Domar, expectations, and growth stabilization

Abstract

Evsey Domar investigated in the 1940s the implementation of growth stabilization policy under the assumption that policy makers and businessmen alike believed his theoretical growth model. Economic policy was supposed to work merely through the impact of its announcement on expectations. He claimed that confident expectations, generated by government’s assurance of future growth through fiscal policy, would induce private investment decisions in a scale that would bring about the required growth rate and by that justify the expectations, without putting the guarantee to test. Domar’s policy framework contrasts with the policy-ineffectiveness proposition of New Classical macroeconomics advanced in the 1970s. Domar’s stabilization plan is discussed in detail in the context of his growth model, together with similar ideas put forward by Roy Harrod, as the latter modified aspects of his original growth model, and critical reactions by Alvin Hansen.

Samuelson's Last Macroeconomic Model: Secular Stagnation and Endogenous Cyclical Growth

“…Schelling most likely attended the seminars Domar organized (together with Hansen) on macroeconomic policy from 1943 to 1946 and interacted with him about his growth models. Schelling (1947) was attracted to Domar's guaranteed growth rate, which he saw as shedding new light on Harrod's (1939) involved notion of the "warranted growth rate" (see Boianovsky 2021).…”

Breaking Free From the Stability Dogma: Samuelson and the Multiplier-Accelerator Model Over the Years

“…That was Domar's proposal of a "guaranteed growth rate" in order to stabilize the business cycle (see Boianovsky 2021).…”

“…"Our conclusion then is that growth via induced investment is unreliable, that a stable dynamic equilibrium cannot be got from acceleration" (Schelling 1948: 875-76). As Schelling noted, that was related to Domar's paradoxical result that excess investment causes capital shortage whereas low investment brings about excess capacity (see Boianovsky 2021). It would in fact be up to Sidney Alexander (1949) to qualify Schelling's view.…”

Domar, the West and Russian economics: a historical perspective

“…By that time, under the influence of Alvin Hansen, his Ph.D. advisor and a leading Keynesian economist, Domar was already well known due to his seminal contributions -together with, but independently from, Roy Harrod (1939 -to the founding of growth economics as a new research field in Keynesian macroeconomics, expressed in the so-called "Harrod-Domar growth model" (Domar [1946(Domar [ , [1947 1957; see Boianovsky 2017Boianovsky , 2021a. Domar became an American citizen in 1942; he lived in that country until his ultimate death in Massachusetts in 1997.…”

“…Domar achieved that by deploying a stable capital-output ratio and applying the general framework of his 1946-47 growth model to show that a rising propensity to save (as assumed by Sweezy) was not necessary to produce excess increase of capacity in relation to the path of aggregate demand, which was Domar's sense of "underconsumption". Excess capacity resulted from an actual growth rate below the required equilibrium growth rate given by the output-capital ratio (σ) times the saving ratio (α), as expressed by Domar's famous formula r = σ α (Boianovsky 2017(Boianovsky , 2021a. Hence, from Domar's standpoint, underconsumption provided an important link in the history of macroeconomics, despite its often-imprecise formulation (see Boianovsky 2021b).…”