Beyond Capital Fundamentalism: Harrod, Domar and the History of Development Economics

Abstract

The origins of “capital fundamentalism” – the notion that physical capital accumulation is the primary determinant of economic growth – have been often ascribed to Harrod’s and Domar’s proposition that the rate of growth is the product of the saving rate and of the output-capital ratio. However, neither Harrod nor Domar fit in the “capital fundamentalism” idea. Development planners in the 1950s adapted the growth formula to their own agenda. Most development economists at the time (Lewis, Hirschman, Rostow and others) were aware that Harrod’s and Domar’s growth models primarily addressed economic instability issues, not long-run growth. Harrod eventually applied his concept of the natural growth rate to economic development. He claimed that the growth of developing economies was determined by their ability to implement technical progress, instead of capital accumulation subject to diminishing returns. Domar observed that the incremental capital-output ratio was more likely a passive result of the interaction between the propensity to save and technological progress, not a causal factor in the determination of growth.

Keywords: Capital fundamentalism, Harrod, Domar, development economics, saving

JEL Classification: B22, B31, O10