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PROFILES OF WORLD 22 ROBERT M. SOLOW

ROBERT M. SOLOW

doc. Ing. Vladimír Gonda, PhD. Faculty of National , University of in Bratislava

Robert M. Solow is one of the major pro- butions to the theory and measurement of ponents of the (the . synthesis of standard neoclassical micro- His pioneering work in the field of growth economics and Keynesian macroecono- theory had a profound effect on the further mics). In the vanguard of this theoretical development of economics and instigated orientation is a quintet of distinguished a discussion on the factors ensuring eco- economists: P. A. Samuelson, J. Hicks, J. nomic growth and, more importantly, a Tobin, F. Modigliani and Solow himself. It is completely new explanation of how tech- worth noting that each of them is a Nobel nological progress contributes to the laureate. Solow was awarded the Nobel growth of national income and social Prize for Economics in 1987 for his contri- .

Robert Merton Solow was born in , was offered publication in book form and $500 (in 1951 on 23 August 1924. His parents were the children of ) once the thesis was ready to be printed. Nevert- immigrants. Educated in the neighbourhood public scho- heless, the thesis was not published and the cheque was ols of , he was, as he himself has said, not cashed. Solow explained that after rereading the text, taught by a devoted teacher to read the great 19th cen- he realised he could do better. In the end, however, he tury French and Russian novelists and to take ideas seri- never returned to this work. ously. In 1940 he won a scholarship to Harvard Universi- In 1950 Solow was offered and accepted an Assistant ty where his first studies were in sociology, anthropology Professorship in the Economics Department at the Mas- and elementary economics. At the end of 1942 he left sachusetts Institute of Technology. After initially teaching university and joined the U.S. Army. He served briefly in courses in statistics and , he focused his North Africa and Sicily and then for the duration of the research on for what he himself has war in Italy, until his discharge in 1945. called a geographical reason – he was given an office Upon returning to Harvard in 1945 he decided to con- next to , who had already written a well- tinue with economics. This came about thanks to a mee- known textbook on economics. Daily contact with Samu- ting with , who became his teacher, elson and conversations on economics, politics and ordi- guide and friend and who taught him the spirit and sub- nary life, eventually drew Solow back to "straight" stance of modern economic theory. As his research assi- economics and he discovered in himself an instinctive stant, Solow produced a set of -coefficients for the macroeconomist. input- model. Apart from his research and teaching, Solow has been Having become interested in statistics and probabilis- involved in practical activities in the government sector. tic models, Solow spent a year studying them at Colum- In 1960 – 1961 he served on President John F. Kenne- bia University in 1949-1950. He was at the same time dy's Council of Economic Advisors, and later he was part working on his Ph.D. thesis, which addressed the model- of a government commission examining the problems of ling of changes in the size of income recipients. For five years in the late 1970s Solow using interacting Markoff processes for - was a director of the Bank in Boston. and wage rates. The thesis was awarded He has also been engaged in a range of topical contro- the Wells Prize at Harvard, along with which the author versies and discussions.

Theory of economic growth Denison. They were nicknamed "economic archaeo- logists" since they were attempting to "dig up" the At the end of the 1950s a majority of source of economic growth. were experiencing fast economic growth generated Solow's main contribution is an elaboration of by demand deferred from the war period and by the neoclassical growth theory. His first pioneering work need to restore the war-torn economies. The econo- was the article "A Contribution to the Theory of Eco- mic sciences also responded to this situation. In the nomic Growth" (1956), in which he developed a neoc- the question of economic growth was lassical-type mathematical model of long-run growth being addressed mainly by Solow, J. Kendrick and E. based on criticisms of the Keynesian Harrod-Domar

BIATEC, Volume XIII, 11/2005 PROFILES OF WORLD ECONOMISTS ROBERT M. SOLOW 23 model (regarding the fact it was a single factor model the traditional production factors of labour and capital. where the sole growth factor was capital accumula- He asserted that, in the mid-20th century, 87.5% of tion). Solow abandoned the standard Keynesian labour was the result of "technological assumption of a fixed ratio between production fac- changes" and only 12.5% could be attributed to con- tors and introduced a ratio variable. The basis of ventional growth in the number of workers and capital growth in his model was, on the one hand, the sub- equipment. He construed technological progress in stitution of labour by capital and, on the other hand, quite broad terms – including, for example, the increa- technological progress, which he considered to be a sing educational qualifications of workers and the key determinant of growth in the long run. more effective organisation and management of pro- Solow drew on the Cobb-Douglas production func- duction – and, understandably, in the narrow sense tion, which expressed the functional dependence of too. Solow's conclusion represented an immediate national product growth on labour growth and on revolution in both economic science and economic capital growth. Developed by the policy.The importance of took a lower pro- Charles W. Cobb and the at file, as economists and politicians gave priority to tech- the end of the 1920s for the U.S. economy, this pro- nical progress and how to go about accelerating it. duction function is represented as follows: Solow in his initial reasoning worked with disembo- died technological progress, which is not tied to the Y= A. La . Kb replacement of old equipment with new. Such tech- a + b = 1 nological progress has the character of an exoge- where: nous quantity, not related to the introduction of pro- A – a constant determined by the effect of other fac- duction factors into the production process. On this tors not directly expressed in the function, basis, the view spread that the main agent of growth L – labour input, is in people and science, rather than K – capital input, investment in capital, which led to a certain underes- a – an coefficient for labour's share of out- timation of . put; it indicates the percentage change in the pro- Solow later developed the hypothesis of embodied duct when, ceteris paribus, the volume of labour technological progress, in other words technical pro- changes by 1%, gress which is embodied in capital (in machi- b– an elasticity coefficient for capital's share of out- nes of various ages). In a work entitled "Investment put; it indicates the percentage change in the pro- and Technical Progress" (1960), he disaggregated duct when, ceteris paribus, the volume of capital capital according to its age structure and therefore changes by 1%. also according to its technical level. Embodied tech- Solow's contribution was to extend the Cobb-Doug- nological progress reckons on the fact that older pro- las production function with a third factor of growth – duction equipment is gradually replaced with new technological progress, which he understood as ope- and improved equipment. Each new generation of rating autonomously in time. For him, technological investments is more productive than the last. In this progress is an exponential function of time. As a case, technological progress is factored into the result he came to a modified version of the Cobb- growth indicator of capital itself. In such an under- Douglas production function: standing of technological progress, capital as a share of economic growth is substantially higher at the Y= A. La . Kb . ert , expense of disembodied technological progress. where ert represents the effect of technological The "Solow residual" – the rate of technological progress (r) in time (t) on economic growth. change that explains the difference between real inco- In contrast to the Harrod-Domar model, the Solow me growth and growth explicable by growth in labour growth model took into account labour-capital sub- and capital – is considered by many to be a key ele- stitution, in other words the change in production ment of the new economics since it reflects the overall technique as a response to changes in relative prices efficiency with which labour and capital are used. of labour and capital. There may be various origins of the efficiency growth Solow attempted to quantify the effect of individual – innovations, technological changes, management factors on the pace of growth. In an article entitled methods, organisational changes, more efficient met- "Technical Change and the Aggregate Production hods of organising production and services, and so on. Function" (1957), he carried out an empirical analysis Theoretical literature was dominated up to the mid- of the long-term growth of the U.S. economy. The key 1970s by the neoclassical theory of long-run econo- to economic growth in the period 1909-1949 was, mic growth that Solow and his followers had develo- according to him, technological progress rather than ped. (The most notable opposition to it came in the

BIATEC, Volume XIII, 11/2005 PROFILES OF WORLD ECONOMISTS 24 ROBERT M. SOLOW

form of the post-Keynesian growth models of N. Kal- en its demand and supply impulses, and, most notab- dor, J. Robinson, et al.) in the theory waned ly, modified the classic by replacing the as a result of the turbulence related to the oil crisis, rate of change of nominal with the rate of infla- , etc. (It is no wonder that cycle tion. In their concept, the Phillips curve modified in theories that had previously been out of fashion enjo- this way illustrated the link between the rate of unem- yed a renaissance at this time.) From the mid-1980s ployment and the rate of . Resembling the ori- the problems of long-term growth once again began ginal Phillips curve in shape, slope and position, this to take a more important place in macroeconomic form of the Phillips curve is today the one most fre- research – the newer research is well known as endo- quently used in economic literature. genous growth theory (Robert Lucas, ). This modification led to a conclusion with interes- ting implications for , in particular, The productivity paradox that the desired low unemployment (sought by the Keynesians) is linked to the undesired growth in pri- On the subject of computers, Solow made the fol- ces – inflation. The extent of unemployment may be lowing observation in 1987: "You can see the compu- influenced by fiscal and monetary policies. The ter age everywhere but in the productivity statistics." government has a certain room for manoeuvre: it The fact that new information technologies have faces a choice of two "evils" – high unemployment hardly registered in productivity growth has been ter- and high inflation – between which there is scope for med "the productivity paradox". The author's doubts substitutability. In this regard Solow focused on the about whether new computers and information tech- selection of an appropriate economic policy. nologies actually increase productivity in individual According to Solow and Samuelson, level sta- sectors are based on the fact that its growth since the bility should be achieved where the rate of unemploy- mid-1970s has been slowing down. It appears that ment stands at 5.5% (5% – 6%). They calculated that the enormous investments in information technologi- an unemployment rate of 3%, which was then consi- es are not having the desired effect of increasing dered an objective of economic policy, would result in productivity growth in the economy as a whole. an annual inflation rate of between 4% and 5%. Nowa- Solow at the same time suggests two possible days these conclusions sound exceptionally optimis- explanations for this paradox. It may, on the one hand, tic. It should be added, however, that the authors the- be due to the time lag between the introduction of new mselves warned about their conclusions only being technology and the effect it has on economic growth. applicable for the next few years since a change in On the other hand, the productivity paradox could be economic policy could shift the Phillips curve. Today caused by a change in the character of national eco- we take the view that the 1970s stagflation represen- nomies. This concerns the fact that there is a transiti- ted a concurrent worsening of both the key indicators on taking place from the old economy, based on the and excluded the room for manoeuvre as being a way automated production of goods and mechanisation of to increase inflation still further. Not only has the Phil- agriculture (with efforts in automation having ensured lips curved shifted rightwards and upwards, it has also average annual growth of between 3% and 4% over lost its characteristic slope. A new interpretation of the the past hundred years), to the new economy. The Phillips curve was provided by . feature of this economy is that, as a result of innovati- ons, manufacturing employs even fewer people and Other contributions of Solow workers are therefore moving into the sector, which is not reporting substantial productivity growth It was in the 1970s that the ecological issues came (less than 1% per year on average). to the centre of public attention. As an expert in the interpretation of the factors affecting long-run econo- Solow's contribution to the development mic growth (in other words, basic production resources of the Phillip's curve and technological progress), Solow entered into this discussion while at the same time exposing a number Solow also devoted himself to macroeconomic of ecological myths. For example, he rejected the opi- questions concerning the problems of inflation, nions of the Club of Rome members who advocated unemployment and selecting an appropriate econo- zero growth (Forrester) and who maintained that we mic policy. In the field of Keynesian macroeconomics could no longer rely on technological progress to solve he attracted attention mainly with an article entitled our problems. Solow argued that the only basis for "Analytical Aspects of Anti-Inflation Policy" (1960), overcoming ecological problems was economic growth co-written with Samuelson. Here the authors analy- and the technological progress which creates new sed the causes of inflation, drew a distinction betwe- economic resources or saves on existing resources.

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Solow also gave a lot of attention to analysing the so that his opponents are often led into labour and the problem of unemployment. He cul-de-sacs. Commenting on an address given by Mil- understood unemployment to be involuntary, a positi- ton Friedman in the late 1960s, he said: "Another dif- on typical of Keynesian economists. As to why the ference between Milton and myself is that everything labour market is distinct from other markets, he con- reminds Milton of the supply. Well, everything sidered the main reasons to be non-economic ones, reminds me of sex but I keep it out of the paper." including social patterns and principles of appropria- Solow's enthusiasm for economics and his sense of te behaviour (for example, unemployment assistan- humour are renowned. He is also aware that econo- ce, management, etc.). These reasons, mics is very difficult to get across to the public. In a according to him, prevented the easy creation of such press conference given after his award, he wage rates that would "clear" the labour market or remarked: "The attention span of the people you write that would adjust more quickly to changed conditions. for is shorter than the length of one true sentence." We will conclude with the dictum that Solow used Solow – Keynesian economist to round off his Nobel Prize lecture: "You never know if you have gone as far as you can until you try to go Even though the Solow growth model has pro- further." nounced neoclassical (in other words non-Keynesi- an) features, Solow himself is a substantially Keyne- Bibliography sian economist. Holding the Keynesian position in key respects, he sees the current problem of the mar- 1. Baláž, P. – Verček, P.: Globalizácia a nová ekonomika ket economy in terms of unemployment, he rejects (Globalisation and the New Economy), Sprint vfra, Brati- slava, 2002. the monetarist doctrine, and he advocates active 2. Buchholz, T. G.: Živé mýšlenky mrtvých ekonomů (New intervention by the government in the economy. He Ideas from Dead Economists), Czech translation, Victoria made highly critical comments about the economic Publishing, Prague, 1993. policies of U.S. President and U.K. 3. Gonda, V.: Monetárna teória – J. M. Keynes versus M. Fri- edman (Monetary Theory – J. M. Keynes versus M. Fried- Prime Minister . That said, he also man), ELITA, Bratislava, 1995. criticised the effectiveness of Keynesian-style inter- 4. Holman, R. et al: Dějiny ekonomického myšlení (History of vention, for example, the anti- measures Economic Thought), 2nd edition, CH Beck, Prague, 2001. pursued in the U.S. in the late 1960s, including the 5. Jonáš, J. et al: Nobelova cena za ekonomii (The Nobel regulation of interest rates and . Prize for Economics), Academia, Prague, 1993. 6. Klaus, V.: Ekonomická věda a ekonomická reforma (Eco- nomic Science and Economic Reform), GENNEX & TOP The human side of Solow Agency, Prague, 1991. 7. Produktívne susedstvo zobudilo v štatistikovi makroeko- Colleagues describe Solow as an unpretentious, nóma (Productive Neighbourhood Woke Up Macroecono- mics in Statistician), newspaper Hospodárske noviny, good and witty person. In personal matters he is article on p. 4, 25 August 2004. known for his moderation. Unlike many of his collea- 8. Samuelson, P. A. – Nordhaus, W. D.: Ekonómia (Econo- gues he never tried his luck as a specu- mics), Slovak translation, 16th edition, ELITA, Bratislava, lator. It was typical that he still kept his office next to 2000. 9. Schwarz, J. – Ševčík, M.: Robert Morton Solow – nositel Samuelson even after being awarded the Nobel Prize. Nobelovy ceny za ekonomii v roce 1987 (Robert Morton Solow is regarded as a skilful debater. His language Solow – 1987 Winner of the Nobel Prize for Economics), and reasoning are elegant and sharp-witted, so much journal Ekonomický časopis, 37, no. 8, 1989.

Major works of R. Solow • Nature and Sources of Unemployment in the USA (1964, Povaha a zdroje nezamestnanosti v USA). Solow's main field of interest was macroeconomics • Capital Theory and the Rate of Return (1965, Teória kapi- where his approach was based on the construction of tálu a výnosová miera). models based on microeconomic principles. His research • Price Expectations and the Behavior of the work was published mostly in journal articles and in the (1968, Očakávania vývoja cien a správanie cenovej hladi- chapters of collective publications. ny). His most important works include: • Growth Theory: an Exposition (1969, Teórie rastu: • Contribution to the Theory of Economic Growth (1956, výklad). Príspevok k teórii ekonomického rastu). • The Labor Market as a Social Institution (1990, Trh práce • Technical Change and the Aggregate Production Function ako sociálna inštitúcia). (1957, Technický pokrok a celková funkcia výroby). • Work and Welfare (1998, Práca a prosperita).

BIATEC, Volume XIII, 11/2005