Economic growth and economic development 229

CHAPTER Foundations of Neoclassical Growth The Solow growth model is predicated on a constant saving rate Instead, it would be much more satisfactory to specify the preference orderings of individuals, as in standard general equilibrium theory, and derive their decisions from these preferences This will enable us both to have a better understanding of the factors that affect savings decisions and also to discuss the “optimality” of equilibria–in other words, to pose and answer questions related to whether the (competitive) equilibria of growth models can be “improved upon” The notion of improvement here will be based on the standard concept of Pareto optimality, which asks whether some households can be made better off without others being made worse off Naturally, we can only talk of individuals or households being “better off” if we have some information about well-defined preference orderings 5.1 Preliminaries To prepare for this analysis, let us consider an economy consisting of a unit measure of infinitely-lived households By a unit measure of households we mean an uncountable number of households, for example, the set of households H could be represented by the unit interval [0, 1] This is an abstraction adopted for simplicity, to emphasize that each household is infinitesimal and will have no effect on aggregates Nothing we in this book hinges on this assumption If the reader instead finds it more convenient to think of the set of households, H, as a countable set of the form H = {1, 2, , M } with M = ∞, this can be done without any loss of generality The advantage of having a unit measure of households is that averages and aggregates are the same, enabling us to economize on notation It would be even simpler to have H as a finite set in the form {1, 2, , M } with M large but 215