Roy Harrod, a British economist, led in the modern work on the theory of economic growth. He wrote about two concepts of the rate of economic growth. Seeing that both investment and increasing labor productivity would be necessary to permit economic growth, Harrod treated investment and labor productivity as independent limits on economic growth.
(A Harvard economist, Evsey Domar, also proposed a theory of this kind, so it is often known as "Harrod-Domar growth theory).
Harrod observed that the rate of economic growth would depend on the growth of capital, and thus on the proportion of income saved and invested. Since businessmen are profit-seekers, investment would in turn be limited by profits. In the view of businessmen, investment would be "warranted" (that is, justified or reasonable) only if the businessmen could expect that it would be sufficiently profitable. Businessmen's expectations of profits would determine one limit on the rate of growth. This would be the "warranted" rate of growth.
On the other hand, the supply and productivity of labor also set a limit to the rate of growth. This -- the sum of the rate of growth of population and the rate of growth of labor productivity -- is the "Natural Rate of Growth" in Harrod's thinking. Conversely, in order to keep unemployment from increasing, it would be necessary for demand to grow as fast as the population, plus any increases in labor productivity.
Harrod believed it would only be a coincidence if the two limits on the rate of growth should agree. In general, he felt, they would disagree. On the one hand, if the natural rate should be greater than the warranted rate, investment would limit the growth of the economy and the growth of the economy, in turn, would limit employment. On the other hand, if the warranted rate were greater than the natural rate, businessmen would have difficulty finding enough opportunities to invest. Either way, an imbalance between the natural and the warranted rate of growth would cause economic problems. Writing in the 1930's, Harrod believed that problem had played a role in the Great Depression.