Further Developments in Dynamic Economics

Harrod’s dynamic theory faced two major criticisms. The first was Harrod’s failure to provide a basis for the existence of a unique warranted line of advance. Harrod responded by making a more general assumption about entrepreneurial behavior, and by introducing the concept of the representative entrepreneur, which did not satisfy his critics. A second line of attack championed by post-Keynesians and neoclassical economists alike argued that cumulative deviations around a warranted line of advance resulted from the assumption of constant parameters which led them to highlight the “knife-edge” properties of Harrod’s dynamics. Harrod never made such assumptions and vehemently opposed the term knife-edge to describe the workings of his dynamic theory. Harrod reacted by giving a more prominent role to the rate of interest which led him to develop his second fundamental equation and to redefine the natural rate of growth (Gn) as a welfare optimum, which eventually Harrod did not consider important.