JOIN EHA

DONATE

Published by EH.NET (April 2000)

Daniele Besomi, The Making of Harrod’s Dynamics. New York: St Martin’s

Press and London: MacMillan, 1999. (Published in the Studies in the History

of Economics series, D.E. Moggridge, editor). xii + 289 pp. $75

(hardcover), ISBN: 0-312-21908-3.

Reviewed for EH.NET by Steve Keen, Department of Economics and

Finance,

University of Western Sydney (Australia).

Movie-going economists might recall the line in Apollo 13 that NASA

learned more from this failed mission than it had from all its previous

successes. In part, Daniele Besomi tries

to achieve something of the same in Roy Harrod’s failure to inspire economists

to adopt a dynamic approach to their discipline.

There is little doubt that Harrod’s adventure into dynamics was a failure,

in that little if any of what he saw as the dynamic way of thinking took root

in economics. Indeed, economics today is distinguished from almost all other

sciences by a central reliance upon static analysis, rather than the dynamic

and evolutionary approaches which characterize other disciplines.

If Veblen were alive today, his seminal methodological work would not be

titled “Why is Economics not an Evolutionary Science?”, but “Why is Economics

the Only Non-Evolutionary Science?”

Much of the answer lies in the strengths, failings and foibles of Roy F.

Harrod, the economist who most openly and prominently championed economic

dynamics, and in the reactions of other economists to his challenge. While this

point is taken up in Besomi’s epilogue, the main purpose of Besomi’s treatise

is to uncover the process by which Harrod developed his approach to dynamics.

Through his comprehensive survey of Harrod’s published writings and

correspondence with other economists, Besomi finds more method in Harrod’s

quest to develop a dynamic economics than is apparent to

anyone who simply relies upon Harrod’s major works on dynamics (I take these to

be “An Essay in Dynamic Theory” [1939], “Towards a Dynamic Economics” [1948],

“Second Essay in Dynamic Theory” [1960], “Themes in Dynamic Theory” [1963], and

“Economic Dynamic s” [1973]). These works in themselves appear a patchy melange

of concepts to anyone well-versed in modern dynamic analysis, with inexplicable

attempts to define the greater part of economics as the province of “Statics”

rather than “Dynamics,” a painfully

slow development of analytic technique – if indeed there was any development

at all – and gross inconsistency over time, as highlighted many years ago by

David McCord Wright (1949).

However, there is methodological consistency, Besomi argues, but it can

only be seen if one looks through Harrod’s eyes and in Harrod’s time.

Harrod believed that the Marshallian theory of value could be extended in

stages to cover dynamics, with an essential first step in this being

generalizing Marshallian analysis to cover imperfect competition. Thus those

of us who normally associate the theory of imperfect competition with Robinson

and Chamberlin learn that Harrod devised the concept of marginal revenue, and

developed the formula relating it to price and the inverse elasticity of

demand.

The belief that there was continuity between static and dynamic analysis

appears curious to a dynamicist today – as curious as the belief that, to ride

a bike, one must first learn how to balance it while it is stationary.

But it is explicable in the context of Harrod’s time, especially when Harrod’s

extremely limited understanding of mathematics is taken into account. However,

this perceived continuity, which he stressed so much in his writing, made it

very difficult for Harrod to convince economists that he was saying something

new – and made it more difficult still for economists to accept that, where

Harrod was obviously saying something new,

he was not also saying something quite wrong.

This problem was sharpest with the next essential element in Harrod’s

methodology, the belief that a dynamic economics required “abandoning the

assumption of stability of equilibrium, and introducing some destabilizing

factor in the model at the outset” (Besomi, p. 3). Here arose many

misunderstandings of Harrod, largely because economists of his time (and many

since) could

not accept that an unstable equilibrium was a meaningful concept. Hicks’s

(1949) erroneous but widely believed statement that “A mathematically unstable

system does not fluctuate; it just breaks down” was typical of the manner in

which this crucial aspect of Harrod’s dynamics was dismissed by economists.

Finally, Harrod was competing for attention at a time when many others –

most notably Keynes – were vying for the attention

of economists, with many calls of new ways to think economically. Besomi

emphasises the extent to which Harrod was a participant in, and product of

these debates, while at the same time establishing that Harrod was as guilty of

misunderstanding his fellows – again, most notably Keynes – as they were of

misunderstanding him.

Besomi also indicates the extent to which Keynes played an important role in

helping Harrod formulate his ideas. Keynes proposed a “fundamental growth

relation” – in terms of the multiplier and accelerator – to Harrod before he

had devised his own (Besomi, pp. 138-150). Keynes’s notion of dynamics was also

much richer than Harrod’s: “What Keynes held against Harrod in the course of

their debate, and what Harrod did not understand,

is

that in dynamics time must be the ordinary time, full of hopes and

disenchantment, enabling one to recognize the importance of the uncertainty

regarding the future course of events as distinct from the certitudes of the

past” (Besomi, p. 162).

Harrod’s

most direct competitors were the econometricians, following on from Frisch, who

modeled the trade cycle as the product of a stable propagation mechanism

reacting to exogenous shocks. Here he lost out completely – so much so that his

own “model” of cycles,

which he insisted could not be reduced to the mechanical interaction of lags,

was recast in precisely that mould by Hicks, Samuelson et al in a fashion which

divorced growth and trend

Harrod was not necessarily correct to oppose a lagged reformulation of his

analysis. Elsewhere (Keen 2000) I argue that the Hicks-Samuelson second order

difference equation was in fact the product of bad economics, and that Harrod’s

model can be stated in a lagged form in which growth and cycle are

interdependent. However,

he was correct to oppose basing cyclical behavior upon lags alone, and

divorcing growth from cycle. But he had little chance of defending this

position against the far more technically proficient Hicks, Samuelson, and

econometricians generally. As Besomi

observes, “We may thus agree with Goodwin, and Samuelson before him, that

Harrod’s intuition was far superior to his mastery of the analytical tools he

devised for solving the important problems he was posing” (Besomi, p.

210).

Given all this, it is remarkable that anything of merit emerged from this sea

of confusion. Yet something of merit did. Harrod’s dynamics, with its

well-known but misunderstood emphasis upon instability, and its poorly known

but important emphasis upon nonlinearity, did contribute something new and

important to economic theory – regardless of whether or not these ideas ever

took root in mainstream economics.

Precisely because these valid ideas did not take root, Besomi’s book is as much

a study in the pathology of economics as is it a study of Harrod per se. Many

of those who are critical of the twists and turns mainstream economics has

taken since World War II point a finger at textbooks, and here Besomi is no

exception. He observes that “The story of the textbook recognition of Harrod’s

contributions concludes even more sadly: since the 1980s, Harrod’s name rarely

appears in the author indexes of books on macroeconomics. Surveys of trade

cycle theory hardly mention his contributions, while endogenous growth

theorists seem to remember Harrod only in passing, for his ‘production

function with little substitutability among the inputs’ used ‘to argue that the

capitalistic system is inherently unstable'” (Besomi, p. 209, citing Barro and

Salai-Martin (1995), p. 10).

Besomi’s Harro dian saga is a useful tonic to the textbook view of the history

of economic thought. Far from showing a linear progression from old ideas to

new, good ideas to better ideas, we see a haltering to and from movement, with

Harrod buffeted by the debates of his day, publishing what he thought would

communicate well rather than what he necessarily thought, tailoring articles

to the desires of editors All stuff with which practitioners in economics are

familiar, but which has rarely been as well

documented for

a major figure like Harrod.

There is, therefore, much that economics could learn from Besomi’s anatomy of

Harrod’s Apollo 13. However, I disagree with the conclusion Besomi

himself draws, when he states that “it would seem that the success of a theory

does not depend only upon its clarity, logical consistency, and heuristic

value, let alone empirical accuracy, but also on its capacity to be integrated

within the accepted currents of thought. To generate

interest, a theory must contain some element of novelty; but to be

understood and integrated, the break with tradition must not be too radical”

(Besomi, p. 214).

I would instead argue that Harrod’s false belief that dynamics did not

constitute “too radical a break with tradition” is part of the reason why

economic dynamics was stillborn in Harrod’s hands.

(Daniele Besomi is an independent research scholar (lucky man!) based in

Switzerland.)

References:

R. Barro and X. Sala-I-Martin, 1995. Economic Growth, New York:

McGraw-Hill.

R. F. Harrod, 1 939. “An Essay in Dynamic Theory,” Economic Journal, 49:

14-33.

1948. Towards a Dynamic Economics, London: Macmillan.

,1960. “Second Essay in Dynamic Theory,” Economic

Journal, 70:

277-293.

, 1963. “Themes in Dynamic Theory,” Economic Journal,

73: 401-421.

, 1973. Economic Dynamics, London: Macmillan.

J. R. Hicks, 1949. “Mr. Harrod’s Dynamic Theory,” Economics 56: 106-121.

S. Keen, 2000. “The Nonlinear Economics of Debt Deflation,” in W. Barnett

,

C. Chiarella, S. Keen,, R. Marks, and H. Schnabl, editors, Commerce,

Complexity and Evolution, New York: Cambridge University Press.

D. M. Wright, 1949. “Mr. Harrod and Growth Economics,” Review of Economics

and Statistics, 31: 322-328.

Steve Keen’s principal interests are in dynamic modeling and Hyman Minsky’s

Financial Instability Hypothesis. He is co-editor of Commerce, Complexity

and Evolution (see references above), to be published this August by

Cambridge University Press. Works in progress include Debunking

Economics

(Zed Books) and Finance and Economic Breakdown (Edward Elgar).

Subject: L Geographical Area: not relevant Country/Region: not relevant Time

Period: 8, 9