Economic theory and modern controversies
Vinod Anand | 06 Apr 2012

This all too brief and general excursion through the history of economic theory provides a means of distinguishing between modern theories of economic growth which can be traced, directly or indirectly, to one of the historical lines of development.

ECONOMIC GROWTH can be traced, directly or indirectly, to one of the historical lines of development. The two basic approaches to the problem of growth in the present day descend from the two approaches to value theory presented above.

Despite their more ancient lineage, both modern theories must give credit to R. F. Harrod, who explicitly opened the question of dynamic theory in 1934 and applied it specifically to a model of growth in 1939. Harrod, working in the shadow of Keynes, sought to provide an application of Keynesian principles to problems of the long-period. From this lead has come the recent revival of interest in growth as well as some rather heated disagreement.The theories of growth that follow the neoclassical line of development may be called the new Neoclassical? or neo-Neoclassical theory.

They descend directly from the marginal approach, exemplified in the general equilibrium theory of Walras. Although Walras himself admitted that he was perplexed by the problem of change through time when produced goods as inputs were introduced, this has not dissuaded economists from recasting Harrod?s original model in marginal terms complete with production functions and marginal product equivalences. None of these relations was thought necessary by Harrod.The problem of valuation and the determination of the rate of profit has largely been ignored in these models, which attempt to dynamise the static Neoclassical model by differentiating the given quantity variables with respect to time. The subjective basis is maintained intact.

Without prejudging this approach, it will be profitable to remember the one-commodity assumption that has been used in the past to overcome the valuation problems faced by both Classical and Neoclassical theory.The second basic approach does not derive its background directly from Classical theory but is based primarily on the work of Keynes and Kalecki. This post-Keynesian approach attempts to fit the General Theory to long-period problems of growth. Harrod is quite obviously the chronological head of this line.The post-Keynesian theories are distinguished by their use of the Classical distinction between costs of production and output. In addition, they recognize and acknowledge the difficulties of valuation, and some attempt to provide a theory of distribution based on the independent determination of the rate of profit.

Their genealogy can be traced to the Classical tradition, Ricardo and Marx in particular. The post-Keynesian approach has been greatly aided by Piero Sraffa?s elegant solution to the Classical valuation problem published in The Production of Commodities by Means of Commodities Although space does not permit a close analysis of the work, Sraffa?s essential result is that it is impossible to speak of capital values without an independent determination of the rate of profit. This proposition casts a deep shadow over some of the basic axioms of the neoclassical theory when they are taken outside the static determination of optimum resource allocation.With this historical view of the antecedents of the prevailing theories in mind, one can attempt to understand the current conflicts in the growth literature and assess the success of each approach in its handling of the difficult problem that remain from the past and those that exist at present.

Although professional economists are themselves far from unanimous in their assessments the historical background should aid the student in understanding how a particular position is reached, even if he is not in complete agreement with it.It must be remembered, however, that growth theory, now as in the past encompasses the entire corpus of economic theory. Growth theories must be judged on more than their superficial aspects or their logical consistency, given a set of premises. Every particle of underlying theory and the implications of each assumption must be carefully inspected. The pitfalls of simple assumptions are many, and often, as shown in the development of value theory, they may have crucial effects on the ability of a theory to answer the questions asked of it. With these things in mind, the modern approaches to growth theory can be examined, and an assessment drawn.

Gottfried Haberler views the process in quasi-dialectical terms, claiming that this vindicates the neoclassical view of the world and shows Keynes's theory to be just a special short-run case, subsumed under the dialectically refined neoclassical long-run analysis.