Law of decreasing elasticity and Harrod’s principle of Instability

Muriel Dal-Pont Legrand (1) , Olivier Bruno (2) , Michael Assous (3)

1 CLERSÉ - Centre Lillois d’Études et de Recherches Sociologiques et Économiques - UMR 8019
2 GREDEG - Groupe de Recherche en Droit, Economie et Gestion
3 PHARE - Philosophie, Histoire et Analyse des Représentations Économiques

In The Trade Cycle, Roy Harrod (1936a) propounded the Law of Diminishing Elasticity of Demand. The present paper tries to clarify the precise role Harrod assigned to this law, to understand the trade cycle. We discuss the micro and macro foundations of the Law of Diminishing Elasticity of Demand and how, according to Harrod, it explains one of the main mechanisms that stabilize the economy during the trade cycle. We show how the Law of Diminishing Elasticity of Demand allowed Harrod to micro-found a non-linear saving function that can give rise to an endogenous countercyclical value of the multiplier. The paper concludes by reviewing the main arguments related to the Law of Diminishing Elasticity of Demand proposed in the late 1930s.

Mots clés: Harrod; growth; cycles; law of dimishing elasticity of demand

Domaines: Economies et finances

Muriel Dal-Pont Legrand, Olivier Bruno, Michael Assous. Law of decreasing elasticity and Harrod’s principle of Instability. Cahiers d'Economie Politique = Papers in political economy, 2014, What have we learned on growth cycles analysis?, 67 (2), pp.159-174. ⟨hal-01111468⟩