A Macroeconomics Reader

By Brian Snowdon; Howard R. Vane | Go to book overview

Introduction

In 1987 the Nobel Prize for Economics was awarded to Robert Solow for his contributions to the theory of economic growth, the most important of which were made in the 1950s (see Solow 1956; 1957). Solow’s research proved to be highly influential and led to the development of the neoclassical growth model which following the demise of the Harrod-Domar approach, has remained the most popular basic framework for studying economic growth (for an introduction to neoclassical growth theory see Gordon 1993; Barro and Grilli 1994; Jansen et al. 1994; Mankiw 1994; Abel and Bernanke 1995; Froyen 1995).

As we noted in Chapter 1 of this volume, there has been a reawakening of economists’ interest into the long-run issue of growth since about the mid-1980s. This work, known as endogenous growth theory, has sought to provide a better understanding of the growth process and in so doing holds out the prospect of providing insights which may be invaluable in helping to design policies which could make a significant difference to the long-term growth rate (see Crafts 1996). Solow’s neoclassical model shows how capital accumulation could raise an economy’s growth rate in the medium term but generates the prediction that the long-run (steady state) rate of growth is constrained by the rate of growth of the labour force if the production function exhibits diminishing returns to the variable factor, constant returns to scale and zero technical progress. Hence technical progress which is assumed exogenous in the Solow model came to be seen as the main driving force of long-run growth. Following Solow’s (1957) article, where he showed how the aggregate production function could be decomposed so that the contribution of the various factor inputs towards the growth of output could be calculated, it was discovered that a large part of measured growth was left unexplained. This ‘Solow residual’, representing the growth of total factor productivity, was viewed as a measure of technical progress. But since technological change was exogenous, it meant that a large part of economic growth remained unexplained in the neoclassical model. The Solow residual, extracted by growth accounting procedures, was in Abramovitz’s words a ‘measure of our ignorance about the causes of growth’ (see Abramovitz 1956; Fagerberg 1994). Endogenous growth

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