Stubborn Attachments: A Vision for a Society of Free, Prosperous, and Responsible Individuals

by Tyler Cowen

The most prominent economic approach to growth, the Solow model, is named after MIT economist and Nobel Laureate Robert Solow, who laid out the basics of the model in the 1950s. The Solow model postulates a stripped-down economy-wide production function based on constant returns to scale. National output is the result of capital inputs, labor inputs, and technological progress, which renders both capital and labor more effective.10 In this model, the primary way to increase ongoing growth is to induce a higher rate of technological innovation. Indeed, much empirical research has shown embodied technological progress to be a major factor behind U.S. economic growth. The Solow model helps us to understand the phenomenon of catch-up growth, which has been so significant in East Asia. In the model, the rate of return on capital diminishes as the capital stock increases. So when there is not much capital, the returns on investment and thus the incentives to invest are high, at least provided that the labor force is of good quality and institutions will protect the property rights of investors. Poorer countries should therefore be expected to catch up to richer countries as they borrow new technologies and increase their capital stocks to implement new and lucrative opportunities. The economic growth in China that began in the 1980s had this catch-up flavor. The Solow model also implies that economies should recover quickly from one-time negative shocks such as earthquakes or de...

The Solow model.