21 October 1987

The Royal Swedish Academy of Sciences has
decided to award the 1987 Alfred Nobel Memorial Prize in Economic
Sciences to

Professor **Robert M. Solow**, Massachusetts Institute of Technology,
Cambridge, USA,

**for his contributions to the theory of economic
growth.**

The study of the factors which permit
production growth and increased welfare has been a central
feature in economic research for many years. Robert M. Solow's
prize recognizes his exceptional contributions in this
area.

It is eminently reasonable to imagine that increased per capita
production in a country may be the result of more machines and
more factories (a greater stock of real capital). But this
increased production may also be due to improved machines and
more efficient production methods (which may be termed technical
development). In addition, better education and training, and
improved methods of organizing production may also give rise to
increased productivity. The discovery of fresh natural resources,
or improvements in a country's position on the world market, may
also lead to higher standards of living. Solow has created a
theoretical framework which can be used in discussing the factors
which lie behind economic growth in both quantitative and
theoretical terms. This framework can also be exploited to
measure empirically the contributions made by various production
factors in economic growth.

**Solow's Growth Model**

Solow's growth model was presented in an article entitled, *A
Contribution to the Theory of Economic Growth* (1956). The
article contains a mathematical model (in the form of a
differential equation) describing how increased capital stock
generates greater per capita production. Solow's starting point
is that society saves a given constant proportion of its incomes.
The population and the supply of labor, grow at a constant rate
and capital intensity (capital per employee) can be regulated.
Capital intensity is determined by the prices of production
factor. Due to diminishing yields, however, additional capital
injections (increasing capital intensity) will make ever smaller
contributions to production. This means that, in the long term,
the economy will approach a condition of identical growth rates
for capital, labor and total production (on condition that there
is no technological progress). This involves a situation in which
per capita production and real wage no longer increase. An
increase in the proportion of incomes which is saved cannot,
therefore, lead to a permanent increase in the rate of growth. In
contrast, an economy with a higher savings ratio, experiences
higher per capita production, and thus higher real income. But,
in the absence of technological progress, the rate of growth will
be the same, irrespective of the savings quotient, and will be
purely dependent on an increased supply of labor.

As a result, technological development will be the motor for
economic growth in the long run. In Solow's model, if continuous
technological progress can be assumed, growth in real incomes
will be exclusively determined by technological progress.

The preceding discussion has assumed that a given proportion of
economic income is saved and that savings correspond to an
equivalent amount of planned investment. Solow proves, however,
that if corporations had perfect foresight and if the labor and
capital markets function satisfactorily, corporations will wish
to invest to the extent that their total investment plans
correspond to the given value of savings. This means that Solow
ignores the conditions that may underlie, for example, a
Keynesian analysis of unemployment. However, while Keynesians
focus on short term instability, Solow is interested in an
analysis of long term development.

Solow's theoretical model had an enormous impact on economic
analysis. From simply being a tool for the analysis of the growth
process, the model has been generalized in several different
directions. It has been extended by the introduction of other
types of production factors and it has been reformulated to
include stochastic features. The design of dynamic links in
certain "numerical" models employed in general equilibrium
analysis has also been based on Solow's model. But, above all,
Solow's growth model constitutes a framework within which modern
macroeconomic theory can be structured.

**Empirical Growth Analysis**

The empirical estimation of the contributions of various
production factors to GNP is linked with the work of several
other economists. Solow's contributions in two articles,
*Technical Change and the Aggregate Production Function,*
published in 1957, and in *Investment and Technical
Progress,* from 1960, laid the foundations for what was later
to develop into "growth accounting".

In his first article, Solow based his model on time series
figures for total production, the total input of labor and the
cost shares of these factors in total production. Solow thus
achieved a measure for continuous change in production technology
over time by calculating the difference between the relative
development of production and the development of the supply of
labor and capital, weighted by factor shares. On the basis of
this estimated series, Solow could assess the production
function, (ie the mathematical relationship between production,
on the one hand, and the input of production factors, on the
other).

The change in production technology (the change in production
which could not be interpreted as changed inputs of labor and
capital) was interpreted as the result of changes in production
techniques, that is to say, technical progress.

Solow's analysis showed that technical improvements were neutral
over time (the distribution of GNP between earnings and capital
yield was not affected by technical change). He also demonstrated
that only a small proportion of annual growth could be explained
by increased inputs of labor and capital.

Solow's study had a dramatic impact - similar analyses were
undertaken in a great many other countries. Access to better
statistical data in the form of time series for capital and labor
has permitted more reliable results to be achieved.

The first attempts at measuring the contributions of production
factors to total production were based on given series for the
supply of labor and the stock of capital. Both these aggregates
are somewhat controversial, however. Robert Solow participated
actively in lengthy discussions about the measurement of
aggregated capital stock (the "capital controversy" of the 1960s
and 1970s). In an article published in 1960, *Investment and
Technical Progress,* Solow presents a new method of studying
the role played by capital formation in economic growth. His
basic assumption was that technical progress is "built into"
machines and other capital goods and that this must be taken into
account when making empirical measurements of the role played by
capital. This idea then gave birth to the "vintage approach" (a
similar idea was discussed by Leif Johansen in Norway at about
the same time). The vintage approach assumes that new investments
are characterized by the most modern technology and that the
capital that is formed as a result does not change in qualitative
terms over its remaining life. Thus, the investment decision ties
up future technology to some extent, since technological
knowledge is rooted in the physical capital object. Solow's
formulation of a mathematical model based on these ideas enabled
him to develop a theory which permitted empirical calculations to
be made. In principle, the model established a new way of
aggregating capital from different periods. Solow's empirical
results naturally gave the formation of capital a markedly higher
status in explaining the increase in production per
employee.

The most important aspect of Solow's article was not so much the
empirical outcome, but the method of analysing "vintage capital".
Nowadays, the vintage capital concept has many other applications
and is no longer solely employed in analyses of the factors
underlying economic growth. For example, many numerical general
equilibrium models utilize Solow's approach in the study of the
sensitivity of economies to certain types of disruptive effects.
The vintage approach has proved invaluable, both from the
theoretical point of view and in applications such as the
analysis of the development of industrial structures.

**Other Works**

Professor Robert Solow has worked actively within many vital
areas of economic theory. For example, he has published important
contributions in the area of natural resource economics.
Conventional economic growth theories assume that the only
factors which can affect economic growth are labor, capital and
technology. In recent years, the role of natural resources has
also attracted considerable attention. Is it possible to imagine
continued economic growth when we know that natural resources are
finite? Solow studied this question from a theoretical
perspective in an article published in 1974 and found that the
key to this problem lay in assumptions made about the
substitution elasticity for capital and natural resource inputs.
Solow has also studied the environmental consequences of growth
in other works.

Over the last decade, Professor Solow has largely devoted his research efforts to macroeconomic questions involving unemployment and economic policy and he has been a member of the US President's Council of Economic Advisers.

To cite this page

MLA style: "The Prize in Economics 1987 - Press Release".*Nobelprize.org.* Nobel Media AB 2014. Web. 21 Dec 2014. <http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1987/press.html>

MLA style: "The Prize in Economics 1987 - Press Release".