Theory of Economic Growth

By Michio Morishima | Go to book overview

III A Neo-Classical Passage to Growth Equilibrium

1. Our task in this chapter is to investigate whether a series of the short-run equilibria starting from an arbitrarily (or historically) given capital-labour endowment will eventually approach the state of the long-run or 'silvery' (as we have called it) equilibrium. In the conventional discussion of the stability of the growth equilibrium in a two-sector economy, the relative capital-intensities of the two industries have served as a kind of litmus paper with which to test whether the Silvery Equilibrium is stable or not. Assuming that the two industries have fixed coefficients of production, Shinkai observed, for the first time, that the growth equilibrium is stable if and only if the consumption-good industry is more capital-intensive than the capital-good industry. 1 Uzawa replaced Shinkai's production functions of the Leontief type by the neo-classical ones which allow continuous substitution between labour and capital, to find that the relative capital-intensity criterion is a sufficient condition for stability but no longer a necessary condition—though Furuno later saw that the Shinkai-Uzawa finding should be subject to a proviso that the introduction of a production lag narrows the stability region and requires, for stability, that the capital intensity of the consumption-good industry should exceed that of the capital-good by an amount that corresponds to the magnitude of the lag. 2 It is to be noticed, however, that their argument is based on the assumption of steady population growth which plays a very far-reaching role in the discussion of stability. But, once we turn to a more general model of flexible population growth like ours, we find that the Silvery Equilibrium may be unstable even though the relative capital-intensity condition is satisfied. The following discussion leads to a new finding. The stability depends not only upon the capital intensities of the two industries but also upon the relative steepness of the warranted-rate-of-growth and the natural-rate-of-growth curve and the flexibility of workers' and capitalists' consumption-savings decisions.

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