Economic Growth in the West

Professor Jerome L. Stein puts forward two hypotheses in his recent review article.1 He argues, firstly, that Angus Maddison and A. Lamfalussy reached misleading conclusions in their analyses of Western economic growth. The use by these authors of a simple Harrod-Domar model, it is suggested, provided a shaky and insufficient framework. Stein's second hypothesis is that modern economic growth theory can provide much more insight into the growth process, in particular because it allows exploration of the rate of growth of productivity. The modern economic growth theory Stein makes use of is that of the neo-classical approach which, as is well known, owes much to the work of (amongst others) Solow, Swan and Meade, who attempted to break away from the rigidity implicit in the Harrod-Domar model. The neo-classical model builds strong assumptions, the most important being those of perfect competition and full employment. If factor substitution is possible, if the factors are paid the value of their marginal products and if investment of an amount equal to fullemployment savings is undertaken, then it can be shown that the steady state equilibrium rate of growth is the natural rate. Thus, the model stresses considerations the supply rather than the demand side and, consequently, it is not surprising that Stein finds it difficult to give much weight to the issue of aggregate demand which Maddison in particular found to be extremely significant. Stein does effectively use the neo-classical growth analysis to demolish Lamfalussy's surprising conclusions that the efficiency of British net investment in increasing manufacturing output per head was at least as high as that of German investment, and that in order to raise the growth rate the United Kingdom needed to increase the investmentoutput ratio. Lamfalussy did qualify his conclusion. He wrote, on the assumption that there have been no diverging structural changes within manufacturing, progress must have been slower in Germany than in Britain. Structural changes were not defined but it was possible to reflect that the author was at least aware that a complex of factors affected productivity. It was possible for the reader to assume that some of these must have been inadequately reflected in the available statistics. It is well known that Britain in the post-war period has encountered numerous problems in adjusting the pattern of production and in overcoming psychological resistances to change. The statistical residual

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