Different visions of economic development. From Keynes to the Solow Growth, Harrod Domar Growth and the New Growth Model

Contents

1 Introduction

2 Solow growth model
2.1 Origin of the model
2.2 Assumptions of the model
2.3 Criticism of the model

3 Keynesian growth model
3.1 Origin of the model
3.2 Assumptions of the model
3.3 Criticism of the model

4 Harrod-Domar growth model

4.1 Origin of the model
4.2 Assumptions of the model
4.3 Criticism of the model

5 New growth model
5.1 Origin of the model
5.2 Assumptions of the model
5.3 Criticism of the model

6 Conclusion

Addition
1. List of references
2. List of illustrations

1 Introduction

The first economic thoughts went back till the antiquity. Platon wrote the work “Politeia“ back then and put questions about the profitability of the division of labor. Also Aristotelis discussed the value of the money and the interest in one of his works. But these thoughts were always expressed in connection with other sciences.^[1] Only middle of century was founded a school in France by authors who were called themselves “les economistes“. With it the economic science started to stand as a science for itself and not in connection with other sciences as for example of the ethics. A big subject of the economics is the economic growth with which also this work deals.

In this article four economic development models are described. The first one is the basis of the neoclassical theory of economic growth, the Solow model which deals with the exogenous growth. The second model is from Keynes. The third one is the Harrod-Domar model which is the basis of the Postkeynesian theory of economic growth and the last model deals with the endogenous growth and forms the basis for the new-classical theory of economic growth.

In the following four different models are indicated with the help of the method of the literature-based analysis. In every economic development model the origin, the acceptances and the criticism are performed and the frame of this work is not enough to give every derivation. In the end the result summarizes this housework.

2 Solow growth model

2.1 Origin of the model

The Solow development model is named after Robert M. Solow and was developed in the 1950s and 1960s. The economic model of the growth of a national economy forms the basis of the neoclassical theory of economic growth.^[2] Robert Solow was honored in 1987 for his achievements in the area of the theory of economic growth with the Nobel Prize. The Solow model points, like the growth of the capital floor, the growth of the acquisition population and the technological progress co-operates and how thereby the output is influenced.^[3]

2.2 Assumptions of the model

The Solow model assumes from the fact that only one single property is produced. The production of this good is described by a response function. The produced property, called output, can be consumed, or it can be invested. With it is believed that the not consumed income raises the capital floor. The existing capital floor wears out, so that constantly a steady percentage becomes useless in capital goods. The inhabitants of this theoretical world consume, is accepted, a steady part of her income, besides, the number of the inhabitants rises with a steady growth rate. The model subordinates full employment and perfect competition.^[4]

illustration not visible in this excerpt

fig. 1 Solow model-The Production-Function

The growth balance with which the theory of economic growth deals are as a rule a so-called “steady state” balance, that is situations in which everybody increases as pro-head dimensions expressed variables (pro-head income, pro-head-capital floor and pro-head consumption) with the same growth rate. The outlined neoclassical model determines a balance with an exogenous “steady state” growth rate. With it is believed that only the growth trend is determined by an exogenous size and not by interactions in the model.

Where does this come from?^[5]

Intuitively this question can be answered as follows: One fancies, the pro-head-capital floor grows with a positive growth rate. This leads on the fact that also the pro-head income for the time grows. Nevertheless, as a result of the decreasing border product of the capital, the pro-head income increases around less, than the pro-head-capital floor. Vice versa a negative growth rate of the pro-head-capital floor would lead to an in terms of percentage lower decrease of the pro-head income. This means that the only growth rate which can have in common the pro-head income and the pro-head-capital floor must be a zero. The same-weighty pro-head-capital floor is reached when the savings put on one side from the income just are sufficient to hold the pro-head-capital floor, in spite of rising population and

Capital wears, consistently. The described state is same-weighty because the modelled national economy tends to this state, regardless of her source situation, there.^[6]

The neoclassical model determines therefore a balance in which the rate of the growth in

Population determines the growth trend of the national economy. Hence, in the first sense exogenous growth arises, while the capital floor, the national income, and the consumption with the rate of the population growth grow which is not explained in the model. To the explanation of historical growth trends the neoclassical theory of economic growth needs another element. In most countries positive growth rates of the described pro-head dimensions are to be registered since longer time. The neoclassical theory of economic growth grasps this development by the second exogenous factor: Technical progress raises consecutively the productiveness of work and capital. Immediately the growth in population the technical progress in the neoclassical model is a not explained size. Three important acceptances of the neoclassical theory of economic growth: the decreasing marginal returns of the capital, the exogenously given trend of the technical progress and the exogenous growth in population lead therefore to the result of the exogenous, that is through the model did not explain, growth.^[7] With the points of criticism with the help of which the endogenous development models have developed are given.^[8]

2.3 Criticism of the model

The basic Solow model goes out from a closed national economy without state activity.

However, a coinclusion of the state sector and international capital flows is possible.

A central acceptance of the Solos of model is the exogenous given savings rate steady for the time. This means that a national economy saves the same percentage of the same independent of the level of her income always, for unemployment is here no place. The savings behavior is made not artificial, and so cannot be also examined how the national economy is reacted to changes of the interest rate or the capital tax rate.^[9]

Besides the Solow model further does not explain what is to be understood by “technology” or “productivity”. Besides, it concerns collective terms for all factors which influence the pro-head income and are not already in capital and work included. Among the rest, in addition would be able to do the education of the working population which belong infrastructure, but also political institutions like property rights. In addition, the model accepts this growth determinant central for the model, the technological progress, as exogenous given.^[10]

3 Keynesian growth model

3.1 Origin of the model

When the worldwide economic crisis broke out in 1929 and brought the „Great Depression“ with itself, many lost hope to the self healing forces of the market.^[11] Because a decline of the production ruled, social misery stronger and stronger became and broke out a mass unemployment. From this crisis the economist John Maynard Keynes (1883-1946) invented the Keynesian growth model.^[12] With his work “The General Theory of Employment, Interest, and Money” that he published in 1936 he changed the economics. This work hat made Keynes famous.^[13]

[...]

^[1] Vgl. Bernhard Felderer/Stefan Homburg (2005), Makroökonomik und neue Markoökonomik, 9.Auflage, Berlin Heidelberg: Springer New York, S.20ff.

^[2] Vgl. Solow, R.M. (1956), A Constribution to the Theory of Economic Growth. Quarterly Journal of Economics, S. 65ff., available under http://qje.oxfordjournals.org/content/70/1/65.full.pdf+html; [02.03.2015]

^[3] Vgl. N. Gregory Mankiw (2011), Makroökonomik, Stuttgart: Schäffer-Poeschel Verlag, S.247.

^[4] Gabler Wirtschaftslexikon, Solow-Model, Springer Gabler Verlag, available under http://wirtschaftslexikon.gabler.de/Archiv/143812/solow-modell-v6.html; [30.01.2015]

^[5] Gabler Wirtschaftslexikon, Solow-Model, Springer Gabler Verlag, available under http://wirtschaftslexikon.gabler.de/Archiv/143812/solow-modell-v6.html; [30.01.2015]

^[6] Vgl. N. Gregory Mankiw (2011), Makroökonomik, 6. Auflage , Stuttgart: Schäffer-Poeschel Verlag, S.248ff.

^[7] Vgl. Tobias F. Rötheli, (2008), „Exogenes und endogenes Wachstum: ein Streifzug“, available under https://www.uni-erfurt.de/fileadmin/user-docs/Makrooekonomie/Artikel/exogenes_endogenes.pdf; [24.01.2015]

^[8] Vgl. Solow, R.M. (1956), A Constribution to the Theory of Economic Growth. Quarterly Journal of Economics, S.75ff., available under http://qje.oxfordjournals.org/content/70/1/65.full.pdf+html; [02.03.2015]

^[9] Vgl. Manfred Gärtner (2006), Macroeconomics, 2. Auflage, Harlow: Pearson Education

^[10] Vgl. Solow, R.M. (1956), A Constribution to the Theory of Economic Growth. Quarterly Journal of Economics, S. 94, available under http://qje.oxfordjournals.org/content/70/1/65.full.pdf+html; [02.03.2015]

^[11] Vgl. Sarwat Jahan/Ahmed Saber Mahmud/Chris Papageorgiou (2014), What is Keynesian Economics?, International Monetary Fund available under http://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm; [05.03.2015]

^[12] Vgl. Bernhard Felderer/Stefan Homburg (2005), Makroökonomik und neue Markoökonomik, 9. Auflage, Berlin Heidelberg: Springer New York, S.87f.

^[13] Vgl. Lisa Nienhaus/Christian Siedenbiedel (2009), „Keynes für Anfänger“, Frankfurter Allgemeine, Wirtschaft, available under http://www.google.de/imgres?imgurl=http%3A%2F%2Fmedia0.faz.net%2Fppmedia%2Fvideo%2Finteraktiv-1%2F687026988%2F1.760746%2Fdefault%2Finfografik-keynes-wie.jpg&imgrefurl=http%3A%2F%2Fwww.faz.net%2Faktuell%2Fwirtschaft%2Fwirtschaftswissen%2Fein-crashkurs-keynes-fuer-anfaenger-1590559.html&h=382&w=741&tbnid=drFuUKsTKZWbZM%3A&zoom=1&docid=o7VfR0TKkvsrwM&ei=Xr7-VLC_F8jXywOy_4GgCA&tbm=isch&iact=rc&uact=3&dur=275&page=1&start=0&ndsp=24&ved=0CHAQrQMwF; [01.03.2015]