Economic Development: Theory and Policy Applications

By Fidelis Ezeala-Harrison | Go to book overview

5
The Neoclassical Theories of Economic Growth and Development

This chapter deals with the theories of economic growth and development that utilize some of the basic classical tenets outlined in Chapter 4. However, as these theories are built on fundamental Keynesian ideas, we may refer to them as Keynesian-type models of growth and development. These theories stress the role of the demand side of the economy (aggregate demand) in determining output and employment in the short run. Their policy implications involve active (interventionist) roles for government in tackling short-run countercyclical economic difficulties. 1

The neoclassical Keynesian-type growth models rely on market forces to propel the processes of development, but they emphasize that actively pursued and directed (fine-tuning) policies can accelerate the pace of growth and development. That is, governments can, and should, push development faster than market forces (which are rather sluggish) might have allowed. Various policy instruments are at the government's disposal to pursue this objective, and the market economy and its competitive, self-regulating qualities can be complemented by some degree of government controls to guide and quicken the development process. We present three of the leading models of the neoclassical growth theories - the Harrod-Domar growth model, the Hansen Secular Stagnation thesis, and the Solow growth model - and assess their key policy implications for development and underdevelopment.


THE HARROD-DOMAR GROWTH MODEL

The growth theory that is named after its originators, Roy F. Harrod and Evsey D. Domar, was developed separately by these two early twentieth-century economists. 2 These authors established their theories on the Keynesian framework. The theories are highly complex but essentially reach similar conclusions. We present a simplified version of the Harrod-Domar model here

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