Oxford Review of Economic Policy, Volume 23, Number 1, 2007, pp.

314
The last 50 years in growth theory and the
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 briey 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 classication: B22, E13, O41
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 Swanwho was a splendid
macroeconomist also published a paper on growth theory in 1956 (Swan, 1956). In that
article you can nd 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 CobbDouglas 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
The Author 2007. Published by Oxford University Press.
For permissions please e-mail: journals.permissions@oxfordjournals.org

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4 Robert M. Solow
so clear and user-friendly. A second and more substantial reason was that Swan saw himself
as responding to Joan Robinsons complaints and strictures about capital and growth, while
I was thinking more about nding a way to avoid the implausibilities of the HarrodDomar
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 signicant 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 nished 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
ourishing, 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 HowTo 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 nding 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 didnt get lost in the complications and blind
alleys that beset Trevor Swans attempt; and it was plausible in the sense that it tted the
stylized facts, offered opportunities to test and to calibrate, and didnt require you to believe
something unbelievable.
Here is where the anecdote that I promised comes in. I spent the year 19634 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 ofce one day and said: Imagine that Mao Tse-Tung
calls you inshe was in her Chinese period thenand asks a meaningful question. The
Peoples 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 Peoples 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 problemin economics
to navigate between pure and abstract conceptions (how would a concept like capital t
into a complete and formal description of an economy) and the needs of practical calculation
(Maos hypothetical question). It can (almost) never be done perfectly. I thought that Joan
Robinson had been unfairly playing on that difculty in order to undermine the neoclassical

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The last 50 years in growth theory and the next 10 5
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
modications to t 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 cant 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, rst,
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
rst 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) turn 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 rst 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
nd 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 rm 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 conrmed 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 inefcient
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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6 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 inuences that do not even allowfor 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 Schumpeters 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 rst, 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-specic 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
inefciency, 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 difculties. 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 coefcients 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 inuences on TFP is
certainly large and interrelated. Anyone who wants to interpret a cross-country regression
causally has to believe that a particular coefcient really tells you what will happen to the

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The last 50 years in growth theory and the next 10 7
growth rate of a country that experiences an increase of the variable in question by , and
also tells you what will happen if, a few years later, the same variable decreases by the
same . 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
rst is open-economy growth theorythe 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
denitive.
Laundry-list regressions have sometimes found an association between an economys
openness to trade and its growth rate. Classical gains-from-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 arent 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 lled 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 imitationadaptation 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 signicant exogenous element.
As a last comment, I would like to drag my feet about a methodological fashionbut
one with real substantive implicationsthat 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 dene a
growth trajectory quite different from the paths actually followed by observed economies.
Indeed, the rst calibrations of the Ramsey model suggested optimal saving-investment rates
far higher than anything to be found in modern capitalist economies. The excess was large
enough to constitute a serious puzzle (to which Olivier de La Grandvilles article in this issue
proposes a resolution).

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8 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 ownerworkerconsumer households desires. For
example, the identical perfectly competitive rms have to share the households 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 conicting 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 signicant 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 SonnenscheinMantel 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 Walrass 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) modern economy is the outcome of the interplay of some
identiable forces. The main ones seemto 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 9
signicant and interesting factors: natural-resource availability, environmental constraints,
and the complex question of the relation between short-run uctuations 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 Reviewall t 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 dene convergence clubs.
It might take a more subtle specication 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-dened 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 benet 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 nding, if it holds up,
could liberate growth theory from the grip of the CobbDouglas 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 fromthe 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 s
1
and s
2
, and how much from the
difference between A
1
and A
2
.

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10 Robert M. Solow
Gundlach observes that empirical capital output ratios vary very little across countries, and
points out that this is exactly what you would expect, according to the model, if differences in
productivity reect primarily differences in technological level. I would put this in a slightly
different way, without the possibly misleading CobbDouglas assumption. One can solve
the model to give the steady-state productivity (y) and capital intensity (k) as a function of
the parameters that are allowed to differ, A and s. If only A varied from country to country, y
and k for each country would lie on a ray from the origin. They dont quite do that, according
to Gundlachs scatter diagramthough nearly. What kind of and how much variation in
s would account for the deviation from a ray, and does that correspond in any way to the
observed cross-country differences in s? My guess is that Gundlachs evaluation is about
right, but I would like to see how the fuller treatment works out. In any case, accounting
for the cross-country relation between y and kwhich covers both very rich and very poor
countriesis an important matter.
Suppose that the data in Gundlachs diagram do not quite t with theory, when account
is taken of differences in both A and s? There would be at least two implications worth
considering. One is that the model is simply inadequate. Another is that the assumption
that all the observations describe steady states is seriously misleading. Remember that all
cross-country growth regressions of this kind nd a negative and statistically signicant
coefcient on the countrys initial level of income. That by itself contradicts the steady-state
assumption; the question is how much this matters.
One minor detail: Gundlach remarks, correctly, that we lack a good index of technological
level (A) for each country. One device that he tries is to use a conventional measure of
institutional quality, on the hypothesis that this is likely to be correlated with technological
level. My inclination would be to try for something more direct, if possible, such as industrial
electricity consumption per unit of output, or the number of computers.
The very valuable paper by Kieran McQuinn and Karl Whelan carries this general line
of thought in a different direction, with some exciting results. Nearly everyone takes it for
granted that the rate of growth of TFP is the same everywhere. The only thing that justies this
remarkable presumption is the fairly mechanical thought that knowledge of new technology
diffuses rapidly around the world. Maybe so, but productivity performance depends on many
other inuences besides the content of the latest engineering textbook. (The paper by David
Audretsch, to which I will come in a moment, is precisely about one set of forces that drives
a wedge between mere knowledge and TFP.) Even if TFP is likely to increase more or less
uniformly across regions on the time-scale of centuries, common observation suggests (and
more than suggests, according to McQuinn and Whelan) that rates of TFP growth can differ
substantially even among advanced national economies on the time-scale of decades. This
seems correct and theoretically and empirically important to me.
McQuinn and Whelan then go on to make a neat analytical point: the model says that
the law of motion of the capital output ratio is independent of the TFP growth rate, unlike
the dynamics of output per unit of labour. One important consequence of this insight is that
inferences from cross-country observations can be made without assuming a common TFP
growth rate if the analysis is carried on in terms of the capital output ratio. I dont suppose
I had noticed this in 1956, although I certainly messed around with the capital output ratio,
because the idea of cross-country inferences was not in my head. I was thinking only about
single closed-economy time series. (I have never had any sympathy for the uniform-TFP-
growth-rate assumption.) The reader of this paper will see that doing the analysis their way
leads to some substantial revisions of conventional estimates.

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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 me. One is minor. They nd
that their empirical estimate of the speed of adjustment to steady state is always close to
but a little larger than the value suggested by the model, using standard stylized facts. What
might account for this directional difference? The second question is much broader. Once
growth theory abandons the implausible limitation to uniform TFP growth rates, it is natural
to wonder about the actual pattern of national growth rates, and about the likely determinants
of this pattern.
David Audretsch observes that it is useful and correct to say that an important function
of what we call entrepreneurship is precisely to bridge the gap between specic pieces of
technological knowledge and innovations in actual production, often through the creation
of new rms. He remarks in passing that the efciency of this nexus is a major source of
regional differences in the growth of TFP. This is easy to believe, especially for anyone who
has eavesdropped on discussions of growth policy. If this idea can be embodied in empirical
growth accounting, it would add a lot to the explanatory power of growth theory.
There is also a connection to another long-standing worry of mine. We estimate time series
of TFP in the conventional way, more or less completely detached from the narrative of
identiable technological changes that a historian would produce for the same stretch of time.
There are reasons for this disjunction. TFP is estimated for aggregates, for a whole industry
at a minimum, whereas the historical narrative is usually about single rms or even single
individuals. Both temporal aggregation and cross-sectional aggregation will mask individual
events. Besides, a lot of productive innovation has nothing to do with research or with
research workers; it is created in the act of production through learning by doing or some
similar process. And then there are what I have already vaguely called other inuences.
Nevertheless, it would be interesting to see if any connection can be made, perhaps in a
specic industry, between the time series of TFP and an informed narrative of signicant
innovations and their diffusion. (One can see in principle how TFP should be related to
new-product innovations, but it is not clear what would happen in practice.)
This train of thought leads naturally to the very attractive paper by Klump et al. The
connection is that one of their goals is a exible estimate of the character of factor-
augmenting technical progress from US and euro-area time series. Their preferred nding
is a combination of exponential labour-augmenting and sub-exponential capital-augmenting
technical progress. In the long run, then, Harrod-neutrality dominates. (They do not tell us
how long a run that is.) So steady-state growth is possible eventually, but perhaps not now.
(When, exactly?)
Among the other nice aspects of this paper is the effort to put together a consistent data
set, and the use of a three-equation model for estimating the elasticity of substitution. The
three equations are the production function itself and the two rst-order conditions on labour
and capital. (The original 1961 paper by Arrow, Chenery, Minhas, and me used only the
condition for labour; we were doing cross-sections and did not have data on capital stocks.)
Their main nding for both economies is an elasticity of substitution signicantly less than
one, in fact about 0.6.
I have one major reservation about this. The empirical basis consists of annual time series
for the USA from 1953 to 1998 and quarterly for the euro area from 1970 to 2003. The tacit
assumption is that the business cycle can be ignored, which means in effect that the capital
stock is assumed to be fully utilized all the time. Think what this does. Recessions tend to be
fairly short, but they must leave traces in annual data. In a recession, the capital labour ratio
will appear to rise, because recorded employment will catch the diminished use of labour,
but the recorded capital stock does not catch idle capacity. Also, in recessions the income

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12 Robert M. Solow
share of capital tends to be depressed, for the usual reasons. This is the standard recipe
for an elasticity of substitution less than one: the increasingly abundant factor loses relative
share. So I wonder if the Klump et al. nding contains some downward bias. I worried
about this under-utilization problem in 1957; the best I could do then was to assume that
the unemployment rate of capital was the same as that of labour in the same year. It should
be possible to do better now. I dont know how serious this bias could be, but I want to
assure Rainer Klump and his co-authors that I dont mention it just because Olivier de La
Grandville and I have found interesting implications of a large elasticity of substitution. I am
more worried about the tendency of modern (American) macroeconomists to forget about the
pathology of business cycles.
The paper by Davide Fiaschi and Andrea Mario Lavezzi is hard to discuss in just a
few minutes, because its relation to the others is indirect. It also deals with international
cross-sections, but in a very different way; in other respects it stands by itself, but still broadly
within the neoclassical growth framework. All I can do is to make one or two casual remarks.
The descriptive basis of the analysis is a plot of dlog GDP/dt against log GDP for a large
group of countries and times. Then, in a key step, the observations are translated into the
transition matrix of a Markov chain, where the states are dened by the same two dimensions.
This is an interesting approach. Notice that the name of the country has disappeared from
view. The Markov hypothesis says that the probability of moving from one class to each
other class depends only on the starting state; no longer is history relevant. Is it easy to
believe that? In the language I have been using, a particular country at a particular time is
characterized by values of A and s, technology level and rate of investment. Do two countries
in the same state, but with different values of A and s necessarily share the same transition
probabilities? I suppose this could be tested; in fact, when the authors sort observations by
rate of investment, they are testing it.
The only other observation I have time for relates to a very interesting analytic step in the
paper. Fiaschi and Lavezzi try to interpret their data in light of a standard neoclassical model
with a novel twist. They introduce a level-of-technology parameter and then suppose there
are technological spillovers fromeach country to other countries. The strength of the spillover
between any pair depends on the distance between them; and distance means economic, not
geographical, distance, measured by the disparity between their levels of income per head.
What is more, a country receives positive spillovers from more advanced countries,
and negative spillovers from less advanced countries. I nd that a little hard to believe;
it seems to treat having a low technological level like a sort of contagious disease. But
the focus on international technological spillovers strikes me as important and relevant.
Casual observation says that the catch-up process is a vital part of the evolution of national
economies. Its relation to trade and to foreign direct investment needs to be incorporated into
a theory of open-economy growth.
Here I come to the highly interesting paper by my friend and collaborator Olivier de La
Grandville. I leave aside the kind things he said about me; he was not under oath (and neither
am I). He goes on to raise a question that has bothered me, and many others, for a very
long time. Richard Goodwin was one of my teachers; I probably read his 1961 paper on
optimal growth in manuscript. Goodwin found, and de La Grandville veries on a broader and
more detailed scale, that straightforward application of the Ramsey principle to a reasonably
calibrated growth model leads to absurdly high estimates of the socially optimal ratio of
saving-investment to income (and may sometimes lead to mathematical pathologies). What
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 dont know how to calibrate an
essential part of the model: the function that gives the per capita social utility of per capita
consumption. De La Grandville shows that to get the optimal saving rate down to a reasonable
size would require so much concavity in the social utility function as to cast doubt on the
verisimilitude of the whole procedure. Then he takes an altogether different tack that requires
much more discussion than I can give it here.
He gives up on ddling with the utility function, and simply maximizes the time-discounted
sum of consumption per head. That seems to be moving in the wrong direction: a linear utility
function calls for a bang-bang solution to the problem. (I wonder if the fact that the Fisher
equation appears as the formal Euler equation for this problem is a reection of this.) But
he also connes the applicability of the model to situations in which the marginal product of
capital is already very near the social rate of discount. That gets the optimal saving rate back
in the common sense range, as he shows.
It also forces us to rethink the original question in a different way: suppose that a
comfortable situation of the de La Grandville type were suddenly to be disturbed by the
destruction of a substantial part of the capital stock, by a natural disaster, for instance. Are
we not right back in the GoodwinRamsey problem?
Now comes a further radical suggestion: if the Ramsey formulation is really intuitively
satisfying only near the steady state, why should we use it in the recovery-from-catastrophe
context? So he proposes a different sort of rule of thumb, and restores common sense once
again. Does that way of thinking truly resolve the Ramsey paradox? That is a question that
should be discussed at leisure. But it is a useful question not only for its own sake, but because
it reminds us that every abstract model needs this kind of plausibilityreasonableness smell
test before one starts just applying it. We need the reminder because that sort of consideration
is too often omitted.
The compact paper by Philippe Aghion and Peter Howitt teaches a useful lesson about
interpreting growth theory, even if it is more directly relevant for growth accounting. The
general admonition is that the choice of what is exogenous and what is endogenous is an
intrinsic part of any theory. The particular application to growth theory is not necessarily
new, but is certainly still worth stating. One striking conclusion from the original neoclassical
model was that the long-run growth rate is independent of the saving-investment quota. But
that was under the assumption that technological change entered exogenously. Aghion and
Howitt exhibit a model which is like the original one in every respect but one: technological
change is endogenized in a particular way. In their modied model, the saving-investment
rate does inuence the steady-state growth rate. No mechanism in the original model is
contradicted; but the size of the capital stock has an effect on the rate of technological
innovation, and that relationship opens a channel from the saving-investment rate to the
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 CobbDouglas
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 AghionHowitt machinery resembles something I proposed in my own rst
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 CobbDouglas 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 of the AghionHowitt story will hold up outside the CobbDouglas
case, without some other restrictive assumption.
However that turns out, the basic reminder is valid. Exogeneity assumptions matter
beyond themselves. I wrote that 1960 paper trying to nd a path by which the saving-
investment quota could after all affect the asymptotic growth rate. The particular mechanism
I exploredembodiment itselfdid not have that effect. We all believe that the determinants
of long-run growth are somehow endogenous, but the somehow is not obvious, nor is it
easy to test hypotheses. Aghion and Howitt have found one hypothesis that does implicate
the saving-investment quota, but the range of its eld of application should be investigated.
They go about it in the right way, and they may be on the right track. The more the merrier.
References
Aghion, P., and Howitt, P. (1992), A Model of Growth through Creative Destruction, Econometrica,
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(1998), Endogenous Growth Theory, Cambridge, MA, MIT Press.
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Audretsch, D. B. (2007), Entrepreneurship Capital and Economic Growth, Oxford Review of Economic
Policy, 23(1), 6378.
Barro, R. J. (1991), Economic Growth in a Cross Section of Countries, Quarterly Journal of Economics,
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Domar, E. (1946), Capital Expansion, Rate of Growth, and Employment, Econometrica, 14(April), 13747.
Fiaschi, D., and Lavezzi, A. M. (2007), Appropriate Technology in a Solovian Nonlinear Growth Model,
Oxford Review of Economic Policy, 23(1), 115133.
Grossman, G., and Helpman, E. (1991), Innovation and Growth in the Global Economy. Cambridge, MA,
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Gundlach, E. (2007), The Solow Model in the Empirics of Growth and Trade, Oxford Review of Economic
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Harrod, R. (1939), An Essay in Dynamic Theory, Economic Journal, March, 1333.
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