Jim Turnure Principal, Energy Group

Capital Investment and Growth Models (I)

• By the 1950s growth theory had assumed a dominant role in macroeconomics. Key contributions were made by Arrow, Samuelson, and Solow.
• During this period robust quantitative models were developed including general equilibrium models and optimal growth models. More detailed work on economic structure and the availability of measured data through national governments made more sophisticated arguments about the determinants of economic growth possible.
• The dynamic of technology and productivity improvement is critical in economic growth. Other determinants of growth such as population and natural resources depend on physical stocks that can increase, but technological advances can not only increase in a simple incremental fashion, but also multiply in ways that allow for much faster growth in the overall economy.

Capital Investment and Growth Models (II)

• Solow (1956 1957) examined how more flexible production functions, including a technical change term, worked in theory, while noting that he was using technical change “as a shorthand expression for any kind of shift in the production function [emphasis in original].” Solow demonstrated the importance of improvements in productivity, including improvements resulting from technological change.
• Arrow (1962) posited endogenous technical improvement as a function of experience, making the observation that it is not simply the passage of time that results in technical change. ‘Learning by doing’ had been observed in industrial settings and Arrow formalizes this relationship. In this model technical change is a function of producing new capital equipment.
• Mansfield (1961) introduced an early model for the firm’s technology adoption decision. In this model the rate of adoption depends on 1) the proportion of related firms already using an innovation (because of the reduced risk from others’ experience); 2) the estimated profitability of using the innovation; 3) the cost of adoption and 4) inter-industry variations in general propensities for adopting innovations.