Theory of Economic Growth

By Michio Morishima | Go to book overview

IV Harrodian Knife-Edge in a Keynes-Type 'Fixprice' Economy

1. Among the assumptions underlying the foregoing analysis of stability of Growth Equilibrium, the following two have played the most important roles in deriving the conclusions: First, prices and the wage rate are perfectly flexible so that the price of any good or any factor of production will go down to zero if excess supply of it cannot be eliminated (the Rule of Free Goods). Second, unless the price of the capital service is zero, the existing stock of capital is fully utilized and investment is made according to the Acceleration Principle. 1

It would certainly be far from the reality to suppose that all markets work according to the Rule of Free Goods. As Keynes pointed out, the Rule of Free Goods would not prevail in the labour market; there is a certain level of wages at which the supply of labour becomes perfectly elastic; and the wage rate cannot be lower than that level, even though there are a large number of workers involuntarily unemployed. Likewise, positive quasi-rents might be consistent with under-utilization of the stock of capital. For some goods, prices would be set so that they should cover costs; firms would diminish their outputs, instead of reducing prices, in case of being confronted with insufficient demand. It is seen that, as soon as we pass from the Walras-type 'flexprice' model to a 'fixprice' model, 2 either full employment of labour or full utilization of capital is not automatically established any longer. And, in the absence of full utilization of capital, it is evident that investment decisions do not obey the Acceleration Principle.

2. In order to re-interpret our match-box model from the Fixprice point of view, let us assume that the money rate of interest is determined outside the model. An entrepreneur who has a given sum of money available for expenditure can lend it to someone else at the given rate of interest or alternatively can spend it on production processes. In equilibrium it is

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