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A big difference between Classical and Keynesian models is that Classical
models beg to be stable and Keynesian models do not.
Classical models are equilibrium-oriented, Keynesian models are
disequilibrium-oriented.
Classical models tend to have a "guiding hand" built into the logic. Keynesian
models do not.
Hence, Harrod-Domar is a Keynesian model. It has an equilibrium, but the
tendency is to be in disequilibrium and it has no "guiding hand'" to bring it
back to equilibrium.
But most of us, including Keynesian economists, have hard time living in a
state of perpetual disequilibrium. Perpetual disequilibrium is a state of
constant motion, chaos all around you.
Hence, in basic classical economics, prices are the “guiding had” that adjust
to keep the economy operating at full-employment equilibrium. In Keynesian
economics, output and employment adjusts, so that the economy can move
away from full-employment equilibrium and never return, without some
exogenous push.
To make Harrod-Domar palatable,:
In Kaldor's model, the savings propensity adjusts to restore equilibrium on
what is the macroeconomic stability side of the knife-edge, that is, it
restores the balance between the actual and warranted rates of growth.
In the Solow-Swan model, the capital-output ratio adjusts to restore
equilibrium on what is the employment stability side of the knife-edge, that
is, it restores the balance between the warranted and natural rates of
growth.
The reconciliation appears in the Adjustment Process module,
http://cruel.org/econthought/essays/growth/neoclass/solowadjust.html,
which you can read now and we will review on campus next week.
This reconciliation is also a way to demonstrate the answer to Q#!, part d on
the midterm exam.
However, the Solow-Swan model, is a classical model, not a Keynesian
model. The Keynesian "financial" factors omitted, prices adjust so that factor
markets always clear, and the direction of causality between savings and
investment is reversed. I = f(S). This is equivalent to re-imposing Say's
Law: Supply creates its own demand.