Equality, Participation, Transition: Essays in Honour of Branko Horvat

Ivo Bićanić 193
variables lead to transitionary changes in growth rates. For example, an
increase in saving rates does lead to a spurt of growth but it does not
change the steady state growth rate.
The stability of this steady state growth is fundamental to this
approach because it implies all deviations are transitory, namely that
economies will converge to this path regardless of their initial position
(and eventually reach it), which makes for both stability and optimism.
Optimism is further strengthened by the convergency properties of
the model. The same assumptions about technology (encapsulated in
well-behaved production functions with Harrod neutral labour augmenting
technical progress) which generate one steady state path and
stability also generate interesting convergency properties. Namely, the
further any individual economy is from its steady state path the higher
its growth rate will be. The convergency properties are part of the
strong version of the Neoclassical Solow-Swann model drawn in panel
(a) of Figure 11.1. Time is on the horizontal axis and growth rates on
the vertical one (steeper paths imply higher growth rates). The steady
state growth path is given by the thick line and the growth path of
individual economies by the thin lines. The thin lines converge to the
steady state growth path with reduced steepness, implying falling
growth rates the closer they are to the thick line. The final optimism
of the Neoclassical Solow-Swann model is that models can converge
only from below, and optimizing Ramsey households guarantee that
property.
In its strongest version, the Neoclassical Solow-Swann model assumes
a common technology (production function) and common parameters
which generate the steady state growth path and absolute convergency.
Translated into an econometrically testable form, the rate of convergency
was 2 per cent of the distance from the steady state path (see standard
Neoclassical growth textbook Barro and Sala-I-Martin, 1995; and for
an extensive discussion on convergence Sala-I-Martin, 1996). Economies
more distant from this path had higher growth rates and quicker convergence
speeds so that the speed of convergence decreased over time.
A weaker version of the Neoclassical Solow-Swann model had to be
introduced to deal with the complexities of the real world and answer
some of the criticisms leveled at the model in the 1980s. However, the
main assumptions (well-behaved production functions and perfect
competition, profit maximizing firms, welfare maximizing households
as well as exogenous growth rates of population and labour augmenting
technical progress) were retained, and with it, the model’s main features.
For the current discussion an important novelty was the variation