Chapter

Harrodian Knife‐Edge in a Keynes‐Type ‘Fixprice’ Economy

Michio Morishima

in Theory of Economic Growth

Published in print December 1969 | ISBN: 9780198281641
Published online November 2003 | e-ISBN: 9780191596667 | DOI: http://dx.doi.org/10.1093/0198281641.003.0004
 Harrodian Knife‐Edge in a Keynes‐Type ‘Fixprice’ Economy

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Among the assumptions underlying the analysis of stability of growth equilibrium already made in the book, the following two have played the most important roles in deriving the conclusions: first, prices and the wage rate are perfectly flexible so that the price of any good or any factor of production will go down to zero if excess supply of it cannot be eliminated (the Rule of Free Goods); second, unless the price of the capital service is zero, the existing stock of capital is fully utilized and investment is made according to the Acceleration Principle. However, as soon as a progression is made from the Walras‐type ‘flexprice’ model (where quantities are fixed in the short run, and prices adjust faster than quantities) to a ‘fixprice’ model (where prices are fixed in the short run, and quantities adjust faster than prices), either full employment of labour or full utilization of capital is no longer automatically established. Also, in the absence of full utilization of capital, it is evident that investment decisions do not obey the Acceleration Principle. The first four sections of this chapter look at price flexibility and full employment, the possibility of a Keynesian short‐run equilibrium with unemployment, the induction of centrifugal forces around the Silvery Equilibrium by the Harrodian investment function, and the necessity of unemployment in a ‘fixprice’ economy. The last section looks at the possibility of avoiding this last Iron Rule: that in fixprice economies where the Rule of Competitive Pricing does not work, a state of full employment cannot be kept unless the warranted rate of growth is equated with the natural rate of growth.

Keywords: Acceleration Principle; capital; economic growth; employment; fixprice model; flexprice model; growth equilibrium; R. F. Harrod; Harrodian investment function; investment; J. M. Keynes; Keynesian economics; natural rate of growth; prices; quantities; Rule of Competitive Pricing; Rule of Free Goods; short‐run equilibrium; Silvery Equilibrium; stability; unemployment; L. Walras; warranted rate of growth

Chapter.  4112 words. 

Subjects: Economic Development and Growth

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