The contemporary theory of growth of capitalist economies tends to consider the problem of trend and the business cycle in terms of a moving equilibrium rather than adopting an approach similar to that applied in the theory of business cycles. The latter consists of establishing two relations: one based on the impact of the effective demand generated by investment upon profits and the national income; and the other showing the determination of investment decisions by, broadly speaking, the level and the rate of change of economic activity. The first relation does not involve now particularly intricate questions. The second, to my mind, remains the pièce de résistance of economics.
I do not see why this approach should be abolished in the face of the problem of long-run growth. In fact, the long-run trend is only a slowly changing component of a chain of short-period situations; it has no independent entity, and the two basic relations mentioned above should be formulated in such a way as to yield the trend-cumbusiness cycle phenomenon. It is true that the task is incomparably more difficult than in the case of another abstraction, that of the 'pure business cycle' and, as will be seen below, the results of such an enquiry are less 'mechanistic'. This, however, is no excuse for dropping this approach, which seems to me the only key to the realistic analysis of the dynamics of a capitalist economy.
I myself approached this problem in my Theory of Economic Dynamics1 and my 'Observations on the Theory of Growth'2 in a manner which now I do not consider entirely satisfactory: I started by developing a theory of the 'pure business cycle' in a stationary economy, and I later modified the respective equations to get the trend into the picture. By this separation of short and long-run influences I missed certain repercussions of technical progress which affect the dynamic process as a whole. I shall now try to avoid splitting my argument into these two stages just as much as I shall try to avoid____________________