Dynamic Equilibrium and Instability in the Sense of Harrod

Professor Jorgenson has recently displayed great skill in showing that a variety of attempts to demonstrate rigorously the instability in the sense of Harrod of Sir Roy Harrod's system must be regarded as either erroneous or question-begging.' The purpose of this note is to take up a problem which appears to disturb Jorgenson himself.2 In his formulation of the problem, Jorgenson follows Harrod3 in treating growth at the warranted rate as a necessary and sufficient condition, indeed as a definition, of dynamic equilibrium. I propose a different though closely related definition. An economy will be said to be in dynamic equilibrium if and only if the overall or average capital-output ratio is maintained at the required level Cr. It will be found, on assumptions about the behaviour of entrepreneurs analogous to those made by Jorgenson, that instability in the sense of Harrod (i.e., the tendency of the economy not to return to dynamic equilibrium if displaced from it) is not inevitable. Such instability will require, however, a minimum degree of responsiveness to a discrepancy between the actual and the required capital stock which seems almost certain to exist. And if such instability is present, there is an interesting asymmetry in the model which results in a limitation of the intensity of chronic inflationary pressure but not of chronic depression

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• On Instability in the Sense of Harrod

  José Antonio Miranda Encarnación, J Encarnacion•Economica•1965

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