Modeling Economic Growth: Domar on Moving Equilibrium

Abstract

This essay makes use of archival material to examine Evsey Domar's role in the introduction of the rate of growth as a variable in economics in the 1940s and 1950s. Domar investigated the nature of what he called the “moving equilibrium” of economic processes with infinite duration. Reactions to Domar's approach at the time brought about methodological assertions on the distinction between models and theories. Domar's model was an open one, in the sense that his growth equation allowed different closures. A main feature of the model was its relatively stable capital-output ratio, which reflected the terms of the debate about A. H. Hansen's stagnation thesis in the 1940s. The real economy was supposed to be stable, although the model itself was not perfectly consistent with that. The estimation of the “Residual” by Solow and others led Domar to rethink aspects of his original model.