Taking Stock
What have we learned from the Solow model? At some level, a lot. We now have a simple and tractable framework, which allows us to discuss capital accumulation and the implications of technological progress.
As we will see in the next chapter, this framework is already quite useful in helping us think about the data.However, at some other level, we have learned relatively little. The questions that Chapter 1 posed are related to why some countries are rich while others are poor, to why some countries grow while others stagnate, and to why the world economy embarked upon the process of steady growth over the past few centuries. The Solow model shows us that if there is no technological progress, and as long as we are not in the AK world, ruled out by Assumption 2, there will be no sustained growth. In this case, we can talk about cross-country output differences, but not about growth of countries or growth of the world economy.
The Solow model does generate per capita output growth, but only by introducing exogenous technological progress. But in this case, everything is being driven by technological progress, and technological progress itself is exogenous, just a blackbox, outside the model and outside the influence of economic incentives. If technological progress is “where it’s at”, then we have to study and understand which factors generate technological progress, what makes some firms and societies invent better technologies, and what induces firms and societies to adopt and use these superior technologies.
Even on the question of capital accumulation, the Solow model is not entirely satisfactory. The rate of capital accumulation is determined by the saving rate, the depreciation rate and the rate of population growth. All of these are taken as exogenous.
In this light, the Solow growth model is most useful for us as a framework laying out the general issues and questions.
It emphasizes that to understand growth, we have to understand physical capital accumulation (and human capital accumulation, which will be discussed in the next chapter) and perhaps most importantly, technological progress. All of these are black boxes in the Solow growth model. Therefore, much of what we will do in the rest of the book will be to dig deeper and understand what lies in these black boxes. We start by introducing consumer optimization in Chapter 8, so that we can talk about capital accumulation more systematically. Then we will turn to models in which human capital accumulation and technological progress are endogenous. A framework in which the rate of accumulation of factors of production and technology are endogenous gives us a framework for posing and answering questions related to the fundamental causes of economic growth.Nevertheless, we will also see that even in its bare-bones form the Solow model is useful in helping us think about the world and bringing useful perspectives, especially related to the proximate causes of economic growth. This is the topic of the next chapter.
2.8.