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Unformatted text preview: REFLECTIONS ON GROWTH THEORY ROBERT M. SOLOW Abstract This note contains some general and idiosyncratic reflections on the current state of neoclassical growth theory. It expresses some surprise at the lack of attention both to multi-sector growth models and to multi-country models with trade and capital flows. It also suggests that there might be value in further analysis of some old topics like capital–labor substitution with an expanded definition of capital, and the interaction of growth and medium-run phenomena (or, to put it differently, the interaction of demand- side and supply-side variations). Keywords economic growth, neoclassical growth model JEL classification : 041 4 R.M. Solow I cannot remember what words Charles Dickens put in the mouth of The Ghost of Christmas Past. This is not the Cratchit family dinner anyway, and there is no one to play the role of Scrooge. But there is no doubt that I am here in roughly the capacity of the Ghost. So I will make up something for him to say. We are nearing the 50th anniversary of the neoclassical model of growth; astonish- ingly, it is still alive and well. There is not really any competing model. In the broad sense in which I use the term, the “endogenous growth” models of Romer and Lucas and their many successors are entirely neoclassical. So the basic model has survived for 50 years. I emphasize “basic” because progress, in theory and in practical analysis, has come mainly from extending the basic model at the edges. The territory of growth theory has expanded to include more topics in what used to be border areas. This is not necessarily exactly the same thing as “endogenizing” these borderline topics. There is a lot in the Handbook about the influence of background forces like “institutions” on the evolution of technology or total factor productivity. Some of it is in the mood of the “New Growth Theory” but not all of it. Much of it just wants to be explicit about background forces without trying to absorb them into the model. I will come back to some of the extensions of growth theory; but it is also interesting to contemplate a few of the territories into which the theory has not expanded. For exam- ple, I suspect that early on one would have expected much more work on multi-sector growth models than there has been. Not that there has been none: Leif Johansen had an early book, oriented toward planning. Luigi Pasinetti has written extensively on the sorts of structural changes to be expected along a trajectory, arising from such inevitable factors as differing income elasticities of demand for different goods. In a very differ- ent vein, there was a whole literature stemming from the von Neumann model, which now seems to have gone out of favor. Xavier Sala-i-Martin’s chapter in the Handbook reviews some worthwhile developments and promises others....
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- Spring '08