- Person
- Robert Solow
- Lived
- 1924–2023
- Field
- Economics
- From
- American
The story
In the 1950s many economists believed that the surest route to long-term growth was investment: more factories, more infrastructure and ever more capital-intensive production. Robert Solow, a young professor at MIT, had just published a growth model in 1956 suggesting that this could not be the whole story, because each additional machine adds less than the one before. He wanted to test the idea against real numbers.
In "Technical Change and the Aggregate Production Function", published in The Review of Economics and Statistics in 1957, he applied his framework to historical statistics for the United States from 1909 to around 1950. Using figures for total output, total inputs of labour and capital, and the shares of income going to each, he calculated how much of the growth in output could be explained by more workers and more capital. Whatever was left over had to come from somewhere else.
The result surprised him. He had taken it for granted, he later said, like everybody else, that population growth and the accumulation of capital goods were the main engines of growth, but the data would not support that story. Instead, about four-fifths of the growth in output per worker came from what he called technical progress: improving technology, but also better education and skills. He also found that technical change over the period had been roughly neutral, leaving the shares of income going to labour and capital unchanged.
The leftover portion became known as the Solow residual, and its measures are now called total factor productivity or multifactor productivity. The finding pointed to innovation, rather than capital accumulation alone, as the main path to higher living standards. In a 1960 paper Solow refined the picture by recognising that new technology is often built into new machines, an idea known as vintage capital.
The Nobel committee, awarding him the 1987 prize, said the study had a dramatic impact, and similar analyses were carried out in a great many other countries. His method, usually called growth accounting or sources-of-growth accounting, is still used today to estimate the separate effects of technological change, capital and labour on economic growth.
The residual is often described as a question rather than an answer: it measured how much growth came from progress without explaining where that progress came from. That question inspired decades of research, including the endogenous growth theories developed by Paul Romer, Robert Lucas and others in the 1980s.
Why it matters
By measuring how much growth comes from knowledge and skills, Solow helped persuade policymakers to invest in research and education.
About Robert Solow
MIT economist whose growth model showed that technological progress, not just capital and labour, drives rising living standards; Nobel laureate in 1987 and teacher of Nobel winners.
More about Robert Solow
- Robert Solow's 1956 model explained how economies growIn 1956 Robert Solow published a simple model showing that adding machines and workers alone cannot keep an economy growing; lasting growth needs technical progress.
- Robert Solow intercepted German radio traffic in WWIIAt 18 Robert Solow left Harvard to join the US Army, serving in North Africa, Sicily and Italy intercepting German radio messages from trucks near the front.
- Robert Solow helped found MDRC to test anti-poverty programsIn 1974 Robert Solow helped found the Manpower Demonstration Research Corporation, a pioneer in rigorously testing programs that help disadvantaged workers.
Sources
- Institute Professor Emeritus Robert Solow, pathbreaking economist, dies at age 99 MIT News
- Robert Solow Wikipedia
- Solow residual Wikipedia
- The Prize in Economic Sciences 1987: Press release NobelPrize.org
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