The origin of "capital fundamentalism"—the notion that the physical accumulation of capital is the primary determinant of economic growth—has often been attributed to Harrod and Domar's proposition that the rate of growth is the product of the saving rate and the output-capital ratio. . Domar observed that the rising capital-output ratio was more a passive result of the interaction between the propensity to save and technological progress, rather than a causal factor in determining growth. "Capital fundamentalism" described the monistic preoccupation with the physical accumulation of capital as the primary determinant of the rate of economic growth.
As noted by Yotopoulos & Nugent (ibid), the theoretical cornerstone of capital fundamentalism was the thesis of the 'Harrod-Domar model', which states that the rate of economic growth is the product of the savings rate and of the ratio of produced capital. Development economists, writing in the 1950s at the height of the influence of the 'Harrod-Domar model', were unaware of its key features, and more often than not rejected its application to the interpretation of economic development. The diminishing returns to capital accumulation played a role in Harrod's framework (although not necessarily in his equations), unlike most of the economic development literature of the time.
Both Harrod and Domar eventually pointed to the skill of workers, not physical capital, as the main determinant of the rate of growth in underdeveloped countries. Robinson's interpretation was further elaborated by Hamberg (1956, pp. 163–66) as part of a commentary on what he saw as Harrod's and Domar's neglect of the distinction between full employment and full capacity growth rates over time. Arguing that the production side of the Harrod-Domar model is described by a Leontief production function Y = F (K, L) = min (K/a, L/b), where a and b are constants, Solow expressed Harrods case 𝐺 .
Development economists at the time were often aware of the complexity of Domar's and (especially) Harrod's analyses.
Capital requirements and development planning
Hans Singer, an economist at UN headquarters in New York and a former student of Keynes at Cambridge, carried out the first application of the Harrod-Domar equation to development planning. When applying the Harrod-Domar "very simple, almost tautological" equation to the interpretation of the "mechanics of development", Singer p. 396) made an important change in the original formula. The Keynesian view of population growth in industrialized economies was that it stimulated the economy through its effect on the demand for investment ("capital expansion"), as Keynes (1937) claimed in an article anticipating the core of Harrod's (1939) concept has. of the.
In the Solow-Swan growth model, on the other hand, under the assumption of a production function with factor substitution, the steady state of per capita output growth is independent of the saving rate (= . rate of investment) and of the rate of population growth. According to the Solow-Swan model, an increase in the growth rate of the population has no long-term effect on the growth of output per capita, but it lowers its level. Such long-term stability of the capital-output ratio (at a value around 3) was considered based on solid empirical grounds, "one of the most useful parameters with a reasonable degree of stability".
The idea – that the observed long-term stability of the capital coefficient results from the effect of technical progress that counteracts diminishing returns to capital accumulation – was introduced by William Fellner (1951, p. 115) and endorsed by Domar a, pp. Hence, the constancy of the capital coefficient has often been considered a characteristic of the time series, not of the production function itself. Capital requirements were not only dealt with in the context of the development planning of poor provinces, but also in discussions about economic.
6 Kaldor (1961) would soon refer to the stability of the relationship between capital and production as one. Snyder interpreted his finding of proportionality between the growth rates of output and capital as evidence that an increase in the ratio of capital to labor was a source of "national prosperity." Kuznets and other sources, Stern (p. 169) calculated “capital investment per unit of national income growth” (that is, ICOR) and used it to estimate capital requirements: “Multiplying these by the growth rate gives a numerical expression of annual capital requirements as % of national income, in other words, the required saving rate.
The application of the Harrod-Domar framework to an open developing economy raised new questions, since a significant part of the supply of capital goods was imported from abroad. It is relevant to consider a problem specific to underdeveloped countries – namely the possibility of converting savings into real investments. Chenery & Strout (1966, p. 687) redefined Harrod's natural rate as a skill-determined rate, that is, the rate of growth of skilled labor, which should determine the economy's ability to absorb capital productively.
Development economists’ criticism
Lewis noted the “remarkable” stability of the observed value of the incremental capital-production ratio between 3 and 4. Lewis's model of economic growth in a dual economy with a perfectly elastic labor supply was designed to show how the increase in the profit share in the economy income brings about changes in the pace of saving and investing. The growth of the productive labor force depends on the rate of capital accumulation, which gives the model its classic flavor.
Lewis's use of the so-called Harrod-Domar equation without attribution indicates that it had become common knowledge by the mid-1950s. Prebisch (1948), another CEPAL economist, was also critical of the Keynesian multiplier and the mention of Domar. However, his criticism, based on a mix of Robertsonian and Austrian elements, was not limited to the application of the multiplier concept to developing economies (see also Pérez Caldentey and Vernengo 2015).
Again, like Lewis, Rostow's establishment of the arithmetic relationship between growth, saving and the capital-output ratio did not imply an endorsement of Harrod and Domar's growth models, which he clearly distinguished from the standard g = s/v equation. Development economists, on the other hand, focused on the first two stages - the economics of preconditions and the rise. A "serious theory of growth" must closely investigate the economics of growth, something that Harrod, Domar and their followers had not done (Rostow 1956, pp. 31-32). 12.
This is not far from Lewis and Rostow's interpretations of the behavior of the saving relation in that historical episode. The formula developed by Rosenstein-Rodan (p) for capital requirements was a variation of the so-called Harrod-Domar equation. Harvey Leibenstein (1966), who previously used the ICOR as a key tool of development planning (Leibenstein 1957), conducted the first investigation of the short-term association between ICOR and growth.
One of the attractive aspects of the Harrod-Domar model is the wonderful simplicity of its variables. This implied that the ICOR was really a function of growth instead of the other way around. Partly reflecting the increasing influence of the neoclassical growth model, development economists at the time gradually departed from the Harrod-Domar paradigm.
Harrod and Domar on economic development and capital
Such criticisms of the capital-output ratio model were abandoned until Easterly pursued them in Chapter 2 by investigating whether growth could be predicted with a constant ICOR. Like these authors, he was interested in short-run causality—since the long-run positive relationship between investment and growth and the long-run stability of the steady-state capital-output ratio are undisputed—but adopted a slightly different test of regressive growth versus lagged investment. Harrod and Domar were, of course, informed by the emerging literature on development economics and considered how their theoretical frameworks might (or might not) be applied to economic development.
Harrod's (1963b, p. 114) “dynamic version of the law of diminishing returns” asserted that the rate at which future income can be increased by saving depends on the availability of factors other than capital (labor and natural resources). If current growth is below natural growth only because of a lack of savings, there are qualified personnel available to implement the new technology. It is important to avoid oversimplified ideas about the consequences of simply providing additional savings.
Domar a, p. 59) attributed American economic growth during this period to technological improvements and labor force growth, which met Harrod's (1948) “fundamental conditions” for the natural rate of growth. 20 As Abramovitz (1952, pp. 155-56) pointed out, Keynes's concept of the marginal efficiency of capital as a function of the cost of production of capital goods implied that the rate of capital formation that a country could achieve depended on the capacity of the capital goods sector. Domar believed—along with Fellner's 1951 discussion—that the observed stability of the capital-output relationship indicated that the operation of technical progress was counteracting the tendency toward diminishing returns to capital accumulation.
The interpretation of the observed long-term stability of the capital-output relationship attracted Domar's attention. As discussed above, in the 1960s development economists began to question the use of ICOR to figure out capital requirements. Anticipating some of the causal problems discussed in the 1960s, Domar warned of the importance of such stability.
It is also possible that other factors besides capital are primarily responsible for the existing growth rate of production, and the given capital coefficient is simply the result of the interaction of other variables. Thus, the relative stability of the capital coefficient is not a sufficient indicator of the role of capital accumulation in economic growth (Domar 1961, p. 103). According to Solow et al.'s findings on the contribution of technical progress to growth, the capital ratio "will appear as a relatively passive result of the interaction between the propensity to save and the rate of technological progress" (ibid, p. 117). ).
The Origins and Development of the Latin American Structuralist Approach to the Balance of Payments, 1944-1964. In Keynes and Economic Development – The Seventh Keynes Seminar at the University of Kent at Canterbury, 1985, p.
