Beyond capital fundamentalism: Harrod, Domar and the history of development economics

Abstract

The origins of fundamentalism' - the notion that physical capital accumulation is the primary determinant of economic growth - have been often ascribed to Harrod's and Domar's proposition that the rate of growth is the product of the saving rate and of the output-capital ratio. It is argued here that development planners in the 1950s reinterpreted and adapted the growth formula to their agenda in order to calculate requirements. Development economists at the time (Lewis, Hirschman, Rostow and others) were aware that Harrod's and Domar's growth models addressed economic instability based on Keynesian multiplier analysis, which differed from their concern with long-run growth in developing economies. Harrod eventually applied his concept of the natural growth rate to economic development. He claimed that the growth of developing economies was determined by their ability to implement technical progress - not by capital accumulation, subject to diminishing returns. Domar pointed out that the incremental capital-output ratio was more likely a passive result of the interaction between the propensity to save and technological progress, instead of a causal factor in the determination of growth.