theory based on Harrod's contributions aimed at reducing this instability. Following Harrod, who was strongly opposed to the ‘knife-edge’ interpretation, we define the warranted rate of growth as a ‘moving equilibrium’ and focus on its interaction with the effective rate of growth. Our simple Harrodian model generates various dynamics from stable path, to growth cycle and corridor of stability.     

Of clouds and clocks and Keynes: conceptions of reality and the growth of knowledge function of money ∗

In this paper, John Maynard Keynes' General theoryand the concept of money are given an evolutionary interpretation. This interpretation is based on Karl Popper's delightful essay ‘Of clouds and clocks: an approach to the problem of rationality and the freedom of man’. The essay presents two things: Popper's conception of indeterminism and his general theory of abstractions. Popper's general theory concerns the role of abstractions and rule-governed, hierarchical systems of abstractions in structuring an indeterministic and uncertain world. He applies his general theory to science.Popper maintains that science is an abstract, rule-governed, linguistic process that facilitates criticism as a way of learning about our world. Popper calls this the growth of knowledge function of science. Popper's general theory can be applied to Keynes' General theory. Following Popper, I argue for a conception of the economy as a rule-governed, monetary language of commerce that facilitates critically minded inquiry in the domain of ordinary economic transactions. A monetary system facilitates the growth of commonsense knowledge in the economy. I call this the growth of knowledge function of money. An awareness of indeterminism and a growth of knowledge like function of money seem to pervade Keynes' General theory.     

Beyond the principle of population: Malthus's Essay

Abstract

After an introductory section, this article reviews reasons and arguments establishing the invalidity of Malthus's construct of a ‘principle of population’. Section 3 propounds that Malthus's theory is located beyond the principle of population, with the oscillation figure as its centre. Section 4 takes note of the trajectory which the Essay describes between natural and moral science, assesses inequality and growth as the two focal points of Malthus's theory and eventually observes Malthus looking forward to a state beyond the dictates of growth.     

Discounting Nordhaus

This paper evaluates Nordhaus's neoclassical complaints about the Stern Review from the vantage point of classical growth theory. Nordhaus criticizes the Stern Review because it uses a discount rate that is well below the market rate of return on capital. From the perspective of classical growth theory, Nordhaus's belief in choosing preference parameters for the social planner based on observed market rates of return is equivalent to assigning the preferences of the capitalist agents to the social planner. This equivalence is an implication of the Cambridge Theorem, which interprets the Ramsey equation as the saving function of the capitalist agents.     

China's Fiscal Decentralization and Regional Economic Growth

The present paper applies Lucas's theory of endogenous growth and Stiglitz's theory of local public goods to build an econometric model consisting of five simultaneous equations to study China's fiscal decentralization effects on regional economic growth. The model is estimated by two‐stage least squares using a set of panel data on 31 Chinese provinces during 1996–2005. The estimated results show that China's fiscal decentralization increased the local governments' expenditure on physical infrastructure and education, which led to the rising local physical capital stock and human capital levels, respectively, and then resulted in the growth of regional economies.     

Krishna Bharadwaj's “Return to Classical Theory”: an attempt towards an archaeological reconstruction

Abstract

In the wake of Sraffa's ‘return to classical theory’, Krishna Bharadwaj undertook a critical reassessment of Marshall's claim to continuity with classical theory in general and Ricardo's ‘intensive margin’ in particular. Her analysis is based on an analytical separation between two distinct ways of economic reasoning: the ‘surplus based’ and the ‘demand and supply based’ theories. Calling it an ‘archaeological reconstruction’ of the history of economic theories, I will examine how such an interpretation of theoretical shifts clarifies both the presuppositions behind analysing at the ‘margin’, and hence its radical departure from the conceptual content of the classical theory.     

‘Anecdotal myths’: Tinbergen's influence on Harrod's growth theory

Abstract

In the history of economic theory, Harrod's transition from the explanation of business cycles in An Essay on the Trade Cycle (1936) to his well‐known growth theory in ‘An essay in dynamic theory’ (1939) has always been surrounded by some degree of speculation. One of the topics in that area of speculation concerns the (degree of) influence exerted by Tinbergen on the development of Harrod's growth theory during the 1936–9 period.

This paper argues that Tinbergen's influence on Harrod's work mainly took place on formal, mathematical, grounds, leaving methodological matters untouched. This matter is of some importance in understanding the success of what was initially considered by others as a ‘dynamic’ extension of the Keynesian research programme and later evolved, through the work of Tinbergen and Solow, into a neoclassical growth theory.     

Government expenditure and economic growth: evidence from G7 countries

This paper examines Wagner's Law of Public Expenditure, which emphasizes economic growth as the fundamental determinant of public sector growth, using time series data drawn from the G7 industrialized countries over the sample period 1960 1993. It presents evidence on both the short- and long-run effects of growth in national income on government expenditure by resorting to recent developments in the theory of cointegrated processes. An attempt is also made in this study to examine if Wagner's Law holds between certain key components of government expenditure and income.     

Evidence on inflation–output trade-off in developing and industrial countries

This paper subjects Lucas's output–inflation trade-off study to further empirical investigation. The cross-country study divides the 111 countries covered into 90 developing countries and 21 advanced countries. Lucas's proposition is that volatility of aggregate demand growth should reduce the impact of aggregate demand growth on the cyclical output and the implication of this is that there is no output–inflation trade-off in line with the natural rate theory. We employ annual data over periods that fall between 1958 and 1985 in order to conduct the test. Our findings suggest that Lucas's proposition is valid for developed economies but not for developing economies.     

Alfred Marshall's Mecca: Reconciling the Theories of Value and Development*

The purpose of this paper is to explore the evolutionary nature and content of Marshall's theory of value and the relation it bears to his theory of growth and development. In Marshall's work the two theories are inextricably linked, and the subsequent attempt to separate them has not only marginalised Marshall's rich analysis but also made it impossible to appreciate the role he gave to innovation, and its corollary the growth of knowledge and organisation, in the workings of a market economy. At its core is the relation between the growth of firms and the growth of markets, but this is not steady‐state growth theory; rather, it is the different, mutually determined and ever changing growth rates of different groups of firms that is at the centre of attention. Quite how variation is linked to progress is the central topic of this essay, and the elucidation of its central role necessarily means that we must resurrect the representative firm. We conclude that Marshall was correct in stating that ‘the tendency to variation is a chief source of progress’ (Principles, V, 4, p. 355). We develop a set of evolutionary tools to show how and why this is so. But evolution is more than variation; it requires the organisation of firms and the market process to generate that correlation between differential knowledge and economic advance. Most importantly of all, the concept of a representative firm is re‐established as an indispensable element in a Marshallian evolutionary analysis.     

Robert Torrens and the Ricardian model of dynamic equilibrium growth

This paper reconstructs Torrens's dynamic theory of distribution which is based on three notions of wages. In the early stages of growth, capital increases faster than population, so the actual wage rises above the minimum. Thereafter, the economy grows with a tendency for the population to increase faster than the capital while limiting the actual wage below the decreasing maximum until it enters a stationary state and the actual wage and profit rates are reduced to their minimum. Such a theory has been attributed to Ricardo by some scholars, but Torrens proposed a more fully developed account than Ricardo's.     

The Independent,Simultaneous Development of Instrumental Thought in Various Disciplines

This paper seeks to establish that contributions to regional theory advanced by Gunnar Myrdal exhibit high levels of explanatory power when clarifying challenges facing Germany's eastern region since the fall of the Berlin Wall. Myrdal's evolutionary institutionalist contribution is contrasted with the "convergence hypothesis" advanced by R. Barro and X. Sala-i-Martin. Challenged is their prediction that Germany's eastern region would experience relatively higher annual rates of per capita output growth, and that levels of per capita output would converge between the eastern and western regions over time. Myrdal's approach is argued superior as it allows for considering backwash and spread effects within a framework of circular and cumulative causation, emerging between Germany's western and eastern regions.     

Solow's Harrod: Transforming macroeconomic dynamics into a model of long-run growth

Modern growth theory derives mostly from Solow's “A Contribution to the Theory of Economic Growth” (1956). Solow's own interpretation locates its origins in his view that Harrod's growth model implied a tendency toward progressive collapse of the economy. He formulates his view in terms of Harrod's invoking a fixed-coefficients production function. We challenge Solow's reading of Harrod's “Essay in Dynamic Theory,” arguing that Harrod's object in providing a “dynamic” theory had little to do with the problem of long-run growth as Solow understood it, but instead addressed medium-run fluctuations, the “inherent instability” of economies. Solow's interpretation of Harrod was grounded in a particular culture of understanding embedded in the practice of formal modelling that emerged in economics in the post-Second World War period. Solow's interpretation, which ultimately dominated the profession's view of Harrod, is a case study in the difficulties in communicating across distinct interpretive communities and of the potential for losing content and insights in the process. Harrod's objects – particularly, of trying to account for a tendency of the economy toward chronic recessions – were lost to the mainstream literature.     

SLOW DEVELOPMENT AND SPECIAL INTERESTS*

This article argues that a natural implication of an innovation‐based theory of growth is that slow development facilitates the formation of special interest groups. We demonstrate this in a growth model where innovations take the form of new goods and new production processes, and where factor suppliers in individual industries can organize to form rent‐extracting special interest groups. We then examine the effect these groups have on an economy's subsequent development. We find that these groups can retard an economy's development for extended periods, but not permanently. Their long‐run effect is to increase the volatility of the development process.     

Immanuel Kant and Endogenous Growth Theory

Despite the modern origins of endogenous growth theory, we argue that the ‘Idea for a Universal History with a Cosmopolitan Aim’ written by Immanuel Kant in 1784 provides an early and coherent example of such a theory. Kant's endogenous growth mechanism is driven by the inherent rivalry that exists between agents which increases effort and strengthens the accumulation of knowledge, which in turn is carried through generations. In an exercise in ‘rational reconstruction’, we present a mathematical model of Kant's mechanism. We use the model to contribute to the contemporary policy debate as to whether ‘keeping up with the Joneses’ leads to excessive effort.     

Is there a Core of Macroeconomics that Euro Area Forecasters Believe In?

The quantity theory of money, Okun's law, and the Phillips curve are cornerstones of macroeconomic theory. But are they also of practical relevance? Using survey data for the euro area, we found that professional economists’ forecasts are consistent with a version of the quantity theory in which forecasts of the growth rate of money supply correlate in a proportional way with forecasts of the inflation rate. We also found that forecasts of changes in the unemployment rate and forecasts of the growth rate of real output are consistent with Okun's law. Evidence of a systematic link between forecasts of the inflation rate and forecasts of the unemployment rate, however, is not strong.     

‘Marxism Gone Mad’: Tugan-Baranovsky on crises,their possibility and their periodicity

Abstract

Tugan-Baranovsky's theory of crises has two components: a theory of markets, defining the condition under which expanded reproduction can take place, and a theory of crises proper, explaining how any rupture of equilibrium is amplified and extended to the whole system and gives rise to periodical fluctuations. The former, based on the Marxian schemes of reproduction, is logically preliminary to the latter, which relies on the accumulation and depletion of loanable funds. In spite of Tugan's insistence on this nexus, academic commentators have ignored Tugan's theory of markets, while Marxist critics have focused exclusively on this aspect and charged Tugan with upholding Say's Law. While this reading is not entirely justified, there is indeed a deep difference between Tugan's and Marx's interpretation of crises. While Marx considers crises as the necessary corrective to the systematic and necessary breaches of equilibrium, Tugan sees equilibrium as the norm and crises a deviation from it, albeit recurring and periodical.     

Sraffa and von Neumann

This paper discusses the relationship between Piero Sraffa's 1960 book and John von Neumann's 1937 paper on economic growth in the light of some of the material contained in Sraffa's unpublished papers and correspondence. It is argued that the two contributions share a similar outlook and exhibit conceptual parallels; in fact, they can both be said to belong to the 'classical' approach to the theory of value and distribution. The latter is characterized, among other things, by an asymmetric treatment of the distributive variables, the rate of return on capital and the real wage rate. Sraffa's papers show that when he came across the von Neumann model in the mid-1940s his own analysis was already quite advanced, including his analysis of joint production. The paper also contains an exchange of letters between John Richard Hicks and Sraffa on some of the issues dealt with in the latter's book.     

Time series explanations of merger activity: some econometric results

Existing papers which have attempted to test explanations of time series patterns in merger behaviour suffer from the defects that, first, they usually consider only one hypothesis and, secondly, none use a moderm econometric methodology. Consequently, their results may be subject to the spurious correlation problem. In this paper we argue that four well-known approaches to explaining time series data in acquisitions (Gort's disturbance theory, King's Trapped Equity model, disequilibrium hypotheses and ad hoc approaches) can all be nested within a capital budgeting decision-making framework. Using a co-integration methodology, a long-run relationship was found between the quarterly number of acquisitions and the growth rate of GDP, Tobin's Q, the balance of payments, the unemployment rate and share prices. Some of the previously proposed theories were found to explain the short-run dynamic variation in acquisition activity. No support was found for Gort's disturbance theory or for King's Trapped Equity model. Conclusions for antitrust policy are suggested.     

Learning to choose a commodity-money: Carl Menger's theory of imitation and the search monetary framework

This paper studies Carl Menger's theory of the emergence of a commodity money. We propose an interpretation of Menger's learning by imitation process based on the search theoretical formal framework. We show that there exists a tension between the importance of intrinsic properties of commodities and the pure conventional self-fulfilling expectations of agents. This confirms the role of imitation in the emergence of monetary equilibria in search theory. We conclude that Menger's approach may support the idea that the fundamental property of a commodity-money (namely its great liquidity) is the result of its emergence process and not necessarily of its original intrinsic properties.