The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1987
Robert M. Solow
Presentation Speech by Professor
Karl-Göran Mäler of the Royal Academy of Sciences
Translation from the Swedish text
Your Majesties, Your Royal Highnesses,
Ladies and Gentlemen,
Economic growth has in a dramatic way transformed the society and given us possibilities and freedom that only a few generations ago were not thought of. For better or worse the situation for man has changed basically because of economic growth.
Economic growth is an extraordinary complicated process, in which decisions taken by firms, households, governments and others are of importance for the nature of the growth process. It will be affected by an investment in one company and an invention in another. It will change due to changes in the savings behaviour of the households or when the supply of labour increases or decreases. The risk is obvious to get lost in all the details. In order to achieve an understanding of the process, simplifications are required that concentrate the analyses on the most important relations. By doing that a frame of reference or a model is obtained by which details of reality can be evaluated and studied in order to find out how they interact with each other.
Professor Solow's great achievement is that he has created such a model by which the elusive reality can be understood and analysed.
Earlier models of economic growth were based on rigid assumptions that did not allow for substitution between capital and labour f. i. In Robert Solow's model, factor proportions, i. e. the relation between real capital and labour, will adjust and change during the growth process. Robert Solow started from the assumption that a fixed share, the savings propensity, of the national income is saved. With perfect functioning markets for labour and capital, the resulting savings will as Solow showed, exactly correspond to the investments planned by the firms. If the savingsratio is sufficiently high, the cost of capital will decrease in relation to the wagerate and the capital intensity will increase, i. e. the amount of real capital per worker will increase. If, on the other hand, the savingsratio is small, capital becomes relatively more expensive and the capital intensity will decrease. Professor Solow showed, however, that in the long run, with given technology, capital per worker will be constant. But this means that production per worker also will be constant. The real wage will therefore also be constant.
An increase in the share of income allocated to savings will according to this argument only have effects on the growth rate in the short run, while the effects in the long run are non-existent. On the other hand, the increase in the savingsratio will of course have the effect of increasing the equilibrium capital-intensity and therefore a higher long run level of the real wage.
This argument has, however, been based on an unchanged production technology, i. e. the same methods of production are repeated year from year. We know that this is not the case, however. If, by research and development, new production methods are generated, then the economic growth can continue according to professor Solow's model for economic growth even in the long run. The conclusion is then that in the long run, technological development is the major factor behind economic growth.
Besides the formulation of the growth model that now bears his name, Robert Solow has given other fundamental contributions to the analysis of economic growth. He has f.i. studied the importance of embodied technical progress, i.e. technical progress that is embodied in capital goods. These studies have given rise to the most important vintage approach in capital and growth theory. Professor Solow has also made seminal contributions on empirical studies of the major factors behind the growth process. Robert Solow's studies in this area have initiated new areas for economic research.
Professor Robert Solow. Your contributions to the theory of economic growth and to the empirical studies of the growth process are of fundamental importance to economic science. The model of economic growth which is associated with your name is not only of interest for specialists in growth theory but has become a unifying organizing principle in much of contemporary macroeconomics. Your empirical research of the growth process has equally been of fundamental importance for the development of economic science.
Professor Solow, to me has been granted the privilege to convey to you the warmest congratulations of the Royal Academy of Sciences and I now ask you to receive your Nobel Memorial Prize in Economic Science from the hands of His Majesty the King.
From Nobel Lectures,
Copyright © The Nobel Foundation 1987