The Growing Economy

Principles of Political Economy Volume II

James E. Meade

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136258732
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

First published in 1968, this is the second part of Professor Meade's Principles of Political Economy, which presents a systematic treatment of the whole field of economic analysis in the form of a series of simplified models which are specifically designed to show the interconnections between the various specialist fields of economic theory.

In this volume, Professor Meade is concerned with the theory of economic growth and the rates at which various economic quantities are growing. In order to do this, he introduces capital goods into the system and allows for growth through capital accumulation, population expansion and technical progress. His analysis is divided into two models: a one product model and a many-product model.

PART I

THE ONE-PRODUCT MODEL

CHAPTER I

SIX ASSUMPTIONS

In Chapter I of The Stationary Economy we enumerated ten assumptions upon which the static analysis of that volume was constructed. In this and the following volume we intend to alter those assumptions to the extent necessary to investigate the dynamic properties of the static system of that volume. For this purpose at least four of those ten assumptions must be abandoned.

In the first place, to investigate the dynamic properties of our economic system we must allow it to grow; and economic growth may be the result of any of three main causes: (i) continuous improvement of technical knowledge so that more can be produced by any given amount of the factors of production, (ii) growth in the size of the working population, and (iii) growth in the size of the accumulated stock of man-made instruments of production, i.e. of capital goods of all kinds. This means the abandonment of three of the basic assumptions of The Stationary Economy,¹ since we must now introduce into our system the factor ‘capital’ and its accumulation by ‘saving’ and must allow both for a continuous change in the size of the working population and also for a continuous improvement of technical knowledge.

In the second place, we shall no longer retain the simple monetary assumption which we made in The Stationary Economy, namely that the spending habits of the population were such as to keep the money national income constant at $100 million a day.² For, as we shall see later in this volume, it will be convenient for the purposes of exposition to assume that there are certain financial authorities in charge of monetary affairs; and we shall vary our assumptions about the behaviour of these authorities in ways which are convenient for exposition and which we will specify from time to time.

Of the remaining six assumptions of The Stationary State, five will be maintained in the same form in this volume and the sixth will be maintained in a somewhat modified form. To be precise, unless we expressly state the contrary at some stage in the analysis, we shall throughout this volume make the following six assumptions.

(1) We assume that we are dealing with a closed economy.¹

(2) We assume that conditions are such as to make possible perfect competition or perfect potential competition in all markets.²

(3) We assume that there are no indivisibilities and that there are in consequence constant returns to scale in the economy.³

(4) We assume that there are no external economies or diseconomies in the community.⁴

(5) We assume that each individual citizen has a given, independent, and consistent set of preferences.⁵

(6) In The Stationary Economy we assumed⁶ that there was no Government expenditure and no Government taxation. We shall continue to assume that there is no Government expenditure on goods and services. There are no communal real needs (of which defence, police, justice, etc., are the classical examples) which have to be met by State action. But in the modern economy this public finance of communal needs is only one of the three main functions of the Government's Budget. Budgetary policy can also be designed (i) so as to affect the distribution of the total national expenditure as between current consumption, on the one hand, and savings for the finance of additions to the stock of real capital equipment on the other hand and (ii) so as to affect the distribution of personal incomes and personal wealth as between various classes of citizens.

(i) If the State raises a high level of taxation from its citizens or receives interest, profits, or rents on any property owned by it, and if it spends none or only a part of this on current communal needs, then there is a surplus of revenue over current expenditure in the budget. This Budget Surplus represents public savings. Suppose, for example, that the State raises $100 m. a year from the income tax, spends nothing on current purposes, and directly or indirectly lends the whole of the Budget surplus of $100 m. a year to private entrepreneurs for investment by them in extensions of their capital plant and equipment.⁷ Those private citizens who pay the tax have their freely disposable incomes reduced by $100 m. a year. Suppose that as a result they spend $60 m. less on consumption and reduce their private savings by $40 m. As a net result expenditure on current consumption has gone down by $60 m. a year and total savings have gone up by $60 m. a year (public savings being up by $100 m. a year and private savings down by $40 m. a year).

Conversely the Government might run a Budget Deficit of $100 m. a year, borrowing this sum from private savers and using the funds either for the finance of current communal consumption (which we are ruling out by assumption in this volume) or else for distribution as direct payments to individuals to supplement their incomes. Such ‘transfer payments’ as we shall call them might take the form of payments of interest on outstanding debts of the State to private citizens (the National Debt), of old age pensions or family allowances or, conceivably, of straightforward subsidies to all personal incomes. If as a result of receiving these transfer payments of $100 m. a year the recipients spent $60 m. a year more on consumption goods and services and saved $40 m. more a year, then total consumption would be up by $60 m. and t...

Table of contents

• Front Cover
• The Growing Economy
• Title Page
• Copyright
• Title Page
• Copyright
• PREFACE
• CONTENTS
• INTRODUCTORY NOTE: The Measurement Of Rates Of Growth
• PART 1. THE ONE-PRODUCT MODEL
• PART 2. THE MANY-PRODUCT MODEL
• INDEX