Toward a general neoclassical theory of economic growth

Delano Villanueva

Philippine Review of Economics, 2023, vol. 60, issue 2, 64-80

Abstract: The Harrod-Domar (H-D) growth model assumes a fixed capital-output ratio, signifying absence of substitutability between capital and labor, leading to a “knife-edge†problem wherein balanced growth of capital (fixed warranted rate) and labor (fixed natural rate) occurs only by accident, preventing the attainment of macroeconomic stability with full employment. The neoclassical Solow-Swan (S-S) growth model provides an elegant solution to the H-D problem by endogenizing the warranted rate via the saving-investment relation, wherein capital growth is a function of a fully adjusting income-capital ratio (inverse of the H-D capital-output ratio)— allowing for smooth substitutability between capital and labor while keeping the natural rate exogenously fixed. The S-S model implies a positive, albeit temporary output growth effect of a higher saving rate. The present paper extends the capital-labor ratio’s influence onto the natural rate via effects on labor productivity through a modified Arrow learning by doing framework, and via labor participation through real wage adjustments. Thus, the positive output growth of a higher saving rate, although temporary in the short run as in the S-S model, is permanent in the long run through adjustments in both the warranted and natural rates—a generalization of the Solow-Swan model.

Keywords: Harrod-Domar; neoclassical growth model; Solow-Swan; warranted rate; natural rate; balanced growth; learning by doing; labor participation (search for similar items in EconPapers)
JEL-codes: E13 O41 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
https://pre.econ.upd.edu.ph/index.php/pre/article/view/1044/969 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:phs:prejrn:v:60:y:2023:i:2:p:64-80

Access Statistics for this article

More articles in Philippine Review of Economics from University of the Philippines School of Economics and Philippine Economic Society Contact information at EDIRC.
Bibliographic data for series maintained by HR Rabe ().