Academic journal article The Journal of Philosophical Economics

Growth Theory after Keynes, Part I: The Unfortunate Suppression of the Harrod-Domar Model

Academic journal article The Journal of Philosophical Economics

Growth Theory after Keynes, Part I: The Unfortunate Suppression of the Harrod-Domar Model

Article excerpt

Abstract: After Harrod and Domar independently developed a dynamic Keynesian circular flow model to illustrate the instability of a growing economy, mainstream economists quickly reduced their model to a supply side-only growth model, which they subsequently rejected as too simplistic and replaced with Solow's neoclassical growth model. The rejection process of first diminishing the model and then replaced it with a neoclassical alternative was similar to how the full Keynesian macroeconomic paradigm was diminished into IS-LM analysis and then replaced by a simplistic neoclassical framework that largely ignored the demand side of the economy. Furthermore, subsequent work by mainstream economists has resulted in a logically inconsistent framework for analyzing economic growth; the popular endogenous growthmodels, which use Schumpeter's concept of profit-driven creative destructionto explain the technological change that Solow left as exogenous, are not logically compatible with the Solow model.

Keywords: paradigm, macroeconomics, mainstream, Schumpeter, Solow

(ProQuest: ... denotes formulae omitted.)

Introduction

When Keynes published his General Theoryin 1936, the neoclassical paradigm was well-established in the economics profession. Even though the Great Depression weighed heavily on economists' minds, economists were somewhat hesitant to jump to a new paradigm that seemed to contradict conventional mainstream economic thought. Most mainstream economists were more accepting of Hicks' (1937) interpretation of Keynes' General Theory, which omitted Keynes' more complex and radical ideas. For example, Keynes' Chapter 12 on uncertainty and his Chapter 19 on wage flexibility were not incorporated into Hicks' IS-LM framework that effectively came to be known as the 'Keynesian model.' And, Samuelson's (1948) textbook, which featured the simplified 'Keynesian cross' version of the IS-LM model, became the standard introduction for several million American students after World War II. Davidson (1984) has pointed out that Samuelson's graphic model was more in line with neoclassical methodology than it was with Keynes' General Theory.

In the 1970s, most mainstream macroeconomists abandoned the simplified Keynesian models in favor of macroeconomic models that were compatible with neoclassical market-based microeconomic models and which included the self- assuring assumption that humans are all rational beings who make only rational choices as well as the assumption that the economy is guided by an invisible hand. Within three decades, therefore, the Great Depression was forgotten and the Keynesian revolution was defeated.

Of course, intellectual resistance to Keynesian ideas was actively stoked by business and financial interests opposed to Roosevelt's New Dealpolicies, and for which The General Theoryprovided a solid justification. For example, Colander and Landreth (1996) describe how, prior to the appearance of Samuelson's watered- down Keynesian textbook, an authentically Keynesian textbook by Tarshis (1947) was driven out of U.S. universities by a business-supported campaign directed at university administrators and trustees.

While many post-Keynesians and heterodox economists have discussed how Keynesian economics was pushed out of the mainstream of the economics discipline, this article details how Keynesian ideas fared in the sub-field of economic growth and development economics. Specifically, this article examines how an insightful growth model derived from Keynesian macroeconomic foundations by Roy Harrod (1939) and Evsey Domar (1946) was marginalized. Like The General Theory, the Harrod-Domar model was first simplified to where it no longer reflected the authors' original intent, then the faux version of the model was criticized and replaced in mainstream economics a decade later by Solow's (1956, 1957) neoclassical supply side model. This latter model has not been very useful for development policy, but it nevertheless remains central to neoclassical growth analysis. …

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