ABSTRACT
Growth economics as a modern discipline became popular after the Second World War when economists became concerned about the growth of war ravaged economies. If Keynes’ General Theory of Employment, Interest and Money was the answer to the problems of depression of the interwar years, the Keynesian growth theories of Harrod and Domar formed the intellectual basis for reconstruction and growth of the war ravaged world economy. Harrod and Domar emphasised the need to raise the rate of saving and investment to raise the rate of growth of the economy. The equilibrium growth rate of real output in such models was simply equal to the rate of saving divided by the capital-output ratio. Higher growth could be achieved only by either raising the savings rate or lowering the capital-output ratio, i.e., improving the efficiency of capital. For given technology, raising the rate of savings was the only feasible way of raising the growth rate. However, there was a catch. In true Keynesian spirit, investment and savings could not automatically equal each other. This would happen only when the actual rate of growth equalled the ‘warranted’ rate of growth. Any gap between the two would show up as even increasing instability.
