The Essay in Dynamic Theory

“The Essay in Dynamic Theory” (1939) developed further the principle of instability and the idea of endogeneity and inevitability of the trade cycle. However, the conception of dynamics and instability in the Essay differs from that of the Trade Cycle (1936) in two important aspects. Instability is no longer the result of the interaction between the multiplier and the accelerator, but of assuming the independency of the rate of growth, the propensity to save and the incremental capital-output ratio. Also imperfect competition is no longer seen as a microfoundation of the trade cycle. In the Essay, Harrod articulated his dynamics and its central core, the instability principle, around the fundamental equation. He defined it in terms of the warranted rate of growth: that rate of growth that validates the capital accumulation decisions of entrepreneurs. Along with the warranted rate of growth, Harrod introduced the natural and actual rates of growth. The draft Essay (1938) received comments for J. Marschak and J. M. Keynes who pointed out that the model required additional hypotheses that were not made explicit. Marschak also provided the first mathematical formulation of Harrod’s dynamics and raised several important points including the lack of clarity in the definition of the warranted rate of growth. Keynes’s comments led Harrod to compress his discussion of the application of the dynamic determinants to the cycle that give rise to instability of the moving equilibrium and the non-linearities of the trade cycle. This facilitated the interpretation of the fundamental equation as a constant coefficient model.