The Solow Growth Model in Words

The classic model of economic growth explained without equations, and its key lesson that long-run growth depends on technology.

In 1956, the economist Robert Solow published a model of economic growth that is still taught in nearly every economics course. He won the Nobel prize in 1987 for this work. Its main lesson is surprising: saving and investing more cannot, on their own, keep an economy growing forever.

The ingredients

The model describes an economy’s output as depending on:

Capital: machines, buildings and equipment.
Labour: the number of workers.
Technology: how effectively capital and labour are combined.

Diminishing returns to capital

A key assumption is diminishing returns to capital. Giving a worker their first machine raises output a lot. A second machine helps less. A tenth barely helps at all. Each additional unit of capital per worker adds less output than the one before.

The steady state

Capital also wears out, called depreciation. As an economy builds up capital, more and more investment is needed just to replace worn-out machines. Eventually, investment only covers depreciation, and capital per worker stops rising. The economy reaches a steady state, where output per worker stops growing.

A country that saves more reaches a higher steady state and grows faster for a while, but it still eventually levels off.

Technology is the key

So what explains the continuous growth in living standards in rich countries? Solow’s answer was technological progress: better ways of producing things let the same capital and labour produce more. In his model, technology was treated as coming from outside the economy. Later economists, such as Paul Romer, built models explaining where technological progress comes from.

Two farms

A farmer with no tractor buys one and doubles output. Buying a second tractor adds a little more. A third adds almost nothing, because there are not enough workers to drive them. Beyond a point, more tractors do not help. But a new, more efficient seed variety raises output from the same land, workers and tractors. That is technology, and it has no such limit.

Convergence

The model predicts that poorer countries, with less capital, should grow faster than rich ones, because each new unit of capital adds more output. This idea of convergence is explored in the next lesson.

Thinking investment alone drives endless growth

Building more factories and roads raises output, but diminishing returns set in. Sustained growth in living standards comes mainly from improvements in technology and productivity.

Key takeaways

Robert Solow's 1956 model explains growth through capital, labour and technology.
Diminishing returns mean capital accumulation alone eventually stops raising output per worker.
Economies approach a steady state where capital per worker stops rising.
Long-run growth in living standards depends on technological progress.