Alternative Theories of Growth Performance: II The Demand Orientated Approach

By way of introduction to the demand orientated theories, it is useful to briefly recapitulate the conclusions of the ‘old’ neoclassical growth theory, pioneered by Solow. The 1970s saw a proliferation of theoretical neoclassical one sector growth models based on the aggregate production function, although a few models were constructed with separate consumption and capital goods sectors. Under the usual neoclassical assumptions there is always the full and efficient utilisation of all resources. That is to say, countries are assumed to exhibit both allocative and producer efficiency. Resources are optimally distributed between firms so that no redistribution could lead to a net increase in output. Firms are also technically efficient and costs are always minimised; there is no X-inefficiency in Leibenstein’s (1966) sense of the term. In the steady state, the growth of the capital stock is equal to the growth of output.