Theory of Economic Growth

1. In this book we are concerned with the theory of economic growth as a branch of economic dynamics. We abstain from discussing practical problems, such as programmes for advancement of underdeveloped countries, the growth race between capitalist and socialist countries, the Ikeda-Shimomura programme for doubling income, and so on. Instead, our interest is confined to developing a dynamic theory from the formal theory of general equilibrium.

Léon Walras, the sun of one of the planetary systems in the universe of economics, developed a general equilibrium model of capital formation and credit, after he had explored models of exchange and production. But he was primarily concerned with momentary equilibrium to be established in a system with given stocks of capital goods that are shared among a given number of individuals. He did not discuss the working of the model through time, though his Eléments contains a part entitled 'Conditions and Consequences of Economic Progress', which was written with the clear intention of investigating the working of the economy in the course of time. 1 His analysis in that Part was fragmentary and did not go far beyond the confines of literal discussion. It is true that after Walras a number of attempts have been made to extend his theory towards dynamic economics; but it seems to me that they have not yielded a conclusive solution, so that I feel there is still room in the literature for adding a new formulation.

Given this aim, no one will blame us if we ignore such factors as public spending, foreign trade, technical improvement, and monetary policies, in spite of the well recognized fact that they usually play most important roles in determining the actual rate of economic growth. We deal in this book with an economy that is isolated from foreign countries and is provided with knowledge of industrial arts that does not change throughout the time horizon we are concerned with. In the first half of the book, decisions regarding investment are made by private enterprises either in the neo-classical or in the Keynesian manner, while in the second half the planning authorities are responsible for directing firms so that they invest the society's savings in such a way that the economy will progress along a

-3-