The Solow's Model With Endogenous Population: a Neoclassical Growth Cycle Model (original) (raw)
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Modern growth theory derives mostly from Solow’s “A Contribution to the Theory of Economic Growth” (1956). Solow’s own interpretation locates its origins in his view that Harrod’s growth model implied a tendency toward progressive collapse of the economy. He formulates his view in terms of Harrod’s invoking a fixed-coefficients production function. We challenge Solow’s reading of Harrod’s “Essay in Dynamic Theory,” arguing that Harrod’s object in providing a “dynamic” theory had little to do with the problem of long-run growth as Solow understood it, but instead addressed medium-run fluctuations, the “inherent instability” of economies. Solow’s interpretation of Harrod was grounded in a particular culture of understanding embedded in the practice of formal modelling that emerged in economics in the post-Second World War period. Solow’s interpretation, which ultimately dominated the profession’s view of Harrod, is a case study in the difficulties in communicating across distinct interpretive communities and of the potential for losing content and insights in the process. Harrod’s objects—particularly, of trying to account for a tendency of the economy toward chronic recessions—were lost to the mainstream literature.
The Solow Growth Model is a model of capital accumulation in a pure production economy: there are no prices because we are strictly interested in output = real income. Everyone works all the time, so there is no labor/leisure choice. In fact, there is no choice at all: the consumer always saves a fixed portion of income, always works, and owns the firm so collects all " wage " income and profit in the form of all output. We will not need to model the " consumer ". We assume all people work all the time, and we assume they save, hence invest, a fixed portion of their income. There is no government, hence no taxation nor subsidies; this is a closed economy, so there is no trade. Since there are no prices there is no need for money: there are no financial markets, etc. This model, then, is a model that captures the pure impact savings = investment has on the long run standard of living = per capita income. Since we allow for population growth, this model may be called the Blue Lagoon Model (i.e. as opposed to Robinson Crusoe, two people can reproduce). Ingredients: Consumers and Firms. All consumers own the firms, so consumers receive all output, and therefore all profit and rent. Aggregates: Output = Real Income = Yt in period t. Capital Stock = K t ; Population Size = Nt = Labor Supply (since everyone works all the time). Consumption = Ct; Savings = St; Investment = I.t. Per Capita: Output = Real Income = y t = Y t /N t in period t. Capital Stock = kt = Kt/Nt ; Consumption = ct = Ct/Nt; Savings = st = St/Nt; Investment = i.t = It/Nt; THE POPULATION = THE LABOR SUPPLY
International Journal of Pluralism and Economics Education, 2012
The Solow model concludes that long-run growth depends on technological progress, which is taken by neoclassical economists as suggesting there are no limits to growth because humanity's capacity to think and expand knowledge is unlimited. This paper develops a two-sector Solow model consisting of natural and economic sectors, and it demonstrates that continued rapid growth is not inevitable and an economic collapse is possible. The logical application of the Solow model thus does not provide a justification for continuing the energy-based technological change and economic growth we have experienced over the past two centuries.
Solow on exogenous and endogenous growth, and the Swan proposition
2001
In this note, we will review and discuss some of the ideas on exogenous and endogenous growth put forward by RM Solow in his Siena Lectures, [4].1 On the one hand, a theory of endogenous growth would like to do with fewer exogenous parameters than the old, and this can be ...
Towards a new synthesis of economic growth theory
The topic of economic growth is the subject of this excellent book published by Richard Arena and Pier Luigi Porta, professors at the Universities of Nice-Sophia Antipolis (France) and Milano-Bicocca (Italy) respectively. It is not treated however in a simple way, as the editors have compiled writings of important representatives of Keynesian Schools (and Post Keynesian) of Cambridge as; William Baumol, Geoffrey Harcourt and Luigi Pasinetti as well as authors framed in the neoclassical tradition of growth theory such as the Nobel Prize Robert Solow, thus describing the field of an ever-growing economic theory. The comparative analysis of the theories based on the Solow's neoclassical growth model along with those based on the structural dynamics of Luigi Pasinetti, make a strong analytical frame that combines the best analytical tools of economics, with economic history, and the history of economic thought. The contrast between the two analytical frameworks, starting from their own methodological intentions, reaches the points of convergence between the two settings and what would be the modern theory of economic growth. The latter is understood in three main stages of theoretical development. The first is linked to the search of optimal growth models of neoclassical or "Solovian" tradition; the second phase is characterized by the breakdown of the assumption of diminishing returns to capital and the staging of endogenous growth models, to conclude with the stage marked by the inclusion of structural dynamics in the growth models. This last stage is mainly characterized by a breakdown with those " balanced " growth models from the "Solovian" framework, and the occurrence of the demand relevance, sectorial imbalances, innovation, human learning and the resulting imbalance between economic sectors as engines and drivers of growth. In this stage is where the work and influence of Luigi Pasinetti is suited, commonly known as the contribution of last century 50s and 60s Keynesian Cambridge School to the debate on economic growth. Without putting into perspective the three stages of theoretical development of modern economic growth outlined above, it is very difficult to understand the new models that have emerged with the introduction of technology and structural change
Old and new growth theories: a unifying structure?
This paper discusses some of the recent theoretical developments in growth theory, tying them to the earlier growth theories. We do this by setting out a basic generic model and show how it yields two of the key models that have played a prominent role in the recent literature on economic growth theory, the endogenous growth model and the non-scale growth model. We focus initially on the former, emphasizing how the simplest such model leads to an equilibrium in which the economy is always on its balanced growth path. We have also show how the endogeneity or otherwise of the labor supply is important in determining the equilibrium growth rate and the responsiveness of the equilibrium growth rate to macroeconomic policy. But transitional dynamics are an important aspect of the growth process we discuss alternative ways that they may be introduced. Within the endogenous growth framework this occurs naturally through the introduction of a second capital stock and two such examples are considered. The first is the introduction of government capital in the one sector model, and the second is the twosector production model, in which the two capital goods relate to physical and human capital. Criticisms of the endogenous growth model have led to the development of the non-scale model. This is always characterized by transitional dynamics that are more flexible than those of the corresponding endogenous growth model. The model is closer in structure to the traditional neoclassical model, which in fact is an early example. Sorting through the growth literature over the last half century, one sees striking parallels between the old and the new. The structures have many similarities; it is the methods of analysis that are changing. The AK technology of the basic one-sector endogenous growth model is identical to that of the Harrod-Domar model. Furthermore, the equilibrium rate of growth in the AK model can be expressed as the product of the savings rate and the output capital ratio, and is identical to Harrod's warranted growth rate. Moroever, the rigidities that were associated with the Harrod-Domar technology, and led to the development of the Solow-Swan neoclassical model, have their parallels in the more recent literature.