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.

A Critical Essay on Modern Macroeconomic Theory

Abstract: In the early 1980s, rational expectations and new classical economics dominated macroeconomic theory. This essay evolved from the authors' profound disagreement with that trend. It demonstrates not only how the new classical view got macroeconomics wrong, but also how to go about doing macroeconomics the right way. Hahn and Solow argue that what was originally offered as a normative model based on perfect foresight and universal perfect competition has been almost casually transformed into a model for interpreting real macroeconomic behavior. After explaining microeconomic foundations, the authors introduce a better macro model, one that can say useful things about the fluctuation of employment, the correlation between wages and employment, and the role for corrective monetary policy.

From Neoclassical Growth Theory to New Classical Macroeconomics

Abstract: The puzzle I want to discuss — at least it seems to me to be a puzzle, though part of the puzzle is why it does not seem to be a puzzle to many of my younger colleagues — is this. More than forty years ago, I — and many others, especially Trevor Swan and James Tobin — worked out what has since come to be called neoclassical growth theory. It may not be clear exactly what we or I — I had better speak for myself — thought growth theory applied to, what it was trying to describe. We may have to talk more about that later. But it was clear from the very beginning what I thought it did not apply to, namely short-run fluctuations in aggregate output and employment, what used to be called the business cycle and is now often called that again. In those days I thought growth theory was about the supply side of the economy, whereas the business cycle was mostly to be analysed in terms of changes in aggregate demand.

What Is a Nice Girl Like You Doing in a Place Like This? Macroeconomics after Fifty Years

Abstract: It has been my honor to serve as President of the Eastern Economic Association during the past year. Now is certainly the best opportunity I will ever have to offer my thanks and yours to those who keep the Association running and getting better, they include, first of all, the Executive Director, Bill Lott, without whom weeds would be growing here right now. I also want to pay tribute to Mahmood Zaidi, who put this excellent program together, to Ingrid Rima who edits and nurses the Journal, to Ray Canterbery, the next President of the Association, and to Bill Leonard, my predecessor, who were always willing to bring their experience and wisdom to bear when I needed help and advice. My last duty I don't know whether to think of it as a reward or a punishment is to utter a Presidential Address. I can remember reading, when I was very young, a multivolume work that was then thought of as a Great Book, but would now be described as pseudo-anthropology: James Gordon Frazer's The Golden Bough. As I remember it through the haze, Frazer purported to show, through study of myths from all periods and places, that there was a universal myth, perhaps once a description of concrete reality, according to which early societies elected or chose a young man to be a sort of symbolic King For A Year. During his year of kingship he lived in the lap of luxury, sugar-plums all day long. At the end of the year, however, he was ritually slaughtered in the belief that only by such a sacrifice could the continuing fertility of the Earth be ensured. Some pseudo-anthropologists believe that the Presidential Address is a survival of that quaint custom. It was foreordained that our 1986 convention would take as its theme the 50th anniversary of the publication of The General Theory of Employment, Interest and Money. Like it or not, it has certainly been the most influential work of economics of the 20th century, and Keynes the most important economist. You have heard a lot about The General Theory and about Keynesian economics during the past couple of days, perhaps more than you wanted to know. That leaves me with a dilemma. I have the strong feeling that I should conform to the general theme: it is, after all, both historically important and completely contemporary. But I do not want to repeat myself or others, and that leads in the opposite direction.

Policies for economic growth

Abstract: The ‘old’ growth theory of the 1950s led to certain conclusions about the sorts of economic policies that would promote economic growth, and also about their limitations. The ‘new’ growth theory of the 1980s makes much stronger assumptions and leads to correspondingly stronger conclusions about the scope of growth-promoting policy. This article argues that: (1) empirical work so far has neither confirmed nor denied the strong assumptions underlying the new theory; (2) the theory is worth pursuing because of its intrinsic interest and the possibilities it opens up; (3) whatever the final verdict on the new theory, both theory and evidence support the belief that significant long-run gains, even if not permanent changes in the growth rate, can be achieved by increased investment in the broadest sense, including human capital, technological knowledge, and industrial plant and equipment.

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.