The last 50 years in growth theory and the next 10

Author(s): Robert M. Solow

Source: Oxford Review of Economic Policy , SPRING 2007, Vol. 23, No. 1, THE SOLOW
GROWTH MODEL (SPRING 2007), pp. 3-14
Published by: Oxford University Press

Stable URL: https://www.jstor.org/stable/23606793

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Oxford Review of Economic Policy, Volume 23, Number 1,2007, pp.3 14 ¿00Z S 2 Nílf

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The last 50 years in growth theory and t

next 10

Robert M. Solow*

Abstract This article offers a personal view of the main achievements of (broadly) neoclassical growth
theory, along with a few of the important gaps that remain. It discusses briefly the pluses and minuses of
two major recent lines of research: endogenous growth theory and the drawing of causal inferences from
international cross-sections, and criticizes the widespread contemporary tendency to convert the normative
Ramsey model into a positive representative-agent macroeconomic model applying at all frequencies. Finally,
it comments on the articles appearing in this symposium.
Key words: Solow growth model, growth theory, 1956 anniversary
JEL classification: B22, E13, 041

I am cheered and delighted by the attention paid to this anniversary; but I am also a
little embarrassed. Why embarrassed? Because I really believe that progress in economics
(and other similar disciplines) comes more from research communities than from any one
individual at a time. It is research communities that separate the good stuff from the routine,
and see to it that the sillier outcroppings of imagination get sanded down. At least it works
that way most of the time. We owe more than we acknowledge to our colleagues and graduate
students.
Here is a partial example that I will come back to in a minute. If you have been interested
in growth theory for a while, you probably know that Trevor Swan—who was a splendid
macroeconomist—also published a paper on growth theory in 1956 (Swan, 1956). In that
article you can find the essentials of the basic neoclassical model of economic growth. Why
did the version in my paper become the standard, and attract most of the attention?
I think it was for a collection of reasons of different kinds, none individually of very
great importance. For instance, Swan worked entirely with the Cobb-Douglas function; but
this was one of those cases where a more general assumption turned out to be simpler and
more transparent. As a result, his way of representing the model diagrammatically was not

* Massachusetts Institute of Technology

doi: 10.1093/icb/grm004
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 Robert M. Solow

so clear and user-friendly. A second and more substantial reason was that Swan saw himself
as responding to Joan Robinson's complaints and strictures about capital and growth, while
I was thinking more about finding a way to avoid the implausibilities of the Harrod-Domar
story (Harrod, 1939; Domar, 1946). (I will tell you a relevant anecdote in a minute.) That is to
say, I happened to be coming at the problem from a more significant direction. A third reason
is that Swan was an Australian writing in the Economic Record, and I was an American
writing in the Quarterly Journal of Economics. The community of growth theorists took it
from there.
When I finished that 1956 paper, I had no idea that it would still be alive and well 50 years
later, more or less part of the folklore. Nor did I understand that it would be the origin of
an enormous literature and a whole cottage industry of growth-model building that is still
flourishing, as the articles in this issue of the Review demonstrate. So why was it such a
success? Are there methodological lessons to be learned about How To Make An Impression?
My own favourite how-to-do-it injunctions are: (i) keep it simple; (ii) get it right; and
(iii) make it plausible. (By getting it right, I mean finding a clear, intuitive formulation, not
merely avoiding algebraic errors.) I suspect that all three of these maxims were working for
that 1956 paper. It was certainly simple; it didn't get lost in the complications and blind
alleys that beset Trevor Swan's attempt; and it was plausible in the sense that it fitted the
stylized facts, offered opportunities to test and to calibrate, and didn't require you to believe
something unbelievable.
Here is where the anecdote that I promised comes in. I spent the year 1963 -4 in Cambridge,
England, engaged in one interminable and pointless hassle with Joan Robinson about some of
these issues. Interminable is bad enough, pointless is bad enough, and putting them together
is pretty awful. The details are too lurid to be told to young people. At one point, however,
I realized that the discussion had become metaphysical and repetitive, and I decided to try a
new tack. So I buttonholed Joan in her office one day and said: 'Imagine that Mao Tse-Tung
calls you in'—she was in her Chinese period then—'and asks a meaningful question. The
People's Republic has been investing 20 per cent of its national income for a very long time.
There is now a proposal to increase that to 23 per cent. To make a correct decision, we need
to know the consequences of such a change. Professor Robinson, how should we calculate
what will happen if we increase our investment quota and sustain it?'
'So what will you tell Chairman Mao?' I asked Joan. She baulked and bridled and dodged
and changed the subject, but for once I was relentless. 'Come on, Joan, this is Chairman Mao
asking a legitimate economic question; the future of the People's Republic and possibly of
mankind may depend on the answer. What do you tell him?' Finally, she grumbled: 'Well, I
guess a constant capital-output ratio will do.' It made my day; I knew I could do better than
that, and I knew she had been forced by practicality, even imaginary practicality, to give up
the metaphysical ghost. I was smiling all the way home to tell my wife that Joan had buckled,
and violated her own metaphysics.
One of her major contentions had been that it was illegitimate to think of 'capital' as a
factor of production with a marginal product. Yes, a single capital good (or its services)
was a productive input. But aggregating those goods, whose services are yielded over their
remaining lifetimes, introduces all sorts of complications. It is always a problem in economics
to navigate between pure and abstract conceptions (how would a concept like 'capital' fit
into a complete and formal description of an economy) and the needs of practical calculation
(Mao's hypothetical question). It can (almost) never be done perfectly. I thought that Joan
Robinson had been unfairly playing on that difficulty in order to undermine the 'neoclassical'

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The last 50 years in growth theory and the next 10

attempt to construct a usable model of investment and growth. Faced with the need to be
pragmatic, she had no recourse but the kind of statement that she had criticized in others.
That is what I mean by making it plausible: a simple, clear model should tell you how
to get from empirical beliefs to practical conclusions. There will always be additions and
modifications to fit the occasion, but the model should provide a road map. I still think that
is how growth theory should be done, though the beliefs and conclusions may, of course,
change through trial and error and the passage of time, and reasonable conclusions can't be
more detailed than the model will bear.
With those general principles as background, I suppose I should say something about the
two most important innovations to come along in the past 50 years within the framework of
neoclassical growth theory. The two I have in mind are, as I hope you would guess, first,
'endogenous growth theory' as pioneered by Paul Romer (1986) and Robert Lucas (1988),
and then taken up by an army of economists, and, second, the drawing of inferences about
the determinants of economic growth from international cross-sections, an activity whose
first protagonist may have been Robert Barro (1991), also with innumerable followers among
individuals and institutions. This second line of thought only became thinkable after the
publication of the Penn World Tables by Robert Summers and Alan Heston. No arguments
without numbers, and they provided the numbers.
The story of endogenous growth theory may (repeat: may) tum out to be a good example
of the way a research community takes a new thought and moulds it into something useful.
One of the earliest products of endogenous growth theory was the so-called AK model, which
I thought from the first to be a distraction. It claimed to endogenize the steady-state growth
rate by what amounted to pure surface assumption. It was simple, all right, but neither right
nor plausible. The community eventually made an implicit judgment and sees less of it these
days.
Then a further thought dawned on me. If you want to endogenize 'the' growth rate of
x, you are going to need a linear differential equation of the form dx/dt = G(.)x, where
the growth-rate G is a function of things you think you know how to determine (but not a
function of x or its growth rate). Exponential curves come from that differential equation. So
buried in every 'endogenous growth' model there is going to be an absolutely indispensable
linear equation of that form. And sure enough, if you root around in every such model you
find somewhere the assumption that dx/dt — G(.)x, where x is something related to the level
of output. It may be the production function for human capital, or the production function
for technological knowledge, or something else, but it will be there. And the plausibility of
the model depends crucially on the plausibility and robustness of that assumption. I want
to emphasize how special this is: it amounts to the firm assumption that the growth rate of
output (or some determinant of output) is independent of the level of output itself.
If you want to endogenize the steady-state growth rate in a model driven by human-capital
investment or technological progress, you need precisely this linearity. But then, I think,
you owe the community a serious argument that this assumption is either self-evident or
robustly confirmed by observation. My impression is that this demonstration has not been
forthcoming. The literature seems to take it for granted and move on to elaboration.
Is that just all in the game? I think there has been one unfortunate semi-practical
consequence. Some of the literature gives the impression that it is after all pretty easy to
increase the long-run growth rate. Just reduce a tax on capital here or eliminate an inefficient
regulation there, and the reward is fabulous, a higher growth rate forever, which is surely
more valuable than any lingering bleeding-heart reservations about the policy itself. But
in real life it is very hard to move the permanent growth rate; and when it happens, as

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 Robert M. Solow

perhaps in the USA in the later 1990s, the source can be a bit mysterious even after the fact.
Endogenizing the steady-state growth rate is a serious ambition and deserves serious effort.
An alternative idea may be to focus less on the notion of exponential growth. One can
easily imagine classes of models and exogenous influences that do not even allow for episodes
of steady-state exponential growth. That would have to be a more computer-oriented project,
but the building-up of simulation experience under varied assumptions may lead to general
understanding.
In the meantime, I suspect that the most valuable contribution of endogenous growth theory
has not been the theory itself, but rather the stimulus it has provided to thinking about the
actual 'production' of human capital and useful technological knowledge.
An important example of progress in this direction is the body of work on 'Schumpeterian'
models, much of it focused on the idea of 'creative destruction'. There have been several
contributions, dominated by the impressive collection of results by Philippe Aghion and Peter
Howitt, together and separately (see, for example, Aghion and Howitt, 1992). I cannot do
justice here to their translation of Schumpeter's imprecise notion into explicit models that
can be and have been pursued to a very detailed level. But it illustrates how progress can be
made. Their 1998 book is a monumental compilation (Aghion and Howitt, 1998).
I have no idea whether it will be possible to reduce these motives and processes to the
simple formulas that can go into a growth model. It is not so important; any understanding
that is gained can probably be patched into growth theory, formally or informally. Precisely
for that reason, one wonders why there has been so little contact with those scholars who
study the organization and functioning of industrial laboratories and other research groups.
Now, what about international cross-section regressions, or what is sometimes called
'empirical growth theory'? There are two distinct varieties. The first, which is primarily aimed
at using cross-section observations to learn something about the aggregative technology, is
a serious matter. I think one has to be precise about what the countries in the sample are
assumed to have in common and what is allowed to differ among them. The literature has
not always been careful about this. The paper in this issue by Erich Gundlach is an excellent
example of the genre. I think I will save my handful of comments for later.
The second variety proceeds by regressing the country-specific growth rates during some
medium-long period on a potentially long list of country characteristics. Many of the
right-hand-side variables are socio-political, some are intended as indicators of regulatory
inefficiency, some are 'cultural'. Here I think a little modesty is in order. At a minimum, those
regressions provide interesting descriptive statistics. It can only be useful to have a good idea
of which national characteristics are associated with faster growth during a fairly long period
across a large sample of countries. It is when the regressions are interpreted causally that I
begin to look for an exit.
Reverse causation is only the most elementary of the difficulties. Maybe democracy and
social peace lead to growth; I certainly hope so. But growth may also lead to democracy
and social peace; and since both sides of that relation are likely to change slowly, the usual
econometric dodge of lagging a variable cannot convincingly settle the issue. There is also
reason to wonder about the robustness of the regression coefficients against variations in
sample period, functional form, choice of regressors, and so on.
But there are other, deeper, problems. The proper left-hand-side variable is growth of total
factor productivity (TFP) rather than of output itself, because that is what the right-hand-side
variables are likely to be able to affect. The array of non-economic influences on TFP is
certainly large and interrelated. Anyone who wants to interpret a cross-country regression
causally has to believe that a particular coefficient really tells you what will happen to the

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The last 50 years in growth theory and the next 10

growth rate of a country that experiences an increase of the variable in question by A, and
also tells you what will happen if, a few years later, the same variable decreases by the
same A. Maybe so; but it is surely troubling that we have not observed such manoeuvres.
I will continue to think of these things as shorthand descriptions rather than as recipes for
economic change. You should, of course, ask yourself whether one of those regressions
plausibly represents a surface along which countries can actually 'decide' to move (back and
forth, remember). That is the acid test.
There is very little space left for stray thoughts about the future of growth theory, which is
probably a good thing; no one can know what the next advance (or fad) is likely to be. I will
just mention a couple of issues that seem to me to have been under-researched until now. The
first is open-economy growth theory—the incorporation of trade, capital movements, and
technology transfer into a multi-country model of growth. Grossman and Helpman (1991)
was the pioneering text; but it attracted attention more for its quality-ladder models than for
its analysis of trading economies. There have been a few further contributions, but nothing
definitive.

Laundry-list regressions have sometimes found an association between an economy's

openness to trade and its growth rate. Classical gains-ffom-trade theory would suggest an
association between openness and the level of output. If there is a connection between trade
and growth, one ought to be able to model it convincingly. I am not aware that there is any
generally accepted story about this. Perhaps there is and I have missed it. Otherwise one
wonders why more growth theorists aren't trying. Foreign direct investment plays a very
important role in practice. Why not in theory?
That brings me naturally to a second analytical gap that could perhaps be filled in the next
few years. We have watched the major European economies almost reach US productivity
levels, and then fall back slightly; we remember the years of extremely fast growth in Japan,
once the source of much hand-wringing in the all-too-scrutable West; we now see China,
or at least part of China, growing faster than we can imagine. Inevitably we see all these as
instances of 'catch-up' to a technological leader, the USA. In the background is always the
need to evolve a skilled labour force.
This seems to be another modelling opportunity. How does, or how should, an economy
deploy its resources when it has the opportunity, via foreign investment, to attract both
capital and already-known technology from abroad? Among the resources I have in mind are
intellectual resources. Imitation of known technology is not always effortless. How should
research capacity be divided between imitation-adaptation on one side, and the search for
brand-new technology on the other? I am not sure that theory has much to say about a
question like this, at least partly because the 'ripeness' of a particular technological area has
to matter, and this is something that theories of endogenous technological change seem to
ignore. It may even have a significant exogenous element.
As a last comment, I would like to drag my feet about a methodological fashion—but
one with real substantive implications—that seems to have taken root in growth theory, and
appears likely to persist. Fifty years ago, the research community would have made a sharp
distinction between descriptive models of economic growth and normative models of optimal
growth. In that view, the Ramsey model was important precisely because it would define a
growth trajectory quite different from the paths actually followed by observed economies.
Indeed, the first calibrations of the Ramsey model suggested optimal saving-investment rates
far higher than anything to be found in modem capitalist economies. The excess was large
enough to constitute a serious puzzle (to which Olivier de La Grandville's article in this issue
proposes a resolution).

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 Robert M. Solow

More recently, it has become almost universally the custom to use the Ramsey construction
as if it described macroeconomic fact, rather than a hypothetical social-consensus target.
The omniscient social planner has morphed into an immortal representative household; and
other economic institutions are assumed to have just those characteristics that will induce
them straightforwardly to carry out the owner-worker-consumer household's desires. For
example, the identical perfectly competitive firms have to share the household's version of
perfect foresight or rational expectations. Some minor imperfections may be allowed, but not
such as to get in the way of the basic formulation. Groups of agents are not allowed to have
different beliefs about the way the economy works, or conflicting objectives. All this is too
well known to require elaboration.
The neatness-freak in me can see why this conversion of normative into positive might
have some initial intellectual appeal. But the pages of a Review of Economic Policy are an
appropriate place to say that the model lacks plausibility as a basis for practical proposals
about growth policy. The only sort of empirical argument in its favour that has been offered by
protagonists is surprisingly weak. The idea is to 'calibrate' the model by choosing parameter
values that have respectability in the literature of economics generally. (Understandably,
some tweaking is permitted.) When the model is simulated with those parameter values, it can
match some very general properties of observed time series, usually the absolute or relative
magnitudes of significant variances and co-variances. This is a very lax sort of criterion, and
cannot hope to earn much in the way of credibility. There must be scores of quite different
models that could pass the same test, but would have different implications for policy. No
one could claim that this sort of model has won its popularity by empirical success.
Instead, the main argument for this modelling strategy has been a more aesthetic one: its
virtue is said to be that it is compatible with general equilibrium theory, and thus it is superior
to ad hoc descriptive models that are not related to 'deep' structural parameters. The preferred
nickname for this class of models is 'DSGE' (dynamic stochastic general equilibrium). I
think that this argument is fundamentally misconceived.
We know from the Sonnenschein-Mantel-Debreu theorems that the sole empirical
implication of a classical general-equilibrium genealogy is that excess-demand functions are
continuous and homogeneous of degree zero in prices, and satisfy Walras's Law. Those
conditions can be imposed directly on a large class of macroeconomic models. I have
made this point in another context, the example being the monetary macro-models of James
Tobin (see Solow, 2004). It applies just as forcefully here. The cover story about 'micro
foundations' can in no way justify recourse to the narrow representative-agent construct.
Many other versions of the neoclassical growth model can meet the required conditions; it is
only necessary to impose them directly on the relevant building blocks.
The nature of the sleight-of-hand involved here can be made plain by an analogy. I tell
you that I eat nothing but cabbage. You ask me why, and I reply portentously: I am a
vegetarian! But vegetarianism is reason for a meatless diet; it cannot justify my extreme
and unappetizing choice. Even in growth theory (let alone in short-run macroeconomics),
reasonable 'microfoundations' do not demand implausibility; indeed, they should exclude
implausibility.
Maybe it would be helpful (to myself, at least) if I said in a couple of sentences what
I think the function of growth theory is. It would go something like this. The long-run
behaviour of a (fully employed) modem economy is the outcome of the interplay of some
identifiable forces. The main ones seem to be the volume of investment in tangible and human
capital, the strength of diminishing returns, the extent of economies of scale, the pace and
direction of technological and organizational innovation. Even this sample list leaves out some

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The last 50 years in growth theory and the next 10

significant and interesting factors: natural-resource availability, environmental constraints,

and the complex question of the relation between short-run fluctuations and medium-run and
longer-run growth. The function of an aggregative growth model is to provide a handy way
of describing how these factors interact, partly to help clear thinking, and partly to guide
empirical research.
The articles in this issue of the Oxford Review all fit within this framework. Two preliminary
comments may be in order. First, my picture of the convergence issue is that the key question
turns on which of the main forces are held in common by various national economies, and
how they differ on the others. Presumably that is how one would define 'convergence clubs'.
It might take a more subtle specification of factors than I suggested here; so much the better.
Second, I interpret the recent surge of interest in the aggregative elasticity of substitution as
a very useful attempt to probe more deeply into the sources and consequences of diminishing
returns. At the aggregative level, this has to be more than a merely technological fact.
Substitution on the demand side must play an equal role, and also any institutional factors that
affect the geographical, occupational, and industrial mobility of labour and capital. Sorting
all this out, theoretically and empirically, is an exciting and important task. We now know,
for example, that the elasticity of substitution has, in a well-defined sense, implications for
the level of output: if two economies are in other respects identical, and start from the same
initial conditions, the one with a larger elasticity of substitution will have a higher growth
trajectory, and the benefit is comparable in size to what would be achieved from a somewhat
faster rate of technological progress,
It is interesting that most (not all) recent attempts to estimate the economy-wide elasticity
of substitution have come up with values far smaller than one. That suggests a sharper
role for diminishing returns than we are used to imagining. This finding, if it holds up,
could liberate growth theory from the grip of the Cobb-Douglas function, whose special
properties get embedded in many model-building exercises for no better reason than its
soothing convenience. It is worth noting, on the other side, that large, but not extreme, values
of the elasticity of substitution allow sustained growth without technological progress.
These matters are at the very heart of neoclassical growth theory and what it has to say
about the constraints on growth (other than those connected with natural resources). There
is, therefore, every reason to welcome continued empirical research on these topics, like that
contained in the paper by Rainer Klump, Peter McAdam, and Alpo Willman in this issue.
I would like to conclude with a few, necessarily brief and sketchy, comments on the
research papers that follow. They are very diverse in content and method. I found every one
of them interesting and provocative. It says something about the neoclassical growth model
that it can provide the framework for such a varied collection of investigations.
It is convenient to start with the paper by Erich Gundlach. I am entirely in sympathy with
his basic insistence: if you want to use the neoclassical growth model to understand the
differences between countries, you have to be clear from the beginning about what parameters
they have in common, and in what ways they are allowed to differ. For simplicity, suppose
there are just two countries. One very common, probably too common, assumption is that
they have the same depreciation rate, the same population growth rate, and the same rate of
technological progress. But they have different saving-investment rates and different current
levels of labour-augmenting technology. In effect, we assume they are in or near their steady
states when we observe them, and we want to know how much of the observed difference
in output per head results from the difference between si and S2, and how much from the
difference between A\ and A%.

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10 Robert M. Solow

Gundlach observes
points out that this
productivity reflec
different way, wit
the model to give t
the parameters that
and k for each coun
to Gundlach's scatt
s would account fo
observed cross-cou
right, but I would
for the cross-count
countries—is an im
Suppose that the d
is taken of differe
considering. One is
that all the observ
cross-country grow
coefficienton thec
assumption; the que
One minor detail:
level (A) for each
institutional quality
level. My inclinatio
electricity consump
The very valuable
of thought in a dif
granted that the rat
remarkable presum
diffuses rapidly ar
other influences be
Audretsch, to whic
a wedge between m
uniformly across r
more than suggests
substantially even
seems correct and t
McQuinn and Whe
the law of motion
the dynamics of ou
inferences from c
growth rate if the
I had noticed this i
because the idea of
single closed-econo
growth-rate assum
leads to some subst

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The last 50 years in growth theory and the next 10 11

I think this is a real advance. Two further questions occur to m

that their empirical estimate of the speed of adjustment to stea
but a little larger than the value suggested by the model, using st
might account for this directional difference? The second quest
growth theory abandons the implausible limitation to uniform TF
to wonder about the actual pattern of national growth rates, and abo
of this pattern.
David Audretsch observes that it is useful—and correct—to say t
of what we call entrepreneurship is precisely to bridge the gap
technological knowledge and innovations in actual production, o
of new firms. He remarks in passing that the efficiency of this
regional differences in the growth of TFP. This is easy to believe
has eavesdropped on discussions of growth policy. If this idea can
growth accounting, it would add a lot to the explanatory power of
There is also a connection to another long-standing worry of mi
of TFP in the conventional way, more or less completely detach
identifiable technological changes that a historian would produce for
There are reasons for this disjunction. TFP is estimated for aggreg
at a minimum, whereas the historical narrative is usually about s
individuals. Both temporal aggregation and cross-sectional aggreg
events. Besides, a lot of productive innovation has nothing to d
research workers; it is created in the act of production through
similar process. And then there are what I have already vaguely
Nevertheless, it would be interesting to see if any connection c
specific industry, between the time series of TFP and an inform
innovations and their diffusion. (One can see in principle how T
new-product innovations, but it is not clear what would happen in
This train of thought leads naturally to the very attractive pa
connection is that one of their goals is a flexible estimate of
augmenting technical progress from US and euro-area time series
is a combination of exponential labour-augmenting and sub-expon
technical progress. In the long run, then, Harrod-neutrality dom
how long a run that is.) So steady-state growth is possible eventu
(When, exactly?)
Among the other nice aspects of this paper is the effort to put
set, and the use of a three-equation model for estimating the elas
three equations are the production function itself and the two first-
and capital. (The original 1961 paper by Arrow, Chenery, Minha
condition for labour; we were doing cross-sections and did not ha
Their main finding for both economies is an elasticity of substitu
one, in fact about 0.6.
I have one major reservation about this. The empirical basis cons
for the USA from 1953 to 1998 and quarterly for the euro area f
assumption is that the business cycle can be ignored, which mean
stock is assumed to be fully utilized all the time. Think what this
fairly short, but they must leave traces in annual data. In a recess
will appear to rise, because recorded employment will catch the
but the recorded capital stock does not catch idle capacity. Also,

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 12 Robert M. Solow

share of capital ten

for an elasticity of
share. So I wonder
about this under-u
the unemployment
be possible to do be
assure Rainer Klum
Grandville and I hav
more worried about
pathology of busine
The paper by Dav
few minutes, becau
cross-sections, but in
within the neoclassi
The descriptive ba
group of countries
transition matrix of
This is an interestin
view. The Markov h
other class depends
believe that? In the
characterized by va
in the same state, b
probabilities? I supp
rate of investment,
The only other obse
paper. Fiaschi and L
with a novel twist.
are technological spi
between any pair d
geographical, distan
What is more, a c
and negative spillov
it seems to treat h
the focus on intern
Casual observation s
economies. Its relati
a theory of open-ec
Here I come to the
Grandville. I leave a
am I). He goes on t
long time. Richard
optimal growth in m
more detailed scale,
calibrated growth
saving-investment
should we think?

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The last 50 years in growth theory and the next 10 13

I spoke of a reasonably calibrated model. But we really don't k

essential part of the model: the function that gives the per capit
consumption. De La Grandville shows that to get the optimal savin
size would require so much concavity in the social utility funct
verisimilitude of the whole procedure. Then he takes an altogether d
much more discussion than I can give it here.
He gives up on fiddling with the utility function, and simply max
sum of consumption per head. That seems to be moving in the wron
function calls for a bang-bang solution to the problem. (I wonder
equation appears as the formal Euler equation for this problem
he also confines the applicability of the model to situations in wh
capital is already very near the social rate of discount. That gets t
in the common sense range, as he shows.
It also forces us to rethink the original question in a diffe
comfortable situation of the de La Grandville type were sudden
destruction of a substantial part of the capital stock, by a natural
we not right back in the Goodwin-Ramsey problem?
Now comes a further radical suggestion: if the Ramsey formu
satisfying only near the steady state, why should we use it in the
context? So he proposes a different sort of rule of thumb, and r
again. Does that way of thinking truly resolve the Ramsey parad
should be discussed at leisure. But it is a useful question not only f
it reminds us that every abstract model needs this kind of plaus
test before one starts just applying it. We need the reminder becaus
is too often omitted.
The compact paper by Philippe Aghion and Peter Howitt teach
interpreting growth theory, even if it is more directly relevant
general admonition is that the choice of what is exogenous and
intrinsic part of any theory. The particular application to growt
new, but is certainly still worth stating. One striking conclusion f
model was that the long-run growth rate is independent of the sa
that was under the assumption that technological change entere
Howitt exhibit a model which is like the original one in every re
change is endogenized in a particular way. In their modified mo
rate does influence the steady-state growth rate. No mechanism
contradicted; but the size of the capital stock has an effect on t
innovation, and that relationship opens a channel from the savi
growth rate.
This is a worthwhile and interesting reminder. It also gives me a chance to ride a few paces
on an old hobby-horse that made a brief appearance earlier in these notes. The Cobb-Douglas
production function is a wonderful vehicle for generating instructive examples. But it has
special Santa Claus properties, and one must not be misled about the generality of those
examples. The Aghion-Howitt machinery resembles something I proposed in my own first
paper on 'embodiment'. To get clean results I had to assume that technological change
was purely capital-augmenting, just the opposite of the conventional assumption of Harrod
neutrality. (See the paper by Klump et al. in this issue for empirical indications.) In the case
of the Cobb-Douglas function (and only then) the distinction between labour-augmenting,
capital-augmenting, and output-augmenting (Hicks-neutral) technological change evaporates.

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 14 Robert M. Solow

I wonder how much

case, without some o
However that turn
beyond themselves.
investment quota cou
Iexplored—embodim
of long-run growth
easy to test hypoth
the saving-investme
They go about it in t

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— — (1998), Endogenous Growth Theory, Cambridge, MA, MIT Press.
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