A Macroeconomics Reader

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

27

Perspectives on growth theory

Robert M. Solow

Journal of Economic Perspectives (1994) 8, Winter, pp. 45-54

The current wildfire revival of interest in growth theory was touched off by articles from Romer (1986, from his 1983 thesis) and Lucas (1988, from his 1985 Marshall Lectures). This boom shows no signs of petering out. The time is not yet ripe for stock-taking and evaluation. My goal is not nearly so ambitious. All I want to do is to place the new thinking in some sort of historical perspective, and perhaps sprinkle a few idiosyncratic judgments along the way.

There have been three waves of interest in growth theory during the past 50 years or so. The first was associated with the work of Harrod (1948) and Domar (1947); Harrod’s greater obscurity attracted more attention at the time (and earlier, in 1939), although Domar’s way of looking at things is more relevant to some of the current ideas. 1 The second wave was the development of the neoclassical model. I think—probably inevitably—that some misconceptions remain about what that was all about, and why. The third wave began as a reaction to omissions and deficiencies in the neoclassical model, but now generates its own alternation of questions and answers.


THE HARROD-DOMAR IMPULSE

Suppose aggregate output is for some reason—technological or any other—proportional to the stock of (physical) capital. There is a warrant for this in the almost-trendlessness of the observed ratio. Suppose that realized saving and investment (net, for simplicity) is proportional to output and income. There is similar warrant for this assumption. It follows that investment is proportional to the stock of capital, and this fixes the trend rate of growth of both capital and output, unless the rate of capacity utilization is allowed to go wild. That rate of growth is the product of the investment-output ratio and the output-capital ratio. If we think entirely in ex post terms, the saving-income ratio and the investment-output ratio are the same thing. One of the defining characteristics of growth theory as a branch of macroeconomics is that it tends to ignore all the difficult economics that is papered over by that sentence.

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