The Solow Model in Action

One of the most useful models to know when you are thinking about the long term growth prospect of any nation is the Solow model. Or as Marginal Revolution University refers to it in what I think is the best video available about the topic online: The Super Simple Solow Model.

Anybody can (and everybody should) see all the videos in that series. What I’m going to attempt to do in today’s post is try and explain to you how to think about the Solow model, and also speak a little about why it (the Solow model) matters.

I’d written a series of short posts about the Solow Model about four years ago: if you (like me) prefer reading to viewing, here they are, in order:

  1. The difference between the long run and the short run
  2. How to think about long term growth
  3. What does capital mean in the context of economics?
  4. Small economies, big economies
  5. The importance of institutions
  6. Understanding depreciation

Now, today’s essay is not so much about the model, but about how to use the model to think about the real non-ivory-tower world.

I often say in classes that economic models are like photographs taken by smartphone cameras. They are abstractions of reality. They can’t possibly capture all the nuances, hues, details and features of whatever it is that you are photographing. And looking at the photograph gives you an idea of what it might have been like to actually be there – but you cannot possibly ever experience it yourself.

Similarly, a model is an abstraction of reality. It cannot possibly capture all that you need to know about the real world. And using a model as a crutch to get to grips with reality is like seeing a photograph and imagining yourself there. As a thought experiment, it’s fun. As a way to reach policy decisions, it is fraught with risk. 1


Noah Smith came up with an excellent post recently about the Global South, which triggered this essay. His essay is a must read, and in a loosely chronological sense, it speaks about the history of convergence in the world. More to the point, it helps one understand the point I was trying to make above:

Economists generally agreed that instead of unconditional convergence, countries showed “conditional convergence” — that poor countries could only reach parity with rich ones if they had broadly similar institutions and levels of human capital . The subtext was that poor countries just didn’t have what it took to become rich. On the political left, this was of course taken as evidence that developing countries were being held down by neocolonialism, or at least that the capitalist global economic system didn’t have what it took to lift nations out of poverty.

https://noahpinion.substack.com/p/checking-in-on-the-global-south)

But the story soon gets better:

Since the mid-1990s, developing countries began to converge toward levels of income of advanced countries. This process accelerated and became strongest in the 2000s…[This] is not driven by advanced nations lowering their growth performance but rather by developing countries raising theirs…Essentially, the entire distribution of growth amongst rich countries has remained stable over time; in contrast, the entire distribution of poor country growth has shifted up.

https://www.cgdev.org/sites/default/files/new-era-unconditional-convergence.pdf

And today, as Noah points out, the world is a much, much better place than it was about seventy years ago. Nations, particularly those in South East Asia, that would simply not have been thought about as having rapid growth prospects are today all but developed nation status (he mentions Malaysia, Laos, Vietnam and Bangladesh in particular) – and a great way to understand my little series about the Solow model and the MRU video is by reading this essay and reflecting on it.


But the basic point of the Solow model is this: growth matters. It is, in fact, the only thing that matters:

Broad-based growth, defined as the process that raises median income, is far and away the most important source of poverty reduction. There is no instance of a country achieving a headcount poverty rate below 1/3 of its population (at moderate poverty line of $5.50) without achieving the median consumption of that of Mexico. This is not to say that there do not exist anti-poverty programs that are cost-effective and hence should be expanded, or, conversely, that there are anti-poverty programs that are not cost-effective (or even have zero impact on poverty) and should be cut back or eliminated. Analyses of these types of programs would enable a more efficient use of resources devoted to poverty reduction. But large and sustained improvements in global poverty will almost certainly have to focus on how to raise the productivity of the typical person in a poor country, which is a key source of national income growth.

https://econofact.org/poverty-reduction-and-economic-growth

I came across this quote in an essay by Gulzar Natarajan, and the rest of the essay is worth reading in its entirety – but I’ll resist talking about it today – maybe tomorrow!


  1. Let me be clear: I am not criticizing modeling as an endeavor. I am simply stating that it has its limitations.[]

Etc: Links for 22nd November, 2019

  1. Timothy Taylor tells us about the time when Hayek spoke about the inadvisability of the Nobel Prize in Economics… while receiving it himself. It is a speech that reads well.
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  2. “With that in mind, the journalist Oliver Morton has made the marvelous suggestion that if at least some abstemiousness is due to shyness and the inability to find partners (while the promiscuous have relatively little trouble in this regard), then the answer might be to establish a government-funded dating service: bring us a used condom and we’ll get you a date.”
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    I cannot remember how and where I chanced upon this article, but I can assure you that I thoroughly enjoyed reading it. Steven Landsburg on why more people should have sex, and how that might benefit society – but only up to a point. If you are confused and intrigues, I strongly recommend reading this article.
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  3. “Trapped in the eye of this storm, Joumban and Mae Seang press their faces against each other. With her trunk, Mae Seang gently touches Joumban’s mouth, his tusks, his eyes. He responds in kind. They wrap their trunks around each other and rub foreheads. What must they make of all this?”
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    A gratifyingly long read about elephants, including how to purchase one. By the way, what this reminded me the most of was (if I recall correctly) an MRU video about buying slaves in Africa, and the elasticity of supply. Via the consistently excellent The Browser
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  4. “Now, thanks to a new initiative by the Internet Archive, you can click the name of the book and see a two-page preview of the cited work, so long as the citation specifies a page number. You can also borrow a digital copy of the book, so long as no else has checked it out, for two weeks—much the same way you’d borrow a book from your local library. (Some groups of authors and publishers have challenged the archive’s practice of allowing users to borrow unauthorized scanned books. The Internet Archive says it seeks to widen access to books in “balanced and respectful ways.”)”
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    Wikipedia’s supply chain.
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  5. “But the work of D’Agostino and a handful of other pioneering ketone researchers over the past decade has also led scientists at Harvard, Yale, and other top institutions to consider the diet’s potential to treat other diseases. Siddhartha Mukherjee, an oncologist and the author of The Emperor of All Maladies, a Pulitzer Prize–winning history of cancer science, is among those interested in whether the ketogenic diet could have a role in cancer therapy.”
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    On the unexpected benefits of the ketogenic diet.