Towards a Theory of the Consumption-Growth Relationship

As suggested by the title the starting point of the paper is Harrod ‘s essay Towards A Dynamic Economics (1948) and more in general the question posed by the HarrodDomar model. Its main purpose is to contribute to the analysis of dynamics, that is, the analysis of the growth process within industrial market economies. The approach presented stems out of the problems raised by the attempt to extend to the longrun Keynes’ theory of income determination. In particular, it focuses on the question of demand, not purely the level of aggregate demand, but the relationship between demand composition and the growth rate. That calls for a theoretical analysis of the consumption-growth relationship. While consumption and growth are mostly understood as opposites, depending on the same process of determination, the paper focuses on a second relationship, i.e. the positive feed back between consumption and growth, which determines, through the growth of production, a shift of the frontier along which the constraint of the consumption-growth trade off operates. The theory of the Consumption-Growth relationship is then the basis of the extension to the long run of the theory of effective demand. Especially the process of new markets formation is relevant for this second relationship. In the last section the paper presents an empirical exercise on the problem of new market formation. The test concerns the 1980’s recovery of the U.S. economy and suggests a general way to conduct exploratory analysis on the issue.