Introduction

VILLY BERGSTRÖM

The neoclassical growth model represented a great step forward from the 'Keynesian' models of Harrod and Domar. By introducing factor prices and substitution of factors of production capital deepening was possible within the model framework and the 'knife edge' instability of the Harrod-Domar scheme was overcome.

In the 1950s and 1960s growth theory was a very active field of research. Interest waned later, probably because most implications of the neoclassical growth model had been revealed. However, interest in growth theory was activated again by the discovery of endogenous growth models. To me it seems astonishing that only a minor technical change in a family of aggregated models--albeit a change with far reaching implications-- was needed to trigger the vast empirical and comparative literature on governments, institutions and policy regimes.

These models abandoned the assumption of diminishing returns to capital. By assuming constant returns to the accumulated factor of production, growth became endogenously determined by the parameters of the model. This was in contrast to the neoclassical growth model, where per capita income growth was completely determined by exogenous technological change. But by the assumption of increasing returns to the accumulated factor an instability is reintroduced in growth theory, similar to the instability of the Harrod-Domar model. Returns to capital must be exactly constant.

All these models are highly aggregated. They relate aggregate output to aggregate capital and labour, an aggregated saving rate determines the aggregated level of investment. Schemes like these can be used to analyse certain broad characteristics of the economic growth process, such as conditions for stability, steady state growth, factor substitution and the functional distribution of income. One should not expect to find specific empirical

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