Capital Theory pp 183-190 | Cite as

# ‘Hahn problem’

## Abstract

Harrod (1939), who inaugurated the postwar concern with growth theory, distinguished between three growth rates: the natural, the warranted and the actual. True to his Keynesian heritage he argued that there were circumstances in which the warranted rate of growth permanently exceeds the natural rate. More importantly from the point of view of this essay he claimed that the warranted growth path was highly unstable — he called it a ‘knife-edge’. By this he meant that small disturbances of the warranted growth path would lead to a cumulative divergence of actual from warranted growth. The argument was simple. Suppose, for instance, that for some exogenous reason the actual growth rate fell a little below the warranted rate. By virtue of the accelerator mechanism, savings would exceed investment (*ex ante*) and income would be given a further impulse taking it below its warranted level. This leads to further reductions in investment and to further downward displacement of the actual path. This process continues. Hicks (1950) quickly saw that this theory could easily serve as an explanation of cycles.

## Keywords

Capital Good Natural Rate Perfect Foresight Price Expectation Actual Growth Rate## Preview

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