The Nobel Prize

Robert M. Solow (b. 1924)

Robert Solow was born in Brooklyn, New York, USA in 1924. In receipt of a scholarship he entered Harvard College in 1940 only to interrupt his undergraduate studies in 1942 when he joined the US army during the Second World War. On his discharge from the army in 1945 Solow returned to Harvard, obtaining a BA in 1947, an MA in 1949 and a PhD in 1951. He was awarded the prestigious David A. Wells Prize for best dissertation of 1951 for his doctoral thesis on the dynamics of income distribution. The thesis was not published because Solow thought it could be improved, but he never made the revisions he deemed were necessary. Before completing his thesis he was appointed, in 1949, as Assistant Professor of Statistics at Massachusetts Institute of Technology (MIT), where he was subsequently promoted to Associate Professor of Statistics in 1954, Professor of Economics in 1958 and institute professor in 1973. Since 1995 he has been Institute Professor Emeritus at MIT.

Solow’s many offices and honours include: the award of the John Bates Clark Medal of the American Economic Association in 1961 and the National Medal of Science in 1999; and election to the presidencies of the Econometric Society in 1964, the American Economic Association in 1979 and the International Economic Association from 1999 to 2002. From 1961 to 1962 he served on the US President’s Council of Economic Advisers. In 1987, Solow was awarded the Nobel Memorial Prize in Economics ‘for his contributions to the theory of economic growth’ (Nobel Foundation, 2004).

Solow is best known for his pioneering work on growth theory which has acted as a platform for an enormous amount of subsequent research in the field, both in terms of theorising and empirical testing. While he has written extensively on the subject over the course of his long and distinguished career, three of his early papers (Solow, 1956; 1957; 1960a), which have become classics, deserve special mention. In his Quarterly Journal of Economics paper entitled ‘A Contribution to the Theory of Economic Growth’, Solow developed a neoclassical model of growth where the aggregate production function is assumed to exhibit constant returns to scale, with substitution between two factor inputs, capital and labour, both of which experience diminishing returns. In contrast to the renowned instability property of the Harrod–Domar growth model developed in the mid-to-late 1940s, by allowing for substitutability between capital and labour, Solow was able to analyse the properties of the long-run equilibrium or steady-state growth rate where output per worker and capital input per worker are constant over time. His model predicts that: (i) an increase in the saving rate will lead to a temporary period of faster growth, but will not affect the steady-state growth rate; (ii) countries with higher rates of growth in their labour force will have lower steady-state levels of capital input per worker and output per worker; and (iii) in the steady state, both capital input per worker and output per worker will grow at the rate of technological progress. One of the main insights of the model is that sustained growth of output per worker depends on technological progress. The growth model developed by Solow has provided a framework to identify which factors determine growth in output over time and also shed light on some of the reasons why real GDP per person varies so widely between countries.

In his 1957 Review of Economics and Statistics paper, ‘Technical Change and the Aggregate Production Function’, Solow used his model to measure the contribution of capital, labour and technology to US growth experience. He estimated that over the 1909–49 period, US output per worker had doubled with about one-eighth attributable to increases in fixed capital per worker and some seven-eighths attributable to changes in technology, or what was later named the ‘Solow residual’. At the time the finding that technological progress, rather than capital accumulation, is the main source of growth was a real surprise. In another very influential paper, ‘Investment and Technical Progress’, published in an edited volume, Solow (1960a) established a method of aggregating capital from different periods, recognising that more recent vintages incorporate more modern technology. The techniques developed in these two seminal articles spawned a vast literature on what later developed into so-called ‘growth accounting’. For highly accessible discussions of Solow’s growth theory, including his reflections on developments in the field since his pioneering work, the reader is referred to his Nobel Memorial Lecture (Solow, 1988), and the second edition of his intermediate textbook (Solow, 2000).

In other important work undertaken in the 1960s, Solow examined the relationship of growth theory to capital theory. For example, his 1963 book, Capital Theory and the Rate of Return, made an important contribution to the ‘Cambridge Controversies’ – between economists (such as Joan Robinson and Nicholas Kaldor) based in Cambridge, England and those (such as Paul Samuelson) in Cambridge, Massachusetts – over the nature of capital and the existence of the aggregate production function. In his book, Solow expressed the view that what is important for capital theory is how the rate of return on capital is determined rather than how capital is measured.

While Solow is best known for his seminal work on growth theory and capital theory, he has also made important contributions to macroeconomic theory and policy. In what follows we mention, in chronological order, some of his most important and influential published papers in this broad field of study. Starting in 1960 in a paper cowritten with his long-time colleague at MIT, Paul Samuelson (see entry in this volume), ‘Analytical Aspects of Anti-Inflation Policy’ (Samuelson and Solow, 1960b), he introduced the Phillips curve to the United States by considering the relationship between the rate of wage increase and unemployment for American data. In his 1968 Quarterly Journal of Economics paper, co-written with Joseph Stiglitz (see entry in this volume), he presented a theory of output, employment and wages in the short run which could account for unemployment equilibrium.

Best described as an eclectic neo-Keynesian, Solow has consistently defended Keynesianism against the attacks of monetarists and new classical economists. In response to the monetarist critique that, in the long run, a bond-financed increase in government expenditure will ‘crowd out’ or replace private expenditure, in 1973 with Alan Blinder, he published: ‘Does Fiscal Policy Matter?’. Incorporating the government budget constraint into the standard Keynesian IS–LM model of a closed economy, Blinder and Solow pointed out that a balanced budget is required for long-run equilibrium. To finance a deficit, the authorities would have to issue more bonds, which would lead to an increase in private sector wealth (owing to increased bond holdings) and an increase in private consumption expenditure and the demand for money. Solow and Blinder were able to demonstrate that if the model is stable and the wealth-induced effects on consumption outweigh those on the demand for money, then crowding out will not occur. Furthermore, if increased interest payments arising from bond finance are taken into account, the long-run multiplier for a bond-financed increase in expenditure will actually be greater than that for a money-financed increase in expenditure.

In his 1979 Journal of Macroeconomics paper, ‘Another Possible Source of Wage Stickiness’, Solow presented a model in which wage stickiness is in the employer’s interest because cutting wages would lower productivity and raise costs. As such, the paper marks an important contribution to the new Keynesian literature on efficiency wage theory. In his presidential address to the American Economic Association entitled ‘On Theories of Unemployment’, Solow (1980) discussed why, given its characteristics, the labour market often fails to clear generating involuntary unemployment. These characteristics include: segmentation within the labour market, trade unionism, unemployment compensation and a ‘code of good behaviour enforced by social pressure’. Other examples of his most widely read and cited papers in macroeconomics include his 1981 American Economic Review article, co-written with Ian McDonald, ‘Wage Bargaining and Employment’, and his 1985 Scandinavian Journal of Economics paper, ‘Insiders and Outsiders in Wage Determination’. In other important work he has criticised the idea of a stable natural rate of unemployment; in The Labour Market as a Social Institution (Solow, 1990), the notion of fairness plays an important role in determining behaviour and outcomes in the labour market. As a result of this work, Solow is well known for his development and championing of neo-Keynesian economics.

In addition to his path-breaking work on growth and capital theory, and his contributions to macroeconomic theory and policy, Solow has also made important contributions to a number of other areas including: linear programming (for example, via his classic 1958 book on the subject, co-written with Robert Dorfman and Paul Samuelson); urban economics (for example, Solow, 1972); and the economics of non-renewable or exhaustible resources (for example, Solow, 1974). A much-admired, respected and well-liked individual among fellow economists, Solow’s insightful work is characterised by its readable prose, which is often laced with a keen and sharp sense of wit.

Main Published Works
(1956), ‘A Contribution to the Theory of Economic Growth’, Quarterly Journal of Economics, 70, February, pp. 65–94.

(1957), ‘Technical Change and the Aggregate Production Function’, Review of Economics and Statistics, 39, August, pp. 312–20.

(1958), Linear Programming and Economic Analysis (with R. Dorfman and P.A. Samuelson), New York: McGraw-Hill.
(1960a), ‘Investment and Technical Progress’, in K.J. Arrow, S. Karlin and P. Suppes (eds), Mathematical Methods in the Social Sciences, Stanford, CA: Stanford University Press, pp. 89–104.

(1960b), ‘Analytical Aspects of Anti-Inflation Policy’ (with P.A. Samuelson), American Economic Review, 50, May, pp. 177–94.

(1963), Capital Theory and the Rate of Return, Amsterdam: North-Holland.

(1968), ‘Output, Employment, and Wages in the Short Run’ (with J.E. Stiglitz), Quarterly
Journal of Economics, 82, November, pp. 537–60.

(1972), ‘Congestion, Density, and the Use of Land in Transportation’, Swedish Journal of Economics, 74, March, pp. 161–73.

(1973), ‘Does Fiscal Policy Matter?’ (with A.S. Blinder), Journal of Public Economics, 2, November, pp. 319–37.

(1974), ‘The Economics of Resources or the Resources of Economics’, American Economic Review, 64, May, pp. 1–14.

(1979), ‘Another Possible Source of Wage Stickiness’, Journal of Macroeconomics, 1, Winter, pp. 79–82.
(1980), ‘On Theories of Unemployment’, American Economic Review, 70, March, pp. 1–11. (1981), ‘Wage Bargaining and Employment’ (with I.M. McDonald), American Economic Review, 71, December, pp. 896–908.
(1985), ‘Insiders and Outsiders in Wage Determination’, Scandinavian Journal of Economics,
87 (2), pp. 411–28.
(1988), ‘Growth Theory and After’, American Economic Review, 78, June, pp. 307–17.
(1990), The Labour Market as a Social Institution, Oxford: Basil Blackwell.
(2000), Growth Theory: An Exposition, 2nd edn, Oxford: Oxford University Press.
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