President Obama today is awarding the Presidential Medal of Freedom to a number of accomplished Americans, including Robert Solow, Institute Professor, emeritus and Professor of Economics, emeritus at the Massachusetts Institute of Technology, Nobel Laureate in Economics, and a member of Equitable Growth’s Steering Committee
Robert Solow’s name is familiar to anyone who’s taken an introductory macroeconomics course. Solow’s model of economic growth is the first, and for the vast majority of students, the only growth model they will learn. And it’s for this work that Solow won the Nobel Prize in 1987.
The Solow growth model has one key takeaway: the source of long-term economic growth is technological growth. Before Solow’s 1956 and 1957 papers outlining the model, some economists believed that a country could boost its rate of economic growth by increasing its savings rate or adding more workers to its labor force.
But Solow’s model shows something else. Increasing the savings rate could get an economy to a higher level of output after the increase, but the long-run rate of economic growth wouldn’t increase. Doubling the savings rate would increase a country’s GDP per capita, but it wouldn’t change the fact that the economy would grow at the same rate as before. But a “technological” advance boosts the long-run growth rate of the economy.
Think of it this way: an increase in the savings rate moves an economy along a line, but technological growth shifts the line out.
Now by technology Solow’s model doesn’t mean just advances in computers or robots, but rather anything that allows for a more efficient use of capital and labor. In that way, technology is essentially the same thing as total factor productivity. What determines the growth in TFP over time is still very much an open question in economics.
But Solow’s model is important for guiding how we thinking about economic growth in the real world. For example, once you understand the Solow model you realize a country like China growing much faster than the United States isn’t so surprising. China is experiencing catch-up growth as it invests more in its economy and adopts technology and other resources from richer countries. Eventually China will catch up to the technological frontier and grow at about the same rate as the United States. At least in the long-run.
As for countries already at the frontier, the model indicates that the path to sustainable long-term economic growth is to improve productivity. Rich countries can help boost the productivity of labor by improving access to and the quality of education, increasing the productivity of capital by creating institutions that allocate it more efficiently, fostering innovation, or a variety of other policy options.
Solow’s most famous work is certainly theoretical, but it has clear policy implications. Solow himself delved more directly into the world of economic policy when he served in government. He served as a senior economist for the Council of Economic Advisers during the Kennedy Administration in the early 1960s.
Though Solow officially retired from MIT in 1995, he continues to engage in the economic and policy debates of the day. He wrote one of the best received reviews of Thomas Piketty’s Capital in the 21st Century published in the New Republic. And he does not shy away from engaging in contentious debates.
The Presidential Medal of Freedom is awarded to individuals who make especially “meritorious contributions” to society. Robert Solow’s contributions certainly have great merit. Through his groundbreaking insights into economic growth, his government service, and his role in the public debate, Solow has helped create a more prosperous United States.