Harrod-Domar Economic Growth Model: 8 Major Criticisms

The following points highlight the eight major criticisms of Harrod-Domar economic growth model. The criticisms are: 1. Unrealistic Assumptions 2. Aggregative Character of Models is Open to Criticism 3. Variables Expressed Only in Real Terms 4. Exaggeration of Instability and Others.

Criticism # 1. Unrealistic Assumptions:

The main objection to these models is that they are based upon rigid, abstract and unrealistic assumptions.

These models assume many things constant, which actually do not do so. For example, propensity to save and capital-output ratio are assumed constant.

In the short period, propensity to save and capital-output ratio may remain constant, but in the long run, these factors are likely to undergo change.

Likewise, it is also assumed that the production function is fixed, and factors of production cannot be substituted for each other. These assumptions are also contrary to facts. In actual world, different factors of production can be substituted for one another to some extent.

In a dynamic economy, factor substitution takes place through changes in the relative factor prices. Moreover, technological and organisational changes in a society bring about shifts in production pattern. It is, therefore, unrealistic to assume the fixed production function co­efficients in the context of long-run growth of an economy. Hence these models are based on unrealistic assumptions.

Criticism # 2. Aggregative Character of Models is Open to Criticism:

These models are criticised because their excessively aggregative in character. The variables used in the exposition of these models are macro in character. Single sector models based on aggregates can hardly explain the relation among different sectors of an economy. Such a model fails to explain the structural changes taking place in the various sectors of an economy.

It should be remembered that the study of structural changes is very essential for analysing the pace and pattern of economic development of under­developed countries. Harmonious and balanced growth of the different sectors is indispensable for smooth and steady growth. But the Harrod-Domar models do not take into consideration the growth requirements of individual sectors of the economy.

Criticism # 3. Variables Expressed Only in Real Terms:

Another point of criticism of these growth models is that the variables are expressed in real terms. In other words, the variables are non-monetary in character. Due to the “real” nature of the variables, the influence of monetary factors on investment, savings and demand cannot be considered. In the present day world, monetary and real factors cannot be separated for the purpose of policy-making.

Surely, the growth theory given by Harrod and Domar has become simpler and sharper with the introduction of only “real” factors. But this has restricted their policy use. Prof. H.G. Johnson and Prof. Tobin have made the Harrod-Domar model more realistic by introducing money as an explicit variable in their structure.

Criticism # 4. Exaggeration of Instability:

Instability of steady-growth has been exaggerated in these models. These models conclude that once the path of steady-growth is disturbed, the forces of instability gather momentum, which results in either secular inflation or secular over-production.

This view is not shared by some contemporary writers. They believe that “real cause of instability” is entrepreneurial behaviour and the lag between investment decisions and capital outlay. The slight departure from the path of steady growth need not cause dislocation in the functioning of the economy.

It should be understood that the extreme instability, as shown in these models, is due to the assumption of “fixed factor proportions”. As the assumption hardly holds good in real life. Prof. R.M. Solow is of the opinion that instability can be significantly- reduced once we. accept the variability of factor proportions.

Henry Y. Wan Jr. has summed up saying that “there exist alternative assumptions about the adjustment processes, some implying the equilibrium path to be unstably some stable, and that the comparative realism of these assumptions is not easy to determine by casual observation. Empirical studies are needed in this area.”

Criticism # 5. Natural Growth Rate Concept (G_n) is Open to Objection:

Prof. L.B. Yeager has raised objection against the use of the concept of “natural growth rate” (G_n) in Harrod’s model. He is of the opinion that ceiling limit to growth is not only determined by the available labour and natural resources as suggested by Harrod but also by the production techniques employed.

Even if it is be assumed that labour and natural resources are fixed, output can be raised by combining these resources with better techniques of production. It is quite possible to increase output by organisational and technological improvement even though the resources are fixed.

So, Harrod’s contention that there is a ceiling on potential output put by the fixity of resources does not hold good. Yeager has also pointed out that cumulative upward and downward movements are merely theoretical exercises which have not been supported by empirical statistical data.

Criticism # 6. Limited Relevance to Under-developed Countries:

Harrod-Domar models have been criticised on the ground that they have little application for underdeveloped countries. These models attempt to solve the problem of economic instability but neglect the problems of development which is the main concern of under-developed countries. Again the problem of unemployment as found in under-developed countries defies the solution provided by these models.

The under-developed countries have disguised unemployment arising due to the deficiency of capital. Unemployment in the developed countries is of cyclical nature, and that arises due to deficiency of effective demand.

The solution of disguised unemployment lies in raising the level of capital formation, whereas managing effective demand is the remedy for cyclical unemployment rather than disguised unemployment. Thus, these models offer little help in solving the problem of unemployment in under-developed countries.

Criticism # 7. Assumption of Laissez-faire Policy is Unwarranted:

Harrod-Domar models are based on the assumption of laissez-faire. This assumption might have been realistic and warranted in the past. Modern governments can ill afford to sit like silent spectators in matters of economic development.

Fiscal neutrality which is the off-shoot of laissez-faire policy can hardly solve the problems of economic development. However, some less developed countries have used the Harrod-Domar analysis to estimate the investment requirements of a given rate of growth of income.

Criticism # 8. Non-economic Factors Ignored:

Harrod-Domar models stress the importance of economic parameters only. These models have not provided due place to the non- economic parameters such as social, political, religious factors etc. Some writers say that the non-economic determinants are more important than the economic determinants.

The economic factors (saving, investment, capital formation etc.) can initiate the process of economic development and non-economic factors provide the necessary stimulus for the maintenance of stable growth. Meier and Baldwin have aptly remarked, “The psychological and sociological requirements of development are as important as the economic requirements.”