Beyond Solow: Understanding The Exogeneities In The Solow Growth Model

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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From Hyderabad, India: Robert Solow had published a landmark paper in the Quarterly Journal of Economics in 1956 cleaning up all the growth theory which had come before him. The model is non-derivable but for its two seminal assumptions: population growth and technical change, principally caused by human response to challenges to the survival of the species, are external to understanding economic growth. They are a given in the Solow Growth Model and he then goes on to mathematically model the relationship between the macroeconomic economic output variable and the microeconomic capital stock variable beginning with the standard Cobb-Douglas production function at constant returns to scale.

Solow neatly circumvents any efforts to understand the mystical process of ideation and technical innovation leaving that to Joseph Schumpeter’s creative destruction to explain implicitly the drivers of structural change and population growth rate to the fickleness of human nature and to God. Species survival is left to chance in the model just as the species also come into being.

Observation over time of economic growth, however, reveals a pattern which can provide a useful lens through which Solow’s exogenous variables can be viewed to be better understood: declining population growth rates or the anticipation of population decline drives technical change.

The relationship between Solow’s two exogenous variables endogenizes one of them – lower population can ironically enhance the prospects of species survival through the process of invention, without meaning to imply intended war (Israel) and disease.

Once intended war and disease are left out for the purposes of obviating value judgments in policy making, it is clear that countries with lower populations brought about by any number of exogenous factors such as lower immigration rates, geographical resource or climate constraints (United Kingdom, Northern Europe and Japan) or natural calamities (plague in Europe) can, in fact, produce rapid technical change to raise standards of living.

Empirically this view is verifiable when the rate of technical change is examined within the less populous advanced economies. New technologies are always the means to raise consumption at a rate far higher than in economies where populations are larger and, in a systemic feedback, the labor effort to cause the technical change dampens the indigenous, non-immigrant population growth rates in industrial societies.

In contrast to existing endogenous growth theories such as those of David Romer which put the premium on the need for ever higher segments of a population to participate in the knowledge creation process to raise the probability of technical change, it appears that stable, low population economies specialize better in producing technical change due to precautionary motives. Meaning, for example, it is not to the advantage of China and India to allocate scarce resources to innovation as much as United States or Europe. The rate of imitation is always faster than the rate of innovation in technical change.

Population and the quality of human capital to cause technical change are, within a range, inversely proportional and, therefore, geopolitically, in the immediate term, it is more beneficial for the G7 plus Russia to specialize in innovation.

To prepare for the long run, however, the production function for species survival has only one factor input: energy from the sun, all other factors being derived from it.


About Chandrashekar (Chandra) Tamirisa
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