INTRODUCTION
Growth and fluctuations are sometimes referred to as the Twin Horns of Harrod because of two influential essays (see Harrod 1936, 1939). Both Hicks and Solow reacted to the ‘knife-edge path’ implied by these papers’ dynamics. Hicks emphasised the consequences of ‘falling off’ the edge. Solow gave a rationale, grounded in agents’ behaviour, that would keep the economy on this knife-edge path. Yet, the urge to study growth and fluctuations can be traced back, by way of Ricardo, Malthus and numerous other classical authors to the very birth of economics as a field. Given the vastness of the subject matter, one must set clear goals to what one hopes to achieve here.
This chapter is going to visit several schools that have attempted to blend the theory of economic fluctuations with the theory of growth. Both theories are interesting in their own right and are technically difficult. The early non-market approaches of the Hicksian accelerator and of the Goodwin predator–prey model are a good point of departure because of their intuitive nature. Hicks and Goodwin wrote at a time when an author could not rely on mathematical expertise to get published and in a style that borders, at times, on story telling. This chapter will start by reviewing their approaches, in section 2, as they have essentially disappeared from modern textbooks. Therein lies a deep vein of theory that, as we shall see, has influenced more modern approaches and still has the potential to enrich them further. Next, in section 3, we will review both real business cycle (RBC) theory and the deterministic dynamic system approach. RBC has established itself as the leading explanation for economic fluctuations and its paradigm when applied to growth is the model of King, Plosser and Rebelo (KPR) (1988a, 1988b). Anyone interested in working on the subject would be well advised to study that model. To help researchers, details of the rather intricate calculations in KPR are provided. Section 4 will evoke the problem of persistence in macroeconomic data. It will point to a convincing source for this phenomenon, namely aggregation. It will argue that persistence fogs our reading of economic relationships. It will call for the development of new tools to deal with the problem of persistence, in the absence of which no theory can be tested properly.