PART III - A UNIFIED APPROACH
Published online by Cambridge University Press: 01 February 2010
Summary
Bethe had found out that if you do just the right things,
if you kind of forget some things and don't forget other
things, do it just right, you can get the right answers.
Richard FeynmanIn this book we have presented the theory of economic growth along the lines it followed in the twentieth century: in Part I, we considered positive, or descriptive growth theory. Assumptions were made about the functioning of the economy (income was generated through a production function); the savings rates s chosen by society; and finally the growth rate of population. In Part II, we discussed the normative approach, whereby society chooses a savings rate so as to meet a long-term objective such as the maximization of welfare over a long horizon. This was the heart of optimal growth theory.
We will now show, in the third part of this book, that both approaches can, and should, be unified. If, as Robert Solow pointed out in his path-breaking essay, we are in a competitive economy, the wage rate and the real rental rate are determined by the traditional marginal productivity equations. We underline the second relationship, namely the equality between the real rental rate and the marginal productivity of capital because, as we will show, it determines a savings rate leading to an optimal, dynamic, allocation of capital.
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- Economic GrowthA Unified Approach, pp. 259 - 262Publisher: Cambridge University PressPrint publication year: 2009
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