Investment, Savings and Employment in the Long-Run

Abstract

MOST STUDIES in the theory of growth assume that goods and factor markets clear sufficiently fast that they can always be considered in equilibrium, and the principal interest has been in the convergence of 'equilibrium' paths to steady state growth. With a few exceptions, very little attention has been given to discovering how the aims and behavioral patterns of the different economic agents interact in the various markets, and what the consequences of this interaction are for the long-run growth of the economy. The principal aim of this paper is to examine a range of models where the economy is not always in equilibrium and to see how (under various possible specifications of market behavior) these differ from those conventionally studied. The first section of the paper describes the main elements of the models to be considered. In the second section, we examine a simple disequilibriumii model where planned investment is not necessarily equal to planned savings, although full employment is still assumed to be maintained. This latter assumption is relaxed in Section 3, where we consider a model in which there is disequilibrium in both product and labor markets. This model incorporates a lagged adjustment of employment and a number of assumptions about wage determiniation. Finally in Section 4, we examine a model in which there is cost inflation. The impetus to write this paper came largely from an early article on this subject by F. H. Hahn [2] and the models we discuss are basically a development of those presented by him. We should also refer to the work on monetary growth models by H. Rose, J. L. Stein and others (for a survey of this work, see Stein [8]).2 These authors have considered some of the consequenlces of disequilibrium, but their primary concern has been with comparative dynamics rather than with questions of stability. Our paper represents a rather different (and complementary) approach in that it is principally concerned with the real side of the economy and in its emphasis on the stability of steady state growth.