Frank Hahn

The Theory of Economic Growth: A Survey

Our purpose is to survey the contributions that have been made to the theory of economic growth in the last twenty-five years and endeavour to place them in relation to one another. It will be clear that the survey cannot hope to cover all of growth economics. We have accordingly restricted ourselves in the following ways: (1) We take up the story with Harrod’s famous article of 1939 and make no attempt to cover writings before this date. The seriousness of this omission is evident when one recalls that this decision not only excludes the classical economists but also Wicksell, Marshall, Robertson and Cassel. (2) We restrict ourselves (except for occasional references) to the theoretical literature. Our central concern is with models of economic growth. The authors of these models have naturally had in mind as a rule that their work should contribute to an understanding of the way economies actually grow over time; but this approach to growth theory is none the less different from that which would be used if the immediate purpose was to provide the best available explanation of the variety of historical growth experiences.2 (3) While it has been found appropriate to give some summary of results in the theory of efficient accumulation, the problems of optimum saving and the development of backward countries have not been considered. (4) No discussion is presented of growth theory as applied to international trade.

EQUILIBRIUM WITH TRANSACTION COSTS

Publisher Summary This paper examines some of the modifications required in well known propositions of general equilibrium theory when transactions require resources. Some preliminary remarks on the analysis of money in such economies are also offered.

Equilibrium Dynamics with Heterogeneous Capital Goods

Introduction, 633. — The assumption, 634. — Notation, 634. — The model, 635. — Balanced growth, 637. — Momentary equilibrium, 638. — Two capital goods, 641. — Some comments, 644.

The Next Hundred Years

This paper conjectures that, in the future, economists will rely more on computer simulation and less on analytical methods. Copyright 1991 by Royal Economic Society.

The economics of missing markets, information, and games

Part 1: out-of-equilibrium beliefs and out-of-equilibrium behaviour, David M.Kreps the role of common knowledge assumptions in game theory, Adam Brandenburger and Eddie Dekel repeated games - a survey, H.Sabourian information dynamics and equilibrium, Frank Hahn. Part 2: the economics of parallel research, Partha Dasgupta strategy variables and theories of industrial organization, Christopher Doyle bargaining theory, David Canning imperfect competition and international trade, K.Gatsios. Part 3: missing markets - consequences and remedies, David M.Newberry rational expectations, information and asset markets, Margaret Bray decision-making in the presence of risk, Mark J.Machina. Part 4: theoretical modelling of banks and bank runs, Luca Anderlini optimal multi-unit auctions, Eric Maskin and John Riley labour contract theory, Tim Worrall. Part 5: intertemporal general equilibrium models, Timothy J.Kehoe sunspots, Stephen Burnell an introduction to nonlinear dynamics and its application to economics, David Kelsey. Part 6: some micro and macro implications of inventories, J.P.Thomas Keyness liquidity preference theory - a suggested reinterpretation, Louis Makowski.

Keynesian Economics and General Equilibrium Theory: Reflections on Some Current Debates

To many economists Keynesian economics deals with important relevant problems and General Equilibrium theory deals with no relevant problems at all. This view is often the consequence of the ease of learning Keynesian macro-arithmetic compared with reading Debreu. But it also has, alas, an element of truth. This is quite simply that General Equilibrium theorists have been unable to deliver one half at least of the required story: how does General Equilibrium come to be established? Closely related to this lacuna is the question of what signals are perceived and transmitted in a decentralised economy and how? The importance of Keynesian economics to the General Equilibrium theorist is twofold. It seems to be addressed to just these kinds of questions and it is plainly in need of proper theoretical foundations.

The Foundations of Monetary Theory

To the pure theorist, at the present juncture the most interesting and challenging aspect of money is that it can find no place in an Arrow-Debreu economy. This circumstance should also be of considerable significance to macroeconomists, but it rarely is. Much of current macroeconomics is written as if the ‘real’ economy could be looked at as an equilibrium of an Arrow-Debreu economy. It is true that these economists have given the economy a sequential characterisation, but they believe that the postulate of rational expectations renders this inessential: the underlying economy could just as well be that described by Debreu. In this, I believe, they are not only careless (since the matter is never given proof) but also mistaken. It is one of my central concerns in what follows to argue this. Indeed, I shall wish to maintain the view that from our present standpoint Keynes’s theory, and in particular his monetary theory, is best understood as a denial of the realism and relevance of Arrow-Debreu equilibrium. Of course, Keynes did not and could not have put it in this way and in any case, while he had a poet’s insight, he lacked the seriousness and care of a theoretician.

The Stability of Growth Equilibrium

Introduction, 206. — I. Statement of the problem, 209; growth equilibrium formulated, 210; the Solow case, 212. — II. Model A. Continuous full employment, the Wicksell case, 213. — III. Model B. Unemployment permitted, 219; the stabilizing effects of redistribution, 221; the stabilizing effect of changing money wages and changing interest rates, 223. — IV. Model C. The Keynesian assumptions, 224.

Chapter 16 Stability

Publisher Summary The chapter is concerned with endogenous processes operating in an economy that brings equilibrium; the most famous and most discussed is the law of demand and supply. If, at prevailing market signals, there is a positive excess demand in a market price, it will rise; if there is a negative excess demand, it will fall. In a partial equilibrium framework when all other prices are held fixed, it seemed that this process would bring about equilibrium provided only that the excess demand in this market was a diminishing function of its price. The chapter discusses that there is a large class of economies that have unstable equilibria under the most popular form of the price mechanism. The chapter discusses the Arrow–Debreu specifications in which goods are distinguished by physical characteristics, location, date of delivery, and state of nature. It is a commonplace that many of these goods lack markets in actual economies. It is also clear that many planned excess demands are not public knowledge and that one cannot sensibly retain the traditional price adjustment schema. An alternative is to study a sequence of short period equilibria—a procedure familiar from the theory of growth. The aim is to study convergence to long-run equilibrium whether in a deterministic or in a stochastic setting. Expectations and their formation are central to this kind of approach once durable goods and production lags are included. One is then concerned with convergence to rational expectation equilibrium.

On Warranted Growth Paths

Recently I showed [2] that the steady state path of an economy with more than one capital good was not the asymptotic state of all equilibrium paths. For some special cases I demonstrated that indeed all equilibrium paths diverged. This is in marked contrast to the well known result of Solow for the one-sector world and to the equally familiar two-sector propositions. Partly through discussions with Mirrlees, I had become aware that my analysis bore a family resemblance to the “local turnpike theorems” of Dosso, Samuelson and McKenzie [4, 6], which exploit the fact that the Neumann ray is a saddle point’ in the phase space of all inter-temporally efficient paths. However I could not make a firm connection since my construction allowed for a separate consumption sector, a descriptive consumption function and for an exogenously given labour force. The “turnpike” results had none of these features. But further study of the problem has enabled me to clarify the connection between the descriptive and the “planning” model and it is the first purpose of this paper to report on this.