On the road to the Golden Age

Summary

To find a pattern leading to the Golden Age it is necessary to introduce a principle for the division of consumption between generations.

The Golden Rule result gives the fraction of G. N. P. that each generation saves on behalf of future generations but since this fraction is constant, previous generations have made an “identical” sacrifice on behalf of the present one.

In a similar fashion it is postulated here that every generation chooses the proportion of G. N. P. which it wishes to save while requiring previous generations to save in exactly the same way. This means that although very generations would like to increase its consumption, it does not wish earlier generations to do so since that would leave less total G. N. P. in the present.

The part of G. N. P. to be invested is assumed to be a certain, to be determined, function of time. The production function is taken to be Cobb-Douglas with constant returns to scale. The optimal growth path is determined under various assumptions about labour supply. It is shown that the Golden Age results are obtained as time approaches infinity.