A Dynamic, Keynesian Model of Development

Abstract

The Harrod-Domar growth model is extended in a way that introduces the possibility of persistent excess capacity as a potential source of slow growth. This extended model has five growth rates, which must be equal for there to be a full-employment, full-capacity dynamic equilibrium, instead of the three growth rates in the standard Harrod-Domar model. These growth rates will be called the justified, the actual, the warranted, the potential and the natural rate of growth. This model is held to provide a consistent framework for discussing many disparate view of economic development. Specifically, much of development theory can be divided in to three types of theories, which focus on different structural rigidities in the economy. First, there are theories that emphasize a lack of saving and thus propose mechanisms for augmenting saving. Second, theories emphasizing a shortage of investment and thus the existence of excess capacity. Third, there are theories emphasizing inadequate labor absorption and the need to develop or employ labor by using capital saving technology. It is argued that the essence of Keynesian development economics is the belief that the development process is served better by pursuing policies that enhance growth with existing obstacles than by simply trying to remove these obstacles in the hope that development will then occur.