Pure Harrodian dynamics: heterogeneous expectations and the loss of three established propositions

Within the narrow but convenient framework of a pure Harrodian dynamics, the paper sheds new light on the macroeconomic textbook modelling with normal utilization in the steady state and the problem of Harrodian instability. To this end, it introduces interacting heterogeneity in the firms’ expectations about future demand. Specifically, the individual firms switch randomly between an optimistic and a pessimistic growth rate, where in the Harrodian spirit the transition probabilities vary with the utilization gap. Unlike the original aggregate analysis, this agent-based approach gives rise to the following three features at the macro level: (i) while the positive Harrodian feedback effects are basically maintained, there is also some scope for the steady state to be stable; (ii) persistent non-normal utilization in this state is not only possible but even the rule; and (iii) the paradox of thrift is re-established (the opposite relationship is true) if the steady state is stable (unstable). A calibration of the IS part provides for a reasonable order of magnitude of the investigated effects.