Prof J.E.Meade has constructed a neo-classical model of economic growth which is designed to show the way in which the simplest form of economic system would behave during the process of economic growth.
ASSUMPTIONS
The basic assumptions for J.E.Meade’s model are as follows:-
(1) The economy is question in a closed economy with no relationship with the outside world.
(2) There is no government activity involving taxation and expenditure (laissez-faire in nature).
(3) Perfect competition exists in the market.
(4) Constant returns to scale prevail in the economy.
(5) There are only two commodities- consumption good and a capital good.
(6) There is full employment of land, labour and machinery.
(7) All machinery is alike
(8) The ratio of labour to machinery can be easily varied, hence there is perfect malleability of machinery.
(9) There is perfect substitutability between capital goods and consumption goods
(10) Any given stock of machines, no matter how old or new they are, a certain percentage gets replaced every year. Meade calls this phenomenon the assumption of depreciation by evaporation.
THE MODEL
In the economy visualized above, the net output produced depends upon four factors:-
1) The net stock of capital available in the form of machines
2) The amount of available labour force
3) The availability of land and natural resources
4) The state of technical knowledge which continues to improve through the time.
This relationship is expressed in the form of the production function
Y=F (K, L, N, t)
Here, Y-Net output or net national income
K-existing stock of capital or machinery
L-labour force
N-land and natural resources
t- Technical progress
Hence, to increase National income, three factors of production can be changed
ΔY=MPPK ΔK + MPPL ΔL +ΔY’ ……………………………………….. (1)
Here, Δ shows an every time increase
MPPk- Marginal output of Capital
MPPl –Marginal product of labour
ΔK- increase n machines
ΔL- increase in labour stock
ΔY’-technological progress
ΔY = MPPK (ΔK)K+ MPPL (ΔL)L + ΔY’ …………………………........ (2)
Y Y K Y L Y
Here,
ΔY shows ratio of growth rate of population
Y
ΔK shows capital stock growth rate
K
ΔL shows ratio of labour growth rate
L
ΔY =y, MPPk = U, MPPL =Q, Δy’ = r, ΔK =k, ΔL =l
Y K L y K L
y = Uk
Equation (3) shows that growth rate of income Y depends on marginal productivity of capital ‘U’, + stock of capital ‘K’ + marginal product of labour Q + growth rate of population ‘l’ +technological change ‘r’.
U, Q, r are independent variables and Y depends on it. T is proportionate to U and Q.
Meade says that in an economic system, the indicator of real growth rate is real per capita income and not the national income. Population growth rate has dominance in NY which needs to be subtracted to know the real NY.
Y-l= Uk
So, Y-l = Uk
Here, -(1-Q) shows that two factors U, r help in economic growth rate but labour factor leads to decrease in NY. The more the proportion of labour, the lesser the income.
Y K
One of the important factors contributing to the growth rate of output is the annual rate of capital accumulation in the economy.
Y K
=MPPK. S
Here, Uk
By putting its value in equation (4), we get:-
y-l= vs -(1-Q)l+ r…………………………………………………………... (5)
TECHNICAL PROGRESS
Having examined the main factors, Prof. Meade discusses the conditions which may lead to changes in the rate of economic growth over time. Assuming l and r to be given and constant, changes in growth rate would be determined by the behaviour of V,S, and Q over time. If there is no change in population, and technical progress®, an increase in the rate of savings(s) would raise per head capital and bring a decline in marginal product of capital (v). This decline in V will be less if it is possible to substitute capital for land and labour.
If the rate of technical progress along with population growth is assumed to be constant, the growth rate in income per head will vary directly with VS.
Y-l = vs - (1-Q)l + r ………………………………………………………. (6)
So, y = vs + r (because l=0)
So, y= vs (because r= 0)
The effect of technical progress on total NY is shown above. The total stock of machinery (capital) is represented on x-axis and total amount of output is on y-axis. OF1 is the production function which shows the quantity of output produced in a year with the given quantity of machinery when the technical knowledge is given. If in a year, the quantity of machinery is OK, the production in that year will be KA. The slope of the curve at point A shows the marginal productivity of machinery which declines as we move towards the right along the curve.
The state of steady economic growth requires
1) All elasticities of substitution between various factors are equal to unity.
2) Technical progress is neutral towards all factors.
3) The proportion of profits saved, of wages saved, and of rent saved is all constant.
y = Uk
According to Meade, there is a critical growth rate of capital growth rate of income equal to growth rate of capital stock.
I = s Y = s (because Δk= I =sY= S)
k k k
CRITICAL GROWTH RATE
The equilibrium position ultimately depends upon the rate of accumulation of the capital stock. According to Meade, there is critical growth rate of the capital stock which makes the growth rate of income equal to the growth rate of capital stock.
A more or less growth rate in capital stock than “the critical growth rate” will not bring equality of y on k. If we put ‘a’ for the critical growth rate, basic relationship will be
a = Ua + Ql + r
a =Q +r *
1 - U
CONDITIONS OF INSTABILITY
(1) s Y > Ql + r
K 1 - u
If at any time there is any deviation from the level of steady growth, forces will set in to bring the growth rate of capital stock at an equilibrium level of Ql + r ;
1 - u
Suppose k or s Y > Ql + r
K 1 - u
In such a situation, income will be growing at lower rate than the capital stock as a result, savings will decline so will the capital growth rate thereby bringing sY/k towards the critical level.
(2) s Y < Ql + r
K 1 - u
Conversely, if ) s Y < Ql + r then income would increase more rapidly that the capital
K 1 - u
stock, savings would increase and so will the capital stock. As a result sY/k would rise towards the critical level Ql + r
1 - u
Thus under the 2 assumptions and 3 conditions noted above, the growth rate of NY and capital stock would both lead towards constant Ql + r.
1 - u
A CRITICAL APPRAISAL
Professor Meade’s model has been severely criticized due to its unrealistic assumptions
-This model is steeped in the classical tradition of a perfectly competitive economy where all production units are assumed independent of each other. But these are unrealistic assumptions as they do not match the reality.
-The assumption of constant returns to scale is also defective as it is observed that increasing returns to scale prevail in real scenario.
-Mrs. Robinson calls Meade’s model pseudo-causal because it merely states that monetary policy keeps the prices of consumption goods constant while money wage rate ensures full employment.
-Another serious defect of the neo-classical model is stems from the assumptions that all the machines are alike and there is perfect malleability of machines. The latter implies that the ratio of labour to machinery can be changed both in the short and the long run. But this is unrealistic because the ratio of labour to machinery cannot be changed in the short run. This Meade sidetracks the problem of foresight by assuming perfect malleability of machines and depreciation by evaporation. This makes his model impracticable.
-According to Professor Butterick, there is no place for uncertainty in Meade’s model. The interrelationship between all the variables is considered very certain. This detracts from the practicability point of view and remains just a theory.
-Like most of the growth models, this model is also of laissez-faire economy. But this is an unrealistic assumption which neglects the importance of foreign trade in economic development.
-Another serious defect of this model is that it completely neglects the role of institutional factors in the development process. Meade forgets that social, cultural, political, and institutional factors play an important part in economic growth. In the absence of these factors –the model becomes one of the fictional or hypothetical model.
Despite these defects, the Meade’s model had a chief merit of demonstrating the influence of population growth, capital accumulation, and technical progress on the growth rate of national income and per capita income over time. Further, the state of steady growth is indeed Mrs. Robinson’s Golden Age explained in a more realistic manner by studying the behaviour of those variables which she assumes to be constant.
REFERENCES
The Economics of Development and Planning by M.L.Jhingan
en.wikipedia.org/wiki/James_Meade
