Solow: A Contribution to the Theory of Economic Growth

RM Solow, “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics 70, no. 1 (1956): 65-94.

Solow begins by explaining that all theory relies on sets of assumptions, and that there are different kinds of assumptions that one can make based on the degree to which they will affect the outcome of the theory. Theories that make assumptions that directly drive the outputs of the theories must clearly articulate why those assumptions were put forth. The author makes an argument about the assumptions underlying the Harrod-Domar model of economic growth.

This core assumption of the Harrod-Domar model is that of fixed proportions in production. "There is no possibility of substituting labor for capital in production" (65). This assumption leads to what Solow terms a "knife-edge" balance, where if one of the "key parameters" is thrown off slightly, than negative consequences will arise for an economic system. "A remarkable characteristic of the Harrod-Domar model is that it consistently studies long-run problems with the usual short-run tools...The bulk of this paper is devoted to a model of long-run growth which accepts all of the Harrod-Domar assumptions except that of fixed proportions. Instead I suppose that the single composite commodity is produced by labor and capital under the standard neoclassical conditions" (66).

"The basic conclusion of this analysis is that, when production takes place under the usual neoclassical conditions of variable proportions and constant returns to scale, no simple opposition between natural and warranted rates of growth is possible. There may not be--in fact in the case of the Cobb-Douglas function there never can be--any knife-edge. The system can adjust to any given rate of growth of the labor force, and eventually approach a state of steady proportional expansion" (73).

Explores examples of Harrod-Domar models, Cobb-Douglas models, and what I assume can be called Solow models of growth.

"Everything above is the neoclassical side of the coin. Most especially it is full employment economics--in the dual aspect of equilibrium condition and frictionless, competitive, causal system. All the difficulties and rigidities which go into modern Keynesian income analysis have been shunted aside. It is not my contention that these problems don't exist, nor that they are of no significance in the long run. My purpose was to examine what might be called the tightrope view of economic growth and to see where more flexible assumptions about production would lead a simple model" (91).