A Model Of Maximal Economic Growth

Even with unchanged technology and under ceteris paribus conditions, fixed capital cost per unit of output will not remain constant. Production becomes less and less costly as the rate of growth increases. This means that for a given output and in order to keep the output capacity unimpaired in a specified period of time a smaller amount of real resources has to be spent in an economy growing more rapidly. The marginal efficiency of gross investment increases. It is further increased by technological progress, which may be taken as an increasing function of gross investment. Due to the limited absorptive capacity of any economy (and quite apart from the capital saturation phenomenon, which in a relatively small open economy may be neglected) diminishing returns set in, they eventually outweigh increasing returns mentioned above and for a sufficiently high rate of growth the economy reaches the point where mei= 0. This is the point of the maximum rate of productive investment. This is also most likely the point of the optimum rate of investment, because consumption effects are such that we may reasonably expect the population to accept this policy as the most desirable.