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Connecting Classical and Early Neoclassical Views on Savings and Capital Formation to Modern Growth Theory Through the Lens of F. P. Ramsey

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Abstract

We investigate the origins of modern growth theory using Ramsey’s seminal A Mathematical Theory of Saving (1928) by dividing Ramsey’s optimal savings problem into two principal components, (1) the relationship between personal savings and the formation of capital, and (2) the optimal intertemporal balance between consumption and savings. The first component serves as a philosophical conduit for surveying classical and early neoclassical perspectives on savings and capital formation. The second details early neoclassicists’ consideration of mathematical methods and intergenerational welfare. Taken together, we create a pathway between early discussions of savings and capital formation, and the origins of growth theory.

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Notes

  1. The author wishes to express his gratitude to the late Roy Gardner for his generous mentorship. I am also indebted to several readers and colleagues for their advice. I alone am responsible for all errors and omissions.

    Since the publication of Solow (1956), many theoretical economists have accepted economic growth as coincidental with an improvement in welfare, albeit not without occasional criticism. However, it is important to note that Ramsey’s novel approach explicitly incorporated intergenerational responsibility into his and many subsequent models of savings and economic welfare which are cited later.

  2. Ramsey also maintained a close professional relationship with philosopher Ludwig Wittgenstein.

  3. The University of Pittsburg Library System (ULS) has archived an impressive collection of Ramsey’s notes on economics, philosophy and logic, and mathematics. These are available to the public at https://digital.library.pitt.edu/collection/frank-plumpton-ramsey-papers.

    The University of Cambridge also houses a collection of Ramsey’s personal reflections and correspondence. See https://archivesearch.lib.cam.ac.uk/repositories/7/resources/1216.

  4. The University of Pittsburg Library System (ULS) has archived an impressive collection of Ramsey’s notes on economics, philosophy and logic, and mathematics. These are available to the public at https://digital.library.pitt.edu/collection/frank-plumpton-ramsey-papers. The University of Cambridge also houses a collection of Ramsey’s reflections and correspondence.

  5. See “Ramsey Economics” (006-07-01, 36) in the archives of The University of Pittsburg Library System (ULS), https://digital.library.pitt.edu/islandora/object/pitt%3A31735044221434/viewer#page/10/mode/2up .

  6. Misak (2020) provides a comprehensive overview of F.P. Ramsey’s life and professional contributions. Those interested in learning more about F.P. Ramsey should start with her book.

  7. See “Ramsey Economics” (006-07-10, 13) in the archives of The University of Pittsburg Library System (ULS), https://digital.library.pitt.edu/islandora/object/pitt%3A31735044221434/viewer#page/10/mode/2up . Accessed July 17, 2023.

  8. Though the distinction is sometimes difficult to discern, the author attempts to use term ‘formation’ when referring to how new capital is added, and ‘accumulation’ otherwise. In reality, economic growth does not become a focal point of discussion until the twentieth century.

  9. It is not possible herein to list the entire body of literature on savings, capital and investment that existed prior to Ramsey (1928). The works cited herein are those that appear to lay a path for Ramsey (1928) while also considering Ramsey’s age, location, immediate influencers, and intended career path as a mathematical logician (Misak 2020). I am indebted to several readers and colleagues who have helped to define this list. I remain solely responsible for all remaining omissions and debatable influences.

  10. Baumol and Tobin (1989) acknowledges that Allais (1947) first described the square-root formula for the transactions cost model of optimal cash balances found in Baumol (1952) and Tobin (1956).

  11. Allais (1947) also introduces the golden-rule for optimal growth.

  12. According to Google Scholar, Ramsey (1928) is cited in over nine-thousand books and articles.

  13. Political economy investigates the impact of economic activity within a political context. Classical economics focuses on economic problems and solutions. However, it is often difficult to distinguish between the two, especially when considering the literature from the 18th and 19th centuries.

  14. Hoselitz et al. (1960) provides the narrative from Mills Principles [1900 (1848), 407–427].

  15. Fetter (1900) offers critiques of how Böhm-Bawerk, Clark and Fisher interpreted capital. He continues his criticism of Fisher and others in Fetter (1914). Fisher (1907b) offers a convincing rebuttal. Due to his position at Cambridge in mathematics, it is likely that Ramsey was at least indirectly familiar with the collective works of Böhm-Bawerk, Clark and Fisher; these remain cornerstones of current theory.

  16. See Dimand (2019) for a thorough discussion of the Fisher Diagram (Fisher 1907a, 409).

  17. At this juncture, it is important to note the much earlier contributions of A.R.J Turgot [1727–1781] to the concept of time-preference. In an excellent narrative on theories of time-preference, Rothbard (2011), declares that A.R.J Turgot “in a relatively few hastily written contributions, anticipated almost completely the later Austrian theory of capital and interest” (61). Turgot recognized that due to future risk, goods and assets received in the present are preferred to those received in the future, and that “the rate of interest equates present with future, or temporally distant, money” (61).

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  1. Department of Economics and Finance, Rubel School of Business, Bellarmine University, Louisville, KY, 40205, USA

    Francis E. Raymond

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Raymond, F.E. Connecting Classical and Early Neoclassical Views on Savings and Capital Formation to Modern Growth Theory Through the Lens of F. P. Ramsey. Eastern Econ J 50, 54–78 (2024). https://doi.org/10.1057/s41302-023-00262-1

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