Markets, Productivity, and Happiness in a Historical Perspective

A Marxian Perspective on the Harrodian Instability

Chatzarakis Nikolaos, Trinity College, Dublin & Aristotle University of Thessaloniki
Tsaliki Persefoni, Department of Economics, Aristotle University of Thessloniki

One of the key issues of current economic growth theory is the question of whether a capitalist economy can attain and sustain a long-run equilibrium. In the seminal works by Harrod (1939) and Domar (1946), this long-run equilibrium comes along with serious problems termed ‘Domar’s disinvestment problem’ and ‘Harrod’s knife-edge problem’. The Neoclassical school set out by Solow (1956) attempted to bypass this problem by shifting towards fundamental neoclassical assumptions; however, the fallacies of this attempt have been pointed out by many and approaches initiated by Kalecki (1954), Robinson (1956) and Kaldor (1957) attempted to resolve the instability by introducing the idea of the ‘animal spirits’ in the theory and to link the economic cycle to the long-run tendency of growth. Unfortunately, their attempts did not probe for a consistent theory of cycles and growth while Pasinetti (1960) pointed out that such a theory is not possible within the limits of Keynesian framework. It is noteworthy that the issue of sustained long-run equilibrium goes back to Marx’s discussion who had already described the possibility of a ‘warranted’ growth path in his Schemes of Expanded Reproduction (Capital II). Furthermore, Tugan-Baranovskii (1905), Luxemburg (1913) and Grossman (1929) showed that divergences from this growth path were inherent within Marx’s theory and would eventually result to the outburst of crises. Grossman, Dobb (1937), Shaikh (1978, 1987 and 2016), Mandel (1995) and Tsoulfidis and Tsaliki (2019) inter alia identified the persistent appearance of crises with the consequences of the law of the falling rate of profit, (Capital III). In a recent work by Chatzarakis et al. (2022), an integrating growth-cum-cycles model is presented which is founded in Marx’s work and provides a possible explanation of the inherent instability of capitalist long-run evolution. Hence, the deviation of the ‘warranted’ growth rate from the rates of accumulation of constant and variable capital is not attributed to psychological mechanism, but due to the fluctuating rates of the change of the rate of surplus-value, a fundamental variable of the Marxian system. In this work, we dive deeper in the interplay of these variables and attempt to show that the Harrodian knife edge problem is indeed an inherent feature of the system and it is explained by the inner nature of the capitalist development.

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Keywords: capital accumulation, falling profitability, economic growth, long cycles, knife-edge instability

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