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Part III
In this book we have voluntarily presented the theory of economic growth
along the lines it followed in the 20
th
century: in Part I, we considered
positive, or descriptive growth theory. Assumptions were made about the
functioning of the economy (income was generated through a production
function); the savings rates
s
of population. In Part II, we discussed the normative approach, whereby
society chooses a savings rate so as to meet a longterm objective such as the
maximization of welfare over a long horizon. This was the heart of optimal
growth theory.
We will now show, in the third part of this book, that both approaches
can, and should, be uni&ed. If, as Robert Solow pointed out in his path
breaking essay, we are in a competitive economy, the wage rate of capital
and the real rental
are determined by the traditional marginal productivity
equations. We underline the second relationship, namely the equality be
tween the real rental rate and the marginal productivity of capital, because,
as we will show, it determines a savings rate leading to an optimal, dynamic,
allocation of capital.
Thus, the 1956 essay by Robert Solow is a major landmark not only
because it freed the theory of rigid production constraints adopted in the
th
century±s literature, but also because it carries all the
seeds of
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This note was uploaded on 06/16/2010 for the course MS&E 249 taught by Professor Olivierdelagrandville during the Fall '08 term at Stanford.
 Fall '08
 OLIVIERDELAGRANDVILLE

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