PROFILES OF WORLD ECONOMISTS 22 ROBERT M. SOLOW ROBERT M. SOLOW doc. Ing. Vladimír Gonda, PhD. Faculty of National Economy, University of Economics in Bratislava Robert M. Solow is one of the major pro- butions to the theory and measurement of ponents of the neoclassical synthesis (the economic growth. 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- wealth. Robert Merton Solow was born in Brooklyn, New York was offered publication in book form and $500 (in 1951 on 23 August 1924. His parents were the children of prices) 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 New York City, 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 econometrics, he focused his North Africa and Sicily and then for the duration of the research on macroeconomics 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 Paul Samuelson, 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 Wassily Leontief, 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 capital-coefficients for the macroeconomist. input-output 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 distribution of wage income welfare recipients. For five years in the late 1970s Solow using interacting Markoff processes for employment- was a director of the Federal Reserve Bank in Boston. unemployment 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 economies 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- United States 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 productivity 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 mathematician policy.The importance of investments took a lower pro- Charles W. Cobb and the economist Paul Douglas 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 investment in people and science, rather than K – capital input, investment in capital, which led to a certain underes- a – an elasticity coefficient for labour's share of out- timation of capital accumulation. 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 goods (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.