Theory of Economic Growth

By Michio Morishima | Go to book overview

VIII Equilibrium Growth (II) Hicks-Malinvaud Trajectories

1. In spite of the elegance of the theory of balanced growth, it must be recognized that neither a competitive equilibrium over time nor a succession of temporary equilibria through time generates a monotonic expansion in the economy, unless it is endowed with the stocks of goods and the labour force exactly in the balanced growth proportions. When the historically given initial point is off the balanced growth path, a path produced by the competitive mechanism would regularly or irregularly wind through the economic field. The rhythm is not monotonic; nevertheless, it is still equilibrated as no dissonance is heard throughout the whole process of development.

Such paths, along which the competitive or 'neo-classical' (as we may call it) system develops from the given historical point, are classified according to the numbers of periods involved. If an equilibrium over T periods is established in an economy whose residents can correctly foresee events in those periods, then that equilibrium is said to be of order T. It is evident that this classification is an extension of the Marshallian tripartite division into the temporary, the short period and the long period equilibrium. The Temporary Equilibrium that rules within any single period is an equilibrium of order 1, while at the other extreme there is the Perfect Equilibrium over Time (or the equilibrium of infinite order) that will occur when prices in any period in the future (as well as tastes, resources and technology in the future) are correctly predicted. As was observed by Malinvaud and others and will in the next chapter be reconfirmed, in the present von Neumann-like model a 'Pareto optimality' of order T is realized along a competitive equilibrium path of the same order. 1 The economy can, therefore, work for ever in an optimum way with perfect efficiency if it travels along the path of competitive equilibrium of infinite order. It would supply a useful standard of reference in the theory of growth and could be compared with the Silvery Equilibrium path (a balanced growth path) discussed in the previous chapter—the other standard of reference. The comparison is the subject matter of one of the later chapters; we devote the present and the next chapter to

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