I. Introduction and summary, 592.--II. The one-sector two-capital model, 593.--III. Dynamic analysis, 597.--IV. Market structure, 603.--V. Rationality and irrationality, 607.--VI. Concluding comments, 609.

There have been two broad strategic approaches to the study of economic growth. The first, exemplified by Solow's paper (1956), attempts to explain how an enterprise economy will grow, given its technology and the market behavior of its consumers. The second approach, exemplified by Ramsey (1928), attempts to determine an optimal development strategy for a fully planned economy, given its technological constraints. These approaches fail to capture a central policy problem of a modern mixed'" economy in which the government can influence investment and saving, but only indirectly, by manipulating certain basic variables like the deficit and the money supply. Our paper represents an attempt to begin the analysis of this problem.1 The very term "mixed economy" implies that there are two centers of decision making and that the preferences of the consumers and of the government are distinguishable.2 It is not at all clear where the preferences of the government come from, or even whether governments have consistent preferences of the kind we will talk about. But a constant theme of policy literature is that government intervention in the economy is effective and can be judged as good or bad for the economy without direct reference to consumer preferences. This is particularly true of policy prescriptions for economic growth. It seems to us that postulating a social welfare