Solow Growth Model - Assignment Example

Solow Growth Model: How far can the shortcomings of the Solow growth model be overcome by alternative models of economic growth Introduction: Robert Solow used the Cobb Douglas function of production to show that economic growth can still be achieved even if an economy uses exhaustible resources in its production process. He emphasised the importance of capital accumulation and the adoption of modern technology to achieve economic growth, He expressed the aggregate production function as Y =F (L, K, E, D) Where: L is labour K is capital E is a constant that has a value slightly lower than one D is labour He argued that an economy using exhaustible resources can still maintain high standards of living; technological progress was one of the factors that would help achieve high levels of technological growth and also the existence of capital accumulation. Solow's model: Solow expressed the aggregate production function using the Cobb Douglas function as follow: Y=E ct +L g +D h + K 1-g-h t is time in years while c is the rate of technological change. He went ahead and divided the above function with labour (L) where Y/L will give us the standard of living in an economy; the subsequent function was as follows: Y E ct + D h + K 1-g-h = L L L L Solow gave three preposition about the model, first he assumed that technology was constant therefore E ct was zero, If K/L remains constant and D/L approached zero as the natural resources get depleted then Y/L will eventually approach zero. The second assumption was that if you hold technological progress and D/L is going down as we deplete the resources in a country, K/L may be going up because of capital accumulation, if capital accumulation was allowed to take place in an economy its possible for Y/L to remain constant or even increase and this will lead to economic growth. If the population remains to grow in the Malthusian version, the Malthusian version is what Malthus discussed what would result from high population, he argued that in the case where population was left to grow without any control measures then this would result to a complete depletion of resources, therefore if the population grows according to the Malthusian version then this dictates that Y/L will eventually approach zero. However if we hold population constant and allow K/L to increase without a limit then Y/L will increase. If technological progress occurs in an economy such that c is not equal to zero then for any value of c its possible to calculate a growth rate of L that is consistent with Y/L remaining positive, therefore technological progress can compensate for population growth. Therefore according to Solow the factors that facilitate population growth include capital accumulation and technological progress, this are the factors that determine whether per capita income grows, decline or remain constant. (Scott (1989)) Shortcomings of the Solows model: The Cobb Douglas function he uses assumes constant returns to scale; also his model assumes that there exists constant elasticity of substitution among the factors of production used in the production process, this assumption allows the standard of living and economic growth to be maintained even if D/L approaches zero as long as K/L rises appropriately. He also assumes that every generation no matter the distance have similar opportunities with the current one, this is not consistent with human behaviour, and people today only care about their immediate gratification and not for generations to come. Other theories of economic growth: The classical school of economist which included Adam Smith, David Ricardo, Thomas Mathus and John Stuart Mill considered the main factors of production which included land, capital and labour but in the absence of technological advancement, they however recognised the role of capital accumulation in economic development and therefore support Solow's idea of capital accumulation that lead to economic growth. (Zhang (2005)) Rostow's growth stage theory also supports Solow's idea of technological advancement that leads to economic growth, when an economy is at the drive to maturity stage according to him, the economy has to apply modern technology in order for it to get to the final stage which is the stage of high mass consumption. Karl Marx argues that the process of economic growth recognised the importance of capital and labour as the only mean of production, he defined the mode of production as the organisation of labour and knowledge of use of resources as well as technological means, he argued that development occurred through increased production through the addition of tools, machines and human resource factors. (Scott (1989)) The mercantile school of thought which lasted between the 15th and the 18th century also advocated for capital accumulation through international trade, they put much weight to gold, how to attain it and retain it, they explained this in the discussion about the wealth of nations. Conclusion: Solow's model clearly indicates that economic growth can be achieved through capital accumulation and technological progress. The theory also gives a solution to high population growth that was predicted by Malthus, technological progress however according to Solow can sustain an economy faced by high population growth. He highlights capital accumulation and technological progress as the main factors that lead to economic growth. Solow's idea therefore can be seen in today's economic world where a country can be experiencing high population growth but still experience high levels of economic growth. Countries with high levels of technological progress often experience high levels of economic growth compared to those countries that have less adoption to modern technology. Economic growth therefore can only be achieved if proper technology is applied in the economy, the economy has also has to have abundant resources as dictated by the classical school of thought. However a developing country tends to degrade its environment and they have to account for this through the use of renewable resources instead of non renewable resources that cause disastrous effects to the environment. References: Maurice Fitzgerald Scott (1989) A New View of Economic Growth, Oxford University Press, Oxford Wei-Bin Zhang (2005) Economic Growth Theory, Ash gate Publishing, USA Read More