Robert M. Solow

Bio: Robert M. Solow is an academic researcher from Massachusetts Institute of Technology. The author has contributed to research in topics: Unemployment & Medicine. The author has an hindex of 77, co-authored 264 publications receiving 57825 citations. Previous affiliations of Robert M. Solow include Princeton University & New York University.

Some Implications of Alternative Criteria for the Firm

Abstract: To avoid elementary misunderstanding, I ought to begin by saying that there is unlikely ever to be a simple answer to the question: What does a firm maximize? In the first place, a firm, especially a large firm, may be unable to maximize anything. Different depart­ments, different committees, different individuals may have different and even conflicting objectives which they pursue with a degree of success depending on a complicated balance of forces and personali­ties. In the second place, even if the firm does have a coherent objective or set of objectives — a utility function — it may be content with approximate solutions and rules of thumb. And in the third place, if the firm does actually maximize something, the thing that it maximizes in any concrete case is likely to be a very complicated quantity, depending on the relative strengths of many interests and persons — owners, managers, the government, public opinion — and on the character of the markets in which it operates. To understand the behaviour of a single complicated firm would be a combined operation in economics, sociology and psychiatry, and in the end the conclusions might not generalize very far, or at all.

U.S. Labor Markets: Imbalance, Wage Growth, and Productivity in the 1970s

Abstract: DURING THE 1970s there was a marked increase in both the turnover and perceived shortages in U.S. labor markets that were associated with a given rate of unemployment. In those years a given unemployment rate became linked with much faster wage growth and much slower productivity growth than it was before. This paper presents evidence that relates the apparent increasing difficulty employers have had in satisfying their labor demands at given rates of unemployment to the U.S. record of wage and productivity growth. Throughout he discussion the extent of labor turnover (measured in terms of discharge and quit rates for the manufacturing sector) and the degree of apparent shortages (reflected primarily in help-wanted advertising per employee) associated with particular unemployment rates are referred to as labor market imbalance. In the 1970s the average annual growth rate of the civilian labor force was much greater than it was in the preceding twenty years: 2.5 percent a year in the 1970s, 1.7 percent a year in the 1960s, and 1.1 percent a year in the 1950s. To put the rate for the 1970s in better perspective, one should include in the picture the forecasts of labor force growth by the

A Contribution to the Empirics of Economic Growth

Abstract: This paper examines whether the Solow growth model is consistent with the international variation in the standard of living. It shows that an augmented Solow model that includes accumulation of human as well as physical capital provides an excellent description of the cross-country data. The paper also examines the implications of the Solow model for convergence in standards of living, that is, for whether poor countries tend to grow faster than rich countries. The evidence indicates that, holding population growth and capital accumulation constant, countries converge at about the rate the augmented Solow model predicts. This paper takes Robert Solow seriously. In his classic 1956 article Solow proposed that we begin the study of economic growth by assuming a standard neoclassical production function with decreasing returns to capital. Taking the rates of saving and population growth as exogenous, he showed that these two vari- ables determine the steady-state level of income per capita. Be- cause saving and population growth rates vary across countries, different countries reach different steady states. Solow's model gives simple testable predictions about how these variables influ- ence the steady-state level of income. The higher the rate of saving, the richer the country. The higher the rate of population growth, the poorer the country. This paper argues that the predictions of the Solow model are, to a first approximation, consistent with the evidence. Examining recently available data for a large set of countries, we find that saving and population growth affect income in the directions that Solow predicted. Moreover, more than half of the cross-country variation in income per capita can be explained by these two variables alone. Yet all is not right for the Solow model. Although the model correctly predicts the directions of the effects of saving and

Endogenous Technological Change

Abstract: Growth in this model is driven by technological change that arises from intentional investment decisions made by profit-maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a nonrival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported. Instead, the equilibrium is one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.

Macroeconomics and reality

Abstract: Existing strategies for econometric analysis related to macroeconomics are subject to a number of serious objections, some recently formulated, some old. These objections are summarized in this paper, and it is argued that taken together they make it unlikely that macroeconomic models are in fact over identified, as the existing statistical theory usually assumes. The implications of this conclusion are explored, and an example of econometric work in a non-standard style, taking account of the objections to the standard style, is presented. THE STUDY OF THE BUSINESS cycle, fluctuations in aggregate measures of economic activity and prices over periods from one to ten years or so, constitutes or motivates a large part of what we call macroeconomics. Most economists would agree that there are many macroeconomic variables whose cyclical fluctuations are of interest, and would agree further that fluctuations in these series are interrelated. It would seem to follow almost tautologically that statistical models involving large numbers of macroeconomic variables ought to be the arena within which macroeconomic theories confront reality and thereby each other. Instead, though large-scale statistical macroeconomic models exist and are by some criteria successful, a deep vein of skepticism about the value of these models runs through that part of the economics profession not actively engaged in constructing or using them. It is still rare for empirical research in macroeconomics to be planned and executed within the framework of one of the large models. In this lecture I intend to discuss some aspects of this situation, attempting both to offer some explanations and to suggest some means for improvement. I will argue that the style in which their builders construct claims for a connection between these models and reality-the style in which "identification" is achieved for these models-is inappropriate, to the point at which claims for identification in these models cannot be taken seriously. This is a venerable assertion; and there are some good old reasons for believing it;2 but there are also some reasons which have been more recently put forth. After developing the conclusion that the identification claimed for existing large-scale models is incredible, I will discuss what ought to be done in consequence. The line of argument is: large-scale models do perform useful forecasting and policy-analysis functions despite their incredible identification; the restrictions imposed in the usual style of identification are neither essential to constructing a model which can perform these functions nor innocuous; an alternative style of identification is available and practical. Finally we will look at some empirical work based on an alternative style of macroeconometrics. A six-variable dynamic system is estimated without using 1 Research for this paper was supported by NSF Grant Soc-76-02482. Lars Hansen executed the computations. The paper has benefited from comments by many people, especially Thomas J. Sargent

Endogenous Technological Change

Abstract: Growth in this model is driven by technological change that arises from intentional investment decisions made by profit maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a nonrival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported, and instead, the equilibriumis one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.