Remembering economist Robert Solow
- from Shaastra :: vol 03 issue 01 :: Jan - Feb 2024
Robert Solow broadened the understanding of economic growth.
Economist Robert Merton Solow, who died on December 21, 2023, was a pioneer of growth theory and shaped the economics profession profoundly. One measure of an economist’s centrality to the profession is the number of concepts and ideas that are named after him. By this measure, Solow was indeed a great economist. Phrases such as ‘Solow growth model’, ‘Solow residual’, ‘Solow-neutral technical progress’ and ‘Solow paradox’ are part of the vocabulary of most working economists.
Solow’s main contribution to growth theory – contained in his celebrated paper ‘A Contribution to the Theory of Economic Growth’ (bit.ly/solow-growth) – should be understood in its proper context. During the 1950s, most economists were convinced that the key to sustained economic growth was a higher rate of savings and concomitant accumulation of physical capital.
This understanding underpinned the planning strategies of many countries, including India. For example, the ‘Mahalanobis model’, which became the theoretical foundation for the Five-Year Plans in India, envisaged increasing the savings and investment rate to nearly two-thirds of national income for faster accumulation of capital and faster economic growth. Solow’s conclusions, following from his model, ran contrary to this conventional wisdom.
Theoretically, the argument of his model was based on a very simple observation that the accumulable factor of production – namely, capital – often runs into diminishing returns. As each incremental addition to the capital yields less and less, at some point, economic growth based on an accumulation-based strategy is bound to fizzle out.
A number of other strong implications followed from his model. First, as far as the growth rate is concerned, the saving rate is irrelevant. Whether a country is saving, say, 50% or 5% of its national income is not relevant for long-term growth potential.
Solow played a key role in reorienting attention towards technological progress as the key determinant of growth.
Secondly, the Solow model also implied that the key distinction between the least developed countries (LDCs) and the advanced economies (AEs) was a transient phenomenon. The gap between the per capita income of the LDCs and AEs can be expected to lessen over time.
The main idea is that for LDCs – with relatively low levels of capital stock – productivity of each additional unit of capital would be pretty high. By contrast, in AEs, the abundance of capital would already have run into the diminishing return, implying lower rates of growth. Given the growth rate differential, living standards in LDCs and AEs can be expected to converge.
In another paper ‘Technical Change and the Aggregate Production Function’ (bit.ly/solow-factors), Solow looked at the ways of decomposing economic growth into the contributions made by different factors of production. It was found that the growth of conventional factors of production like labour or capital did not contribute much to economic growth. The bulk of economic growth thus remained unexplained and came to be known as ‘Solow residual’.
TECHNOLOGY AND GROWTH
Even though the Solow model was partially correct in questioning the centrality of accumulation-led strategy, other predictions like strong convergence were not vindicated by data. Moreover, the mystery of the ‘Solow residual’ persisted. Building on Solow’s work, endogenous growth theory later overcame some of these limitations, and a comprehensive theory of long-term growth based on technological progress emerged. In a sense, Solow played an important role in reorienting attention towards technological progress as the key determinant of economic growth.
Solow was not only a great economist; he had a way with words as well. Usually, technical writing is dull and dry. Solow’s writings by contrast were eminently readable. His one-liners were legendary, especially when rhetorically employed against debating partners.
Not all of Solow’s quips were polemically directed at ideological rivals, however. He once said: “Computers are found everywhere except in productivity statistics.” He was highlighting the problems associated with measuring the contributions of technical progress. Think of Wikipedia, for example. As a free and open source of information, Wikipedia has added enormous value, but this contribution is unlikely to figure in the calculations of national income. This off-hand remark became known as the ‘Solow paradox’ and motivated many research studies.
Robert Solow will be remembered for broadening the understanding of the phenomenon of economic growth, probably the subject most relevant to human welfare.
Avinash Tripathi teaches economics at Azim Premji University. Views are personal.