The previous chapter introduced a number of basic facts and posed the main questions concerning the sources of economic growth over time and the causes of differences in economic performance across countries.

These questions are central not only for growth theory but also for macroeconomics and social sciences more generally. Our next task is to develop a simple framework that can help us think about the proximate causes and the mechanics of the process of economic growth and cross-country income differences.

Our starting point will be the so-called Solow-Swan model named after Robert (Bob) Solow and Trevor Swan, or simply the Solow model for the more famous of the two econo­mists. These two economists published two pathbreaking articles in the same year, 1956 (Solow, 1956, and Swan, 1956) introducing the Solow model. Bob Solow later developed many implications and applications of this model and was awarded the Nobel prize in economics for these contributions. This model has shaped the way we approach not only economic growth but the entire field of macroeconomics. Consequently, a byproduct of our analysis of this chapter will be a detailed exposition of the workhorse model of much of macroeconomics.

The Solow model is remarkable in its simplicity. Looking at it today, one may fail to appreciate how much of an intellectual breakthrough it was relative to what came before. Before the advent of the Solow growth model, the most common approach to economic growth built on the model developed by Roy Harrod and Evsey Domar (Harrod, 1939, Domar, 1946). The Harrod-Domar model emphasized potential dysfunctional aspects of economic growth, for example, how economic growth could go hand-in-hand with increasing unemployment (see Exercise 2.16 on this model). The Solow model demonstrated why the Harrod-Domar model was not an attractive place to start.

An important feature of the Solow model, which will be shared by many models we will see in this book, is that it is a simple and abstract representation of a complex economy.

At first, it may appear too simple or too abstract. After all, to do justice to the process of growth or macroeconomic equilibrium, we have to think of many different individuals with different tastes, abilities, incomes and roles in society, many different sectors and multiple social interactions. Instead, the Solow model cuts through these complications by construct­ing a simple one-good economy, with little reference to individual decisions. Therefore, for us the Solow model will be both a starting point and a springboard for richer models.

Despite its mathematical simplicity, the Solow model can be best appreciated by going back to the microeconomic foundations of general equilibrium theory, and this is where we begin. Since the Solow model is the workhorse model of macroeconomics in general, a good grasp of its workings and foundations is not only useful in our investigations of economic growth, but also essential for modern macroeconomic analysis. In this chapter, I present the basic Solow model. The closely related neoclassical growth model will be presented in Chapter 8.

2.1.