47 - not investment, drives long-run growth. While...

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3 Solow’s Surprise: Investment Is Not the Key to Growth Politicians are the same all over. They promise to build bridges, even where there are no rivers. Nikita Khrushchev Nobel laureate Robert Solow published his theory of growth in a couple of articles in 1956 and 1957. His conclusion surprised many, and still surprises many today: investment in machinery cannot be a source of growth in the long run. Solow argued that the only possible source of growth in the long run is technological change. Solow in the 1957 article calculated that technological change accounted for seventh-eighths of U.S. growth per worker over the first half of the twentieth century. While economists applied (and still apply) Solow’s model of growth to many poor countries, many are reluctant to accept his view that technological change,
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Unformatted text preview: not investment, drives long-run growth. While development practitioners slowly weaned themselves from the Harrod-Domar conclusion that growth was proportional to investment in the short run, they continued to believe that invest- ment was the dominant determinant of growth in the long run. Economists call the belief that increasing buildings and machinery is the fundamental determinant of growth capital fundamentalism. Whether capital fundamentalism holds is fiercely debated in the academic literature on growth; we will see in the next chapter what happens when the notion of capital is extended to include skills and education-human capital. In this chapter, we will see that capital fundamentalism is incompatible with people respond to incentives....
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This note was uploaded on 10/13/2008 for the course ECON 204 taught by Professor Cabal during the Spring '08 term at Williams.

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