Harrodian instability in a post-Keynesian growth and distribution model

Abstract

This article examines afresh the problem of Harrodian instability by incorporating into a post-Keynesian growth model an additional link, first proposed by Adrian Wood (A theory of profit, 1975), between firms’ pricing policies (which determine their profit margins) and their accumulation policies. It is assumed that firms’ pricing strategies are wholly linked to their need to self-finance some of their investments. Such a link suggests, a priori, that there is an endogenous self-correcting force, originating at the micro-level, that is capable of mitigating Harrodian instability. When investment increases or declines uncontrolledly, the variation in the accompanying profit margin is able to exert a contrary smoothing effect on effective demand (through changes in the multiplier). It is shown, firstly, that this effect is such that it leads to the emergence of a basin of attraction for multiple stationary growth rates. However, there is every likelihood that the growth rates in this basin of attraction will be higher than the natural growth rate (and will therefore be unsustainable in the long term). It is shown, secondly, that a sufficiently high budget deficit makes it possible to draw the convergent growth rate space towards a state of stationary equilibrium within the “sphere of the possible”. It is shown, finally, that the state has sufficient room for manoeuvre to arbitrate between competing objectives (employment–distribution–budget deficit) by virtue of the existence of a whole continuum of stationary equilibria.