Sir Roy Forbes Harrod - Theories

Sir Roy Harrod is perhaps best remembered for trying to look at growth not in terms of a simple static equilibrium, which had been the preoccupation of many economists up to that time, but as a changing dynamic situation. The model he developed is called the Harrod-Domar model (guess who the other economist involved was!), and there are further details of this below. He also brought together in a mathematical framework the multiplier and the accelerator.

Multiplier / accelerator interaction

Harrod brought together theory about the multiplier and accelerator to show mathematically how they may interact to change the pattern of growth, and exaggerate the trade cycle. The accelerator theory suggests that net investment depends on the rate of change of output. This means that if there is, say an increase in government expenditure this will boost incomes through the multiplier. This will, in turn, boost investment through the accelerator. Then, because of the increase in investment the multiplier takes over again. As growth reaches its peak the accelerator kicks in in reverse, and investment then falls. This has a multiplied effect and the same process begins but heading downwards this time! The interaction of the multiplier and accelerator serves to create some of the cyclical fluctuations.

Harrod-Domar model

This model is a model of long-term growth and was in fact developed independently by Harrod and Domar around the same time. The model tends to show that there will be no natural tendency for the economy to have a balanced rate of growth. Growth is split into different types and analysed accordingly.

The overall conclusion of the model is that the economy does not naturally find a full-employment equilibrium. This is very similar to the Keynesian belief and is perhaps the main reason why we are considering Harrod as a Keynesian. The policy implication of the conclusion is that the government has to intervene to try to manage the level of output with its policies.

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