Keynesian and neo-classical growth models: A sequential analytical approach

An effort is made to determine the place of the Keynesian and neo-classical growth theories. A division is made between the short run, the medium run, and the long run, each characterized by different capacity quantities, prices, sales, investment decisions, and production techniques. Thus disequilibrium is extended to the medium and long terms. A model is formulated which is a macro-model for a closed economy, without a separate government sector, in which a distinction is made between 4 markets: 1. the commodity market, 2. the labor market, 3. the capital market, and 4. the money market. A variation of the basic model is developed for each of the 3 periods. Results indicate that in the short run, various permanent disequilibria may occur, depending on actual prices and price expectations. In the medium term, the model accords with Harrod's growth model if entrepreneurs distribute all profit to the households. Thus, Keynesian growth appears to be essentially a theory of the medium period, neo-classical a theory of the long period. The main differences between the theories concern the formation of expectations regarding factor prices and the behavior of capacity utilization. Keynesian growth theory does not show a tendency toward a Walrasian growth equilibrium, whereas neo-classical theory does.