Why do some economies grow faster than others?

There’s only one Bob Solow, founding father of neoclassical Growth Theory. It’s a field almost all economists have worked in since 1945. He belonged to a small group of outstanding scientists considered to be the greatest of their time, who shaped the profession unlike anybody else. For half a century, Solow was a professor at MIT, always leaving his office door open to encourage young people to talk to him. His work is extraordinary, as is his one-in-a-million attitude, being gracious, mild and eloquent as ever at the age of 92.

Robert M. Solow

Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, 1987

At a glance

Born: 1924, New York, USA

Field: Macroeconomics, Growth Theory

Prize-winning work: Contributions to the theory of long-term macroeconomic growth

Eureka moment: Wrote down the final thought he needed for his growth model while lying on the waiting room floor of a pediatrician

An immigration officer’s work: The family name was changed from Soloveychik, meaning 'little nightingale', to Solow, which means nothing at all

One love: Married his childhood sweetheart Barbara, 'Bobby', after returning from the army, and stayed by her side until her death in 2014

A lifetime solving economic conflict

It’s hard to believe that the person entering the conference room at the Russell Sage Foundation in Manhattan, wearing a light-colored shirt and a warm smile, is even a day over 80. The famed professor admits his hearing isn’t what it used to be, nevertheless, he’s eager to start talking and sharing insights into his work and his thoughts on ongoing economic conflicts.

A child of the Great Depression

After Solow returned home from Europe after World War II, he resumed his studies at Harvard University. It was his wife Bobby, studying economics herself, who got him interested in the field. He soon started working on one question in particular: Why do some economies grow faster than others? Solow explains how it was a natural question for him, being a child of the Great Depression. "I wouldn’t say that we were deprived or terribly poor or hungry, ever," he remembers. "But I was always conscious that my parents were worrying whether they could survive economically. The depression was part of the background of my life."

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The key to economic growth

In the 1950s, the story of economic growth was a story about capital. “Most economists thought the key was the accumulation of capital; the slow process of saving, of investing and building.” With half a century’s worth of US statistics, Solow established a simple theory. He designed a mathematical model to work out what increases output in a developed economy. "It turned out that by far the largest contribution came from something that can’t be explained by population growth, a labor supply increase or a growing stock of equipment. The largest contribution comes from technological innovation." Solow showed that the key to sustained growth is a country’s ability to create, absorb and use new technology.

Is a 4% annual growth rate realistic for the US?

Many developed countries today face slow productivity growth (if any), giving Solow’s core research questions renewed significance. We speak of his opinion of the current US president’s goal to get growth up to four percent. "President Trump hasn’t thought about those things, and he hasn’t talked to anybody who has thought about it," says Solow.

The US could grow at four percent for a year or two by bringing more people into employment, by using the capital that we have more intensively. But in the long term we know the only way to get sustained faster growth is to have sustained faster technological progress. And Mr. Trump has no more idea about how to bring that about than I have about to flap my wings and fly.

Will unemployment rise due to technological progress?

One of the great fears of mankind since the Industrial Revolution has been the fear that technology would create massive unemployment that could not be eliminated. It has been the other way. The advance of technology has meant more jobs.

This is Bob Solow back in 1989, two years after his growth model had earned him the Nobel Prize. Has his opinion changed? Solow shakes his head, carefully weighing his words. "For the advanced economies, technology hasn’t created an unemployment problem. The unemployment rate has no trend, if anything it’s a little lower than it used to be." But, he emphasizes, there’s no guarantee that this will continue.

Nevertheless, Solow doesn’t look to the future with pessimism. He believes that it’ll be a while yet before robots take over. "Maybe in the economy of 2117, income from wages and salaries won’t be more than 10 or 15 percent of all incomes. Then we have to find another way of providing income, that’s all. This may be difficult, but it’s not inconceivable." He adds how it’s not a "biological necessity" to base your identity on your job, though many people today feel it’s an important part of it. Perhaps Robert Solow is applying the wisdom that comes with age: times change and people get used to all sorts of things. Perhaps in twenty years, people will discuss what they actually do with their time at dinner parties, rather than what their job titles are.

The government and fair income distribution

"Any rapid technological change creates winners and losers amongst workers," Solow points out. "There’s no law of economics that says that it’s impossible for the robots to do more and more, better and cheaper. Maybe in a hundred years, we’ll all be taking care of each other rather than producing goods and services; the robots will be doing that. Let them, let them." Solow strongly feels that a well-functioning society will find ways of providing for people who lose their sources of income due to technological change. "Government is to play an important role here." Solow has always argued that it’s a society’s responsibility to provide education for everyone. This, to him, is more true than ever before. "We have no idea what kind of skills you’ll need. But I think the more you know, the easier it is to adapt."

Leading the way for future Nobel Laureates

Solow emphasizes how education is not the solution to every problem. But, nevertheless, an educated population is needed for societies to progress. As a professor of economics, he’s spent nearly 50 years at MIT. He recollects how much he loved teaching, helping young people find out what they wanted to do in life. Clearly, he was successful. The long list of his doctoral students reveals Nobel Laureates George Akerlof, Peter Diamond and Joseph Stiglitz. Stiglitz reminisces:

The elegance of Bob’s models had enormous intellectual influence on me. It was absolutely brilliant. I was lucky.

Silicon Valley - a benefit or a threat?

Since he’s the economist who famously linked productivity growth to technological innovation, it’s easy to assume Solow’s a great proponent of Silicon Valley. But he has mixed feelings, he admits. "Silicon Valley as a source of technological development is a benefit. But as a source of very rich people who have silly ideas about society, it can be a threat." He’s sure that future conflicts take place within societies. "If the only way I can improve my standard of living is by making your standard of living worse, we’re not going to get along very well. That has happened already, not dramatically, but it has."

If a huge bank balance equates to political power, it may only increase social unrest, says Solow. "Wealthy people will want to use this to accumulate political influence. It’s a good idea to limit the connection between money and political power." Developed countries around the world need to find a way to become more productive and efficient, but at the same time, "what we want to generate is not only more growth, but better shared growth, more inclusive growth".

"Be careful who you vote for!" Solow warns, adding he’s well aware the US isn’t in a position to lecture other nations on the matter at present.

Working together for the challenges ahead

Asked what’s enriched his life, Solow’s mind wanders to fond memories of his late wife. Not wanting to dwell on that, he goes on to share a lesson he learned a long time ago, serving in the US army in Italy World War II. "Most of the important things that get done are achieved by groups, not by individuals. They’re done by a group of people working together, I think that’s a very important lesson to learn."

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What does Solow’s work mean for us?

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"In 1987, Solow asked why you could see the computer age everywhere but in the productivity statistics. Through the dotcom boom, the smartphone age and now the rise of big data, we continue to argue over versions of those questions."

Tim Harford
Financial Times columnist and author of
The Undercover Economist

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"Famously, Solow suggested 80% of the US economy’s growth could be explained by technological progress. Technological change continues to revolutionize the way we do business. The question investors need to ask is whether this is properly being captured in the economic data."

Paul Donovan
Global Chief Economist
UBS Wealth Management

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