Harold's growth theory

Harrods Growth Theory

Sir Roy Harrod was a British economist of the twentieth century, renowned for introducing the concept of dynamic economic growth. He proposed a theory of economic growth, which is now known as ‘Harrod’s Growth Theory’, and became a major milestone in the development of modern economic theory. Harrod’s Growth Theory was elaborated further in his book, The Trade Cycle: An Essay (1939). The objective of this article is to provide a detailed overview of Harrod’s contributions to economics, and his arguments underlying the theory of economic growth.

Harrods growth model was built as an attempt to explain the auto-catalytic style of economic growth. His original model is expressed as a system of two equations, the production function and the savings function. In the production function, the output of a firm Y is expressed as a function of capital K and labour L, such that Y= f(K,L), and the amount of capital available to the firm is the aggregate of new investment (I) and residual capital (K-1) from the previous period, such that K = I + (K -1).

The saving function is expressed in terms of the amount of saving S and the amount of non-saving (dis) saving (D). The relationship is expressed as S = I + (S-1) - D. This model relates the rate of investment to the rate of saving which, in turn, affects the size of the capital stock, and as a consequence, the level of output.

This model was later modified to allow for a more realistic description of economic growth. Harrod argued that, in order for growth to occur, there must be an increase in the amount of investment above the growth rate of the output. This ‘investment to output gap’ is necessary for the economy to grow.

However, it soon became apparent that an increase in investment was not the only requisite for growth. If the saved resources are not sufficient to finance the increase in investment, then the output will not increase. Therefore, the rate of investment had to be increasing at a faster rate than the growth rate of output, thus creating a ‘growth gap’.

To resolve this ‘growth gap’ Harrod proposed that the amount of output had to be increasing faster than the growth rate of the capital stock. He proposed that capital had to be ‘absorbed’ in order to accelerate economic growth. This ‘absorption’ is basically an increase in the amount of capital that is productively employed.

Harrod also suggested that savings had to be sufficient and that the composition of savings had to be sufficient to enable investment and thus ‘there must exist… a balance between the propensity to save and the inducement to invest’.

In summary, Harrods growth model was developed to examine the relationship between the growth of savings and investments in order to facilitate economic growth. His main argument was that, in order for growth to be realized, the rate of investment must exceed the growth rate of output, and that capital had to be productively invested in order to bridge the resultant gap. His model was an important addition to economic theory, and his idea of investment-to-output gap was adopted in much of the subsequent economic theory.

Harold’s theory of physical growth was developed in the late 19th century by British scientist Harold Swaisgood, who argued that physical growth could be explained by an underlying principle of ‘‘growth-energizing power.’’ He theorized that the growth process is determined by both the rate of production and the rate at which the physical growth energy is expended, and that energy is generated by the activities and interactions of the various components of the body, including cells, hormones and enzymes.

Harold proposed that there was an invisible force, or energy, which all living things contain, which regulates and controls physical growth. This energy, according to the theory, is generated by the body’s metabolic activities and the interactions of its various components. His theory of physical growth suggests that the body’s growth is determined by the rate at which this energy is expended and is an expression of the body’s metabolic rate.

Harolds theory was further developed by his successors, and its impact can be observed in the field of child development. It has been used to explain why some children develop slower than others and why growth spurts and plateaus occur during different stages of childhood.

The theory of physical growth has also been significant for its role in the development of theories regarding the human lifespan. Scientists have used the theory to create aging theories, which attempt to explain why physical growth is slowed as age increases, and to establish a logical understanding of why the human lifespan is roughly equal.