22 PROFILES OF WORLD ECONOMISTSROBERT M. SOLOW

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ROBERT M. SOLOWdoc. Ing. Vladimr Gonda, PhD.

Faculty of National Economy, University of Economics in Bratislava

Robert Merton Solow was born in Brooklyn, New Yorkon 23 August 1924. His parents were the children ofimmigrants. Educated in the neighbourhood public scho-ols of New York City, he was, as he himself has said,taught by a devoted teacher to read the great 19th cen-tury French and Russian novelists and to take ideas seri-ously. In 1940 he won a scholarship to Harvard Universi-ty where his first studies were in sociology, anthropologyand elementary economics. At the end of 1942 he leftuniversity and joined the U.S. Army. He served briefly inNorth Africa and Sicily and then for the duration of thewar in Italy, until his discharge in 1945.

Upon returning to Harvard in 1945 he decided to con-tinue with economics. This came about thanks to a mee-ting with Wassily Leontief, who became his teacher,guide and friend and who taught him the spirit and sub-stance of modern economic theory. As his research assi-stant, Solow produced a set of capital-coefficients for theinput-output model.

Having become interested in statistics and probabilis-tic models, Solow spent a year studying them at Colum-bia University in 1949-1950. He was at the same timeworking on his Ph.D. thesis, which addressed the model-ling of changes in the size distribution of wage incomeusing interacting Markoff processes for employment-unemployment and wage rates. The thesis was awardedthe Wells Prize at Harvard, along with which the author

was offered publication in book form and $500 (in 1951prices) once the thesis was ready to be printed. Nevert-heless, the thesis was not published and the cheque wasnot cashed. Solow explained that after rereading the text,he realised he could do better. In the end, however, henever returned to this work.

In 1950 Solow was offered and accepted an AssistantProfessorship in the Economics Department at the Mas-sachusetts Institute of Technology. After initially teachingcourses in statistics and econometrics, he focused hisresearch on macroeconomics for what he himself hascalled a geographical reason he was given an officenext to Paul Samuelson, who had already written a well-known textbook on economics. Daily contact with Samu-elson and conversations on economics, politics and ordi-nary life, eventually drew Solow back to "straight"economics and he discovered in himself an instinctivemacroeconomist.

Apart from his research and teaching, Solow has beeninvolved in practical activities in the government sector.In 1960 1961 he served on President John F. Kenne-dy's Council of Economic Advisors, and later he was partof a government commission examining the problems ofwelfare recipients. For five years in the late 1970s Solowwas a director of the Federal Reserve Bank in Boston.He has also been engaged in a range of topical contro-versies and discussions.

Robert M. Solow is one of the major pro-ponents of the neoclassical synthesis (thesynthesis of standard neoclassical micro-economics and Keynesian macroecono-mics). In the vanguard of this theoreticalorientation is a quintet of distinguishedeconomists: P. A. Samuelson, J. Hicks, J.Tobin, F. Modigliani and Solow himself. It isworth noting that each of them is a Nobellaureate. Solow was awarded the NobelPrize for Economics in 1987 for his contri-

butions to the theory and measurement ofeconomic growth.

His pioneering work in the field of growththeory had a profound effect on the furtherdevelopment of economics and instigateda discussion on the factors ensuring eco-nomic growth and, more importantly, acompletely new explanation of how tech-nological progress contributes to thegrowth of national income and socialwealth.

Theory of economic growth

At the end of the 1950s a majority of economieswere experiencing fast economic growth generatedby demand deferred from the war period and by theneed to restore the war-torn economies. The econo-mic sciences also responded to this situation. In theUnited States the question of economic growth wasbeing addressed mainly by Solow, J. Kendrick and E.

Denison. They were nicknamed "economic archaeo-logists" since they were attempting to "dig up" thesource of economic growth.

Solow's main contribution is an elaboration ofneoclassical growth theory. His first pioneering workwas the article "A Contribution to the Theory of Eco-nomic Growth" (1956), in which he developed a neoc-lassical-type mathematical model of long-run growthbased on criticisms of the Keynesian Harrod-Domar

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model (regarding the fact it was a single factor modelwhere the sole growth factor was capital accumula-tion). Solow abandoned the standard Keynesianassumption of a fixed ratio between production fac-tors and introduced a ratio variable. The basis ofgrowth in his model was, on the one hand, the sub-stitution of labour by capital and, on the other hand,technological progress, which he considered to be akey determinant of growth in the long run.

Solow drew on the Cobb-Douglas production func-tion, which expressed the functional dependence ofnational product growth on labour growth and oncapital growth. Developed by the mathematicianCharles W. Cobb and the economist Paul Douglas atthe end of the 1920s for the U.S. economy, this pro-duction function is represented as follows:

Y = A . La . Kb

a + b = 1

where:A a constant determined by the effect of other fac-

tors not directly expressed in the function,L labour input,K capital input,a an elasticity coefficient for labour's share of out-

put; it indicates the percentage change in the pro-duct when, ceteris paribus, the volume of labourchanges by 1%,

b an elasticity coefficient for capital's share of out-put; it indicates the percentage change in the pro-duct when, ceteris paribus, the volume of capitalchanges by 1%.

Solow's contribution was to extend the Cobb-Doug-las production function with a third factor of growth technological progress, which he understood as ope-rating autonomously in time. For him, technologicalprogress is an exponential function of time. As aresult he came to a modified version of the Cobb-Douglas production function:

Y = A . La . Kb . ert ,

where ert represents the effect of technologicalprogress (r) in time (t) on economic growth.

In contrast to the Harrod-Domar model, the Solowgrowth model took into account labour-capital sub-stitution, in other words the change in productiontechnique as a response to changes in relative pricesof labour and capital.

Solow attempted to quantify the effect of individualfactors on the pace of growth. In an article entitled"Technical Change and the Aggregate ProductionFunction" (1957), he carried out an empirical analysisof the long-term growth of the U.S. economy. The keyto economic growth in the period 1909-1949 was,according to him, technological progress rather than

the traditional production factors of labour and capital.He asserted that, in the mid-20th century, 87.5% oflabour productivity was the result of "technologicalchanges" and only 12.5% could be attributed to con-ventional growth in the number of workers and capitalequipment. He construed technological progress inquite broad terms including, for example, the increa-sing educational qualifications of workers and themore effective organisation and management of pro-duction and, understandably, in the narrow sensetoo. Solow's conclusion represented an immediaterevolution in both economic science and economicpolicy.The importance of investments took a lower pro-file, as economists and politicians gave priority to tech-nical progress and how to go about accelerating it.

Solow in his initial reasoning worked with disembo-died technological progress, which is not tied to thereplacement of old equipment with new. Such tech-nological progress has the character of an exoge-nous quantity, not related to the introduction of pro-duction factors into the production process. On thisbasis, the view spread that the main agent of growthis investment in people and science, rather thaninvestment in capital, which led to a certain underes-timation of capital accumulation.

Solow later developed the hypothesis of embodiedtechnological progress, in other words technical pro-gress which is embodied in capital goods (in machi-nes of various ages). In a work entitled "Investmentand Technical Progress" (1960), he disaggregatedcapital according to its age structure and thereforealso according to its technical level. Embodied tech-nological progress reckons on the fact that older pro-duction equipment is gradually replaced with newand improved equipment. Each new generation ofinvestments is more productive than the last. In thiscase, technological progress is factored into thegrowth indicator of capital itself. In such an under-standing of technological progress, capital as a shareof economic growth is substantially higher at theexpense of disembodied technological progress.

The "Solow residual" the rate of technologicalchange that explains the difference between real inco-me growth and growth explicable by growth in labourand capital is considered by many to be a key ele-ment of the new economics since it reflects the overallefficiency with which labour and capital are used.There may be various origins of the efficiency growth innovations, technological changes, managementmethods, organisational changes, more efficient met-hods of organising production and services, and so on.

Theoretical literature was dominated up to the mid-1970s by the neoclassical theory of long-run econo-mic growth that Solow and his followers had develo-ped. (The most notable opposition to it came in the

form of the post-Keynesian growth models of N. Kal-dor, J. Robinson, et al.) Interest in the theory wanedas a result of the turbulence related to the oil crisis,stagflation, etc. (It is no wonder that business cycletheories that had previously been out of fashion enjo-yed a renaissance at this time.) From the mid-1980sthe problems of long-term growth once again beganto take a more important place in macroeconomicresearch the newer research is well known as endo-genous growth theory (Robert Lucas, Paul Romer).

The productivity paradox

On the subject of computers, Solow made the fol-lowing observation in 1987: "You can see the compu-ter age everywhere but in the productivity statistics."The fact that new information technologies havehardly registered in productivity growth has been ter-med "the productivity paradox". The author's doubtsabout whether new computers and information tech-nologies actually increase productivity in individualsectors are based on the fact that its growth since themid-1970s has been slowing down. It appears thatthe enormous investments in information technologi-es are not having the desired effect of increasingproductivity growth in the economy as a whole.

Solow at the same time suggests two possibleexplanations for this paradox. It may, on the one hand,be due to the time lag between the introduction of newtechnology and the effect it has on economic growth.On the other hand, the productivity paradox could becaused by a change in the character of national eco-nomies. This concerns the fact that there is a transiti-on taking place from the old economy, based on theautomated production of goods and mechanisation ofagriculture (with efforts in automation having ensuredaverage annual growth of between 3% and 4% overthe past hundred years), to the new economy. Thefeature of this economy is that, as a result of innovati-ons, manufacturing employs even fewer people andworkers are therefore moving into the service sector,which is not reporting substantial productivity growth(less than 1% per year on average).

Solow's contribution to the development of the Phillip's curve

Solow also devoted himself to macroeconomicquestions concerning the problems of inflation,unemployment and selecting an appropriate econo-mic policy. In the field of Keynesian macroeconomicshe attracted attention mainly with an article entitled"Analytical Aspects of Anti-Inflation Policy" (1960),co-written with Samuelson. Here the authors analy-sed the causes of inflation, drew a distinction betwe-

en its demand and supply impulses, and, most notab-ly, modified the classic Phillips curve by replacing therate of change of nominal wages with the rate of infla-tion. In their concept, the Phillips curve modified inthis way illustrated the link between the rate of unem-ployment and the rate of inflation. Resembling the ori-ginal Phillips curve in shape, slope and position, thisform of the Phillips curve is today the one most fre-quently used in economic literature.

This modification led to a conclusion with interes-ting implications for economic policy, in particular,that the desired low unemployment (sought by theKeynesians) is linked to the undesired growth in pri-ces inflation. The extent of unemployment may beinfluenced by fiscal and monetary policies. Thegovernment has a certain room for manoeuvre: itfaces a choice of two "evils" high unemploymentand high inflation between which there is scope forsubstitutability. In this regard Solow focused on theselection of an appropriate economic policy.

According to Solow and Samuelson, price level sta-bility should be achieved where the rate of unemploy-ment stands at 5.5% (5% 6%). They calculated thatan unemployment rate of 3%, which was then consi-dered an objective of economic policy, would result inan annual inflation rate of between 4% and 5%. Nowa-days these conclusions sound exceptionally optimis-tic. It should be added, however, that the authors the-mselves warned about their conclusions only beingapplicable for the next few years since a change ineconomic policy could shift the Phillips curve. Todaywe take the view that the 1970s stagflation represen-ted a concurrent worsening of both the key indicatorsand excluded the room for manoeuvre as being a wayto increase inflation still further. Not only has the Phil-lips curved shifted rightwards and upwards, it has alsolost its characteristic slope. A new interpretation of thePhillips curve was provided by Milton Friedman.

Other contributions of Solow

It was in the 1970s that the ecological issues cameto the centre of public attention. As an expert in theinterpretation of the factors affecting long-run econo-mic growth (in other words, basic production resourcesand technological progress), Solow entered into thisdiscussion while at the same time exposing a numberof ecological myths. For example, he rejected the opi-nions of the Club of Rome members who advocatedzero growth (Forrester) and who maintained that wecould no longer rely on technological progress to solveour problems. Solow argued that the only basis forovercoming ecological problems was economic growthand the technological progress which creates neweconomic resources or saves on existing resources.

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Solow also gave a lot of attention to analysing thelabour market and the problem of unemployment. Heunderstood unemployment to be involuntary, a positi-on typical of Keynesian economists. As to why thelabour market is distinct from other markets, he con-sidered the main reasons to be non-economic ones,including social patterns and principles of appropria-te behaviour (for example, unemployment assistan-ce, household management, etc.). These reasons,according to him, prevented the easy creation of suchwage rates that would "clear" the labour market orthat would adjust more quickly to changed conditions.

Solow Keynesian economist

Even though the Solow growth model has pro-nounced neoclassical (in other words non-Keynesi-an) features, Solow himself is a substantially Keyne-sian economist. Holding the Keynesian position inkey respects, he sees the current problem of the mar-ket economy in terms of unemployment, he rejectsthe monetarist doctrine, and he advocates activeintervention by the government in the economy. Hemade highly critical comments about the economicpolicies of U.S. President Ronald Reagan and U.K.Prime Minister Margaret Thatcher. That said, he alsocriticised the effectiveness of Keynesian-style inter-vention, for example, the anti-recession measurespursued in the U.S. in the late 1960s, including theregulation of interest rates and fiscal policy.

The human side of Solow

Colleagues describe Solow as an unpretentious,good and witty person. In personal matters he isknown for his moderation. Unlike many of his collea-gues he never tried his luck as a stock market specu-lator. It was typical that he still kept his office next toSamuelson even after being awarded the Nobel Prize.

Solow is regarded as a skilful debater. His languageand reasoning are elegant and sharp-witted, so much

so that his intellectual opponents are often led intocul-de-sacs. Commenting on an address given by Mil-ton Friedman in the late 1960s, he said: "Another dif-ference between Milton and myself is that everythingreminds Milton of the money supply. Well, everythingreminds me of sex but I keep it out of the paper."

Solow's enthusiasm for economics and his sense ofhumour are renowned. He is also aware that econo-mics is very difficult to get across to the public. In apress conference given after his Nobel Prize award, heremarked: "The attention span of the people you writefor is shorter than the length of one true sentence."

We will conclude with the dictum that Solow usedto round off his Nobel Prize lecture: "You never knowif you have gone as far as you can until you try to gofurther."

Bibliography

1. Bal, P. Verek, P.: Globalizcia a nov ekonomika(Globalisation and the New Economy), Sprint vfra, Brati-slava, 2002.

2. Buchholz, T. G.: iv mlenky mrtvch ekonom (NewIdeas from Dead Economists), Czech translation, VictoriaPublishing, Prague, 1993.

3. Gonda, V.: Monetrna teria J. M. Keynes versus M. Fri-edman (Monetary Theory J. M. Keynes versus M. Fried-man), ELITA, Bratislava, 1995.

4. Holman, R. et al: Djiny ekonomickho mylen (History ofEconomic Thought), 2nd edition, CH Beck, Prague, 2001.

5. Jon, J. et al: Nobelova cena za ekonomii (The NobelPrize for Economics), Academia, Prague, 1993.

6. Klaus, V.: Ekonomick vda a ekonomick reforma (Eco-nomic Science and Economic Reform), GENNEX & TOPAgency, Prague, 1991.

7. Produktvne susedstvo zobudilo v tatistikovi makroeko-nma (Productive Neighbourhood Woke Up Macroecono-mics in Statistician), newspaper Hospodrske noviny,article on p. 4, 25 August 2004.

8. Samuelson, P. A. Nordhaus, W. D.: Ekonmia (Econo-mics), Slovak translation, 16th edition, ELITA, Bratislava,2000.

9. Schwarz, J. evk, M.: Robert Morton Solow nositelNobelovy ceny za ekonomii v roce 1987 (Robert MortonSolow 1987 Winner of the Nobel Prize for Economics),journal Ekonomick asopis, 37, no. 8, 1989.

Major works of R. Solow

Solow's main field of interest was macroeconomicswhere his approach was based on the construction ofmodels based on microeconomic principles. His researchwork was published mostly in journal articles and in thechapters of collective publications.

His most important works include: Contribution to the Theory of Economic Growth (1956,

Prspevok k terii ekonomickho rastu). Technical Change and the Aggregate Production Function

(1957, Technick pokrok a celkov funkcia vroby).

Nature and Sources of Unemployment in the USA (1964,Povaha a zdroje nezamestnanosti v USA).

Capital Theory and the Rate of Return (1965, Teria kapi-tlu a vnosov miera).

Price Expectations and the Behavior of the Price Level(1968, Oakvania vvoja cien a sprvanie cenovej hladi-ny).

Growth Theory: an Exposition (1969, Terie rastu:vklad).

The Labor Market as a Social Institution (1990, Trh prceako socilna intitcia).

Work and Welfare (1998, Prca a prosperita).