page_title: Robert Solow
section_title: Solow's model of economic growth
hierarchical_section_title: Robert Solow / Solow's model of economic growth
caption_attribution_description: English: President Clinton is awarding w:Robert Solow the National Medal of Science
context_page_description: Robert Merton Solow, GCIH, is an American economist whose work on the theory of economic growth culminated in the exogenous growth model named after him. He is currently Emeritus Institute Professor of Economics at the Massachusetts Institute of Technology, where he has been a professor since 1949. He was awarded the John Bates Clark Medal in 1961, the Nobel Memorial Prize in Economic Sciences in 1987, and the Presidential Medal of Freedom in 2014. Four of his PhD students, George Akerlof, Joseph Stiglitz, Peter Diamond and William Nordhaus later received Nobel Memorial Prizes in Economic Sciences in their own right.
context_section_description: Solow's model of economic growth, often known as the Solow–Swan neo-classical growth model as the model was independently discovered by Trevor W. Swan and published in "The Economic Record" in 1956, allows the determinants of economic growth to be separated into increases in inputs (labour and capital) and technical progress. The reason these models are called "exogenous" growth models is the saving rate is taken to be exogenously given. Subsequent work derives savings behavior from an inter-temporal utility-maximizing framework. Using his model, Solow (1957) calculated that about four-fifths of the growth in US output per worker was attributable to technical progress.
  Solow also was the first to develop a growth model with different vintages of capital. The idea behind Solow's vintage capital growth model is that new capital is more valuable than old (vintage) capital because new capital is produced through known technology. He first states that capital must be a finite entity because all of the resources on the earth are indeed limited.  Within the confines of Solow's model, this known technology is assumed to be constantly improving. Consequently, the products of this technology (the new capital) are expected to be more productive as well as more valuable. The idea lay dormant for some time perhaps because Dale W. Jorgenson (1966) argued that it was observationally equivalent with disembodied technological progress, as advanced earlier in Solow (1957). It was successfully advanced in subsequent research by Jeremy Greenwood, Zvi Hercowitz and Per Krusell (1997), who argued that the secular decline in capital goods prices could be used to measure embodied technological progress. They labeled the notion investment-specific technological progress. Solow (2001) approved. Both Paul Romer and Robert Lucas, Jr. subsequently developed alternatives to Solow's neo-classical growth model.
  To better communicate the meaning behind his work, Solow used a graphical design to illustrate his concepts. On the x-axis he puts capital per worker and for the y-axis he uses output per worker. The reason for graphing capital and output per worker is due to his assumption that the nation is at full employment. The first (top) curve represents the output produced at each given level of capital. The second (middle) curve shows the depreciating nature of capital which remains constantly positive. The third curve (bottom) conveys savings/investment per worker. As the old machinery wears down and breaks, new capital goods must be bought to replace the old. The point where the two lines meet is known as the steady state level, which means that the nation is producing just enough to be able to replace the old capital. Countries that are closer to the steady state level, on the left side, grow more slowly when compared to countries closer to the vertex of the graph. However, when countries are to the right of the steady state level, they are not growing because all the returns they create needs to go to replacing and repairing their old capital.
  Since Solow's initial work in the 1950s, many more sophisticated models of economic growth have been proposed, leading to varying conclusions about the causes of economic growth. For example, rather than assuming, as Solow did, that people save at a given constant rate, subsequent work applied a consumer-optimization framework to derive savings behavior endogenously, allowing saving rates to vary at different points in time, depending on income flows, for example. 
  In the 1980s efforts have focused on the role of technological progress in the economy, leading to the development of endogenous growth theory (or new growth theory). Today, economists use Solow's sources-of-growth accounting to estimate the separate effects on economic growth of technological change, capital, and labor.
  Solow currently is an emeritus Institute Professor in the MIT economics department, and previously taught at Columbia University.
caption: Bill Clinton awarding Solow the National Medal of Science in 1999
exif: {}