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Unit II - Economic Growth Models


2.1 Harrod–Domar model

The Harrod–Domar model is a Keynesian model of economic growth. It is used in development economics to explain an economy's growth rate in terms of the level of saving and of capital. It suggests that there is no natural reason for an economy to have balanced growth. The model was developed independently by Roy F. Harrod in 1939, and Evsey Domar in 1946, although a similar model had been proposed by Gustav Cassel in 1924. The Harrod–Domar model was the precursor to the exogenous growth model.
Neoclassical economists claimed shortcomings in the Harrod–Domar model—in particular the instability of its solution—and, by the late 1950s, started an academic dialogue that led to the development of the Solow–Swan model.
According to the Harrod–Domar model, there are three kinds of growth: warranted growth, actual growth and the natural rate of growth.
The warranted growth rate is the rate of growth at which the economy does not expand indefinitely or go into recession. Actual growth is the real rate increase in a country's GDP per year. (See also: Gross domestic product and Natural gross domestic product). Natural growth is the growth an economy requires to maintain full employment. For example, If the labour force grows at 3% per year, then to maintain full employment, the economy’s annual growth rate must be 3%.
Although the Harrod–Domar model was initially created to help analyse the business cycle, it was later adapted to explain economic growth. Its implications were that growth depends on the quantity of labour and capital; more investment leads to capital accumulation, which generates economic growth. The model carries implications for less economically developed countries, where labour is in plentiful supply in these countries but physical capital is not, slowing down economic progress. LDCs do not have sufficiently high incomes to enable sufficient rates of saving; therefore, accumulation of physical-capital stock through investment is low.
The model implies that economic growth depends on policies to increase investment, by increasing saving and using that investment more efficiently through technological advances.
The model concludes that an economy does not "naturally" find full employment and stable growth rates.

2.3 Karl Marx Theory of Development

Karl Marx, the father of scientific socialism, is considered a great thinker of history.
He is held in high esteem and is respected as a real prophet by the millions of people.
Prof. Schumpeter wrote,
“Marxism is a religion. To an orthodox Marxist, an opponent is not merely in error but in sin”.
He is regarded as the father of history who prophesied the decline of capitalism and the advent of socialism.
The Marxian analysis is the greatest and the most penetrating examination of the process of economic development. He expected capitalistic change to break down because of sociological reasons and not due to economic stagnation and only after a very high degree of development is attained. His famous book ‘Das Kapital’ is known as the Bible of socialism (1867). He presented the process of growth and collapse of the capitalist economy.
Assumptions of the Theory:
Marxian economic theory of growth is based on certain assumptions:

1. There are two principal classes in society. (1) Bourgeoisie and (2) Proletariat.
2. Wages of the workers are determined at a subsistence level of living.
3. Labour theory of value holds good. Thus labour is the main source of value generation.
4. Factors of production are owned by the capitalists.
5. Capital is of two types: constant capital and variable capital.
6. Capitalists exploit the workers.
7. Labour is homogenous and perfectly mobile.
8. Perfect competition in the economy.
9. National income is distributed in terms of wages and profits.
Marxian Concept of Economic Development:
In Marxian theory, production means the generation of value. Thus economic development is the process of more value-generating, labour generates value. But a high level of production is possible through more and more capital accumulation and technological improvement.
At the start, growth under capitalism, generation of value and accumulation of capital underwent at a high rate. After reaching its peak, there is a concentration of capital associated with the falling rate of profit. In turn, it reduces the rate of investment and as such a rate of economic growth. Unemployment increases. Class conflicts increase. Labour conflicts start and there are class revolts. Ultimately, there is a downfall of capitalism and the rise of socialism.



Video Lecture Links:
2.1 https://youtu.be/WY8N5KA0NK0
2.2 https://youtu.be/Wtar0UrR6bA
2.3 https://youtu.be/ZgXO1N5cDwk
2.4 https://youtu.be/Joi8TOLWNLU

 
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