The Trouble with Harrod: The fundamental instability of the warranted rate in the light of the Sraffian Supermultiplier

Abstract

The paper argues that Harrodian instability is an instance of what Hicks in his book Capital and Growth (1965) called static instability, related to the direction (and not to the intensity) of the disequilibrium adjustment process. We show why such instability obtains in demand‐led growth models in which the ratio of capacity creating private investment to output ratio is given exogenously by the aggregate marginal propensity to save. We also show that Sraffian Supermultiplier model overcomes the Harrodian instability and that its demand‐led equilibrium is statically stable. It is explained that the latter results do not follow from the presence of autonomous non‐capacity creating expenditure component as such but from its presence within a model in which investment is driven by the capital stock adjustment principle (i.e., the flexible accelerator). Finally, we argue that, although being statically stable, the equilibrium growth path of the Sraffian Supermultiplier model can be dynamically stable or unstable depending on the intensity of the reaction of investment to demand. We then provide a discrete time sufficient condition for the dynamic stability of such equilibrium that implies that the marginal propensity to invest remains lower than the marginal propensity to save during the adjustment process, a modified Keynesian stability condition.

Stagnation and unnaturally low interest rates: a simple critique of the amended New Consensus and the Sraffian supermultiplier alternative*

“…Basically that x in equation 6is sufficiently small. For the formal analysis of the dynamic stability conditions of a similar Sraffian supermultiplier model, see Serrano et al (2019).…”

An Empirical Test on Harrod’s Open Economy Dynamics

“…Moudud (2009) [23] shows how to combine taxation with public investments in order to raise the warranted growth rate (which, according to Harrod, is otherwise reduced by an increase in the budged deficit/GDP ratio). Serrano et al (2019) [24] claim that Harrod's instability is an instance of what Hicks calls "static instability" and they show that the Sraffian Supermultiplier [25] model overcomes the Harrodian instability. Skott (2019) [26] contends that there is no need to introduce autonomous demand as the "driver of long-run economic growth and as a stabilizing force", but it suffice to model "the supply side (the labor market) and/or economic policy" to obtain those results.…”

Investment Sustained by Consumption: A Linear and Nonlinear Time Series Analysis

“…Y Y must be considered as the firms' expectations of the growth rate of aggregate consumption. Entrepreneurs' expectations about the evolution of consumption must be exogenous, or, at least, cannot be mechanically linked to the evolution of effective output, otherwise Harrodian dynamic instability appears (for recent states of the art on Harrodian instability, see [6][7][8][9]). (Dejuán 2005(Dejuán , 2017 [10,11], following [12], emphasize that the expected rate of growth of permanent aggregate demand is the variable that guides investment and, therefore, is the key variable in a multiplier-accelerator system.…”