ROBERT M. SOLOW

ROBERT M. SOLOW

Robert Solow was born in 1924 in Brooklyn, New York and obtained his BA,
MA and PhD from Harvard University in 1947, 1949 and 1951 respectively.
He began his academic career as an Assistant Professor of Statistics (1950–
54) at the Massachusetts Institute of Technology (MIT), before becoming
Assistant Professor of Economics (1954–8), Professor of Economics (1958–
73) and Institute Professor of Economics (1973–95) at MIT. Since 1995 he
has been Institute Professor Emeritus of Economics at MIT.
Professor Solow is best known for his seminal work on growth theory and
capital theory, and for his development and championing of neo-Keynesian
economics. In 1987 he was awarded the Nobel Memorial Prize in Economics
‘for his contributions to the theory of economic growth’. Among his bestknown
books are: Linear Programming and Economic Analysis (McGraw-Hill,
1958), co-authored with Robert Dorfman and Paul Samuelson; Capital Theory
and the Rate of Return (North-Holland, 1963); Inflation, Unemployment and
Monetary Policy (MIT Press, 1998), co-authored with John Taylor; and Growth
Theory: An Exposition (2nd edn, Oxford University Press, 2000). His most
widely read articles include: ‘A Contribution to the Theory of Economic
Growth’, Quarterly Journal of Economics (1956); ‘Technical Change and the
Aggregate Production Function’, Review of Economics and Statistics (1957);
‘Analytical Aspects of Anti-Inflation Policy’, American Economic Review
(1960), co-authored with Paul Samuelson; ‘Does Fiscal Policy Matter?’ Jour-nal of Public Economics (1973), co-authored with Alan Blinder; and ‘On
Theories of Unemployment’, American Economic Review (1980).
We interviewed Professor Solow in Chicago, in his hotel room, on 4 January
1998, while attending the annual conference of the American Economic
Association. In what follows we present an abridged version of the interview,
which focuses on Professor Solow’s views on economic growth. The full text
of the interview, including Professor Solow’s views on the development of
modern macroeconomics, can be found in Snowdon and Vane (1999b).
Background information
When did you first decide to study economics?
Well, there is a story to that. I came to Harvard College in 1940 as a 16-yearold
freshman with no intention of studying economics; I did not even know
what economics was. At that point I thought I might be a biologist but I
proved to be no good at that so I started off as a major in general social
science. I studied subjects like elementary economics, psychology, sociology
and anthropology. The reason I was interested in social science was just the
circumstances of the time. Remember it was 1940, the Depression was just
over, and the war had just begun. In 1942, after two years, I quit Harvard
College and joined the army, which seemed more important to me then. In
1945 I returned to education and I said to the girl I left behind and who has
been my wife ever since, ‘You majored in economics; was it interesting?’
When she said yes I decided to give it a try. At the time I was under pressure
to choose something to study because I was discharged in August and the
school term was due to start in September. I was still an undergraduate.
Anyway, it turned out all right. So the reason I studied economics was related
both to my general interest in what was happening – why society was not
working so well in the 1930s and 1940s – and to sheer desperation because I
had to do something in a hurry.
As a student, which of your teachers inspired your interest in economics?
Mainly Wassily Leontief, who taught me for one course, even before I
joined the army. In those days Harvard College had a tutorial system and
every student majoring in economics had a member of the faculty assigned
to him as a tutor. We met once a week and it was obviously an imitation of
the Oxford and Cambridge system. Wassily was my tutor and I really learnt
my economics from him; he was undoubtedly the main person who inspired
my interest in economics. The only other teacher in those days who really
caught my imagination was Dick Goodwin, who had been my teacher in the
elementary economics course that I had taken in 1940–41. I hit it off with
662 Modern macroeconomics
him very well. After the war when I came back I studied more economics
with him.
Which economists have had the greatest influence on the direction that your
own work has taken?
Since I completed my PhD degree, Paul Samuelson and Jim Tobin – both
very good friends – are the people whose way of doing economics I admired
and still admire. They were representatives of what I now (I did not see it
then) think of as the new style of doing economics after the war. Economics
went from being a sort of cultural subject to a model-building subject, and I
liked that. Paul Samuelson and Jim Tobin were the people who for me
exemplified that new approach. The other name I would mention, but not
from a personal contact point of view, only from his work, was Lloyd Metzler.
I read Metzler’s work after I had read Samuelson’s [1939] multiplier–accelerator
papers. Metzler’s [1941, 1947] papers on inventory cycles and ‘Wealth,
Saving and the Rate of Interest’ [1951] were absolutely splendid. I did not
know Lloyd Metzler very well because he had gone off to Chicago by then
and later he suffered a terrible brain tumour. After that he was no longer the
real Lloyd Metzler.
Economic growth
The whole issue of economic growth has seen a regeneration of interest in
recent years and many prominent economists like Robert Barro and Xavier
Sala-i-Martin [1995] regard it as the part of macroeconomics that really
matters. There seems to have been a neglect of Nobel Prize awards in this
area, so do you anticipate that this relative neglect will be rectified in the
future given the importance of growth for human welfare?
Well, I would not describe it as a relative neglect. I think that what looks like
neglect is actually something quite different. They started the Nobel Prize
awards in Economics in 1969, and, unlike Physics or Chemistry, which had
been going for years, there was a long backlog of people who were clearly of
that calibre, if you have that kind of prize. Therefore it was only natural to
start picking them up in turn. There are exceptions. Some people came out of
order; for example Ken Arrow (deservedly) came early in the awards but even
he was paired with John Hicks who was old by then. In 1987 when I got the
award nobody born later than me had yet been given the prize, so in a way it
is still just rolling up the carpet from the old end. My view is that if growth
theory, the empirical analysis of growth, and ideas connected with them,
continue to be popular, the subject will attract the best people in the profession.
And yes, there surely will be more awards in this area. By the way, I do
not know how you count Arthur Lewis and Ted Schultz, who were interested
Robert M. Solow 663
in economic development – Ted Schultz in a very different way – but Arthur
Lewis contributed that famous 1954 paper on ‘Economic Development with
Unlimited Supplies of Labour’. So I would not say that there has been a
neglect; I would say the timing has been natural. There are likely to be more
surprises, coming at a slightly greater rate than the past, because we are now
getting up to contemporary people, to economists who were doing their work
fairly recently. Since 1987 there has been a real outburst of work on growth
so there will be more awards in that area.
Your 1956 and 1957 papers have clearly had a profound impact on the
direction of research in the area of economic growth. Can you tell us what
were the main influences which led you into that research and which generated
those papers?
Yes, I do recall what led me to that research. I became interested in growth for
three main reasons. First, in the early 1950s everybody was interested in
economic development, for the obvious reason that most of the population of
the world was living in poor economies. I was passively interested in economic
development, but I have never been actively interested – in a research way – in
what happens in underdeveloped countries. But I got to thinking about development
issues and I had read Arthur Lewis. I knew I was not going to work on
development issues, but it did get me interested in the general area of economic
growth. Then Paul Samuelson and I had started thinking about what later
became Dorfman, Samuelson and Solow [1958], the book on Linear Programming.
That was the second factor. In the course of that research we thought
about the Von Neumann and Ramsey models. So from the optimization and
linear programming end and the idea of using programming theory to deal with
intertemporal optimization, I also got interested in growth. The third influence
was my reading of the work of Harrod and Domar; but I guess my reaction to
their ideas was a little different from some other economists. I was suspicious
of the Harrod–Domar model for reasons which I have occasionally explained.
It occurred to me that if the world works in the way suggested by their model,
then the history of capitalism would have been much more erratic than it has
been. If Harrod–Domar was a good macro model for the long run, then it is
impossible to explain, to my mind, how contained economic fluctuations have
been, how you can draw a trend and look at fluctuations around that trend, and
how those fluctuations stay 3–4 per cent either side of trend, except for a few
major depressions. I thought that there must be a way of modelling growth that
does not have the knife-edge property of the Harrod–Domar model. Those
were the influences which led me to the 1956 paper.
You mentioned Arthur Lewis in your answer. His model was described as a
classical rather than neoclassical model. Do you think that the classical
664 Modern macroeconomics
economists made any important lasting insights on the issue of economic
growth?
When you say classical economists do you mean Smith, Ricardo and Mill
and so on?
Yes.
If so, that is not where I got any intellectual help, for a number of reasons.
First, I am not very well read in the history of economic thought. I know the
potted versions of Smith, Ricardo and Mill, but I would never trust myself to
have a deep thought about classical economics. I have looked back to see if
there was anything that I missed, and I would say that apart from Mill on the
stationary state, and Ricardo to a certain extent as Mill’s predecessor, I did
not find much there other than vague ideas. They were obviously interested in
the long run but that does not butter any parsnips really. The relationship of
diminishing returns to the stationary state, especially in Mill, obviously has
some relationship to the work I was doing in the mid-1950s. That paid off a
lot. On the other hand the obvious thing on the negative side is that Ricardo at
the beginning, and Mill a little later on in the course of the Industrial Revolution,
were thinking about the long run and yet the notion that growth can be
maintained by technological improvements did not seem to occur seriously to
either of them.
Was your 1956 paper accepted for publication straight away?
Yes. I can pinpoint when I was working on it; it was in 1955. I sent it to the
Quarterly Journal of Economics and they accepted it right away. Writing
papers is very hard for me; and so throughout my whole career I have only
written papers when I thought that either I had something really serious to
say, or I had to produce a paper for a Festschrift or something like that. In the
latter case anything intellectually respectable would do. But the papers that I
write of my own free will are usually pretty serious, otherwise it is not worth
the effort, because I really do not like doing it.
Earlier you mentioned the growth of interest in development economics which
took off as a research area during the 1950s. Why did development economics
emerge during this period as a separate branch of economics from growth
theory?
Why did it happen that way? Well, I am going to offer a suggestion but it is
not original to me. I guess it comes originally from Paul Krugman of MIT.
On the whole the personality types in the profession who became interested
in economic development were not model builders. They were collectors of
data and generalizers from rough empirical data, like Simon Kuznets; or they
were like Ted Schultz, really deeply into underdeveloped agriculture, or they
Robert M. Solow 665
were people interested in history and backwardness for its own sake. That
sort of temperament is not suited to model building. Growth theory, par
excellence, yielded to model building. So even Arthur Lewis, whom I mentioned
earlier, thought of his 1954 paper as a minor sideline to his book The
Theory of Economic Growth [1955]. The people who got interested in the
theory of economic growth were interested in model building.
When we talked to James Tobin in 1993 he remarked that the really good
papers in economics always contain a surprise. Were you surprised to find
that the steady state rate of growth is independent of the saving rate?
Oh yes. I wrote that up right away and wanted to publish it in spite of my
dislike of writing papers. I thought it was a real shocker. It is not what I
expected at all, and by the way, when I did the 1957 paper on technical
change I also expected a different answer from the one that I found. I
expected that the main source of growth would be capital accumulation
because that is what everyone talked about and I had heard that all my life as
a student. Those were both real surprises.
That 1957 paper inspired a vast literature on growth accounting, with contributions
from economists such as Denison, Kendrick, Jorgenson, Maddison
and others. After 40 years of work, what have we learned about the sources
of economic growth?
I think we have learned a great deal, not compared with what might be
learned, but compared to what we have learned in other areas of macroeconomics.
The notion that technical change or the residual accounts for much
more of growth than you would expect, much more of productivity increase
than capital accumulation, has stood up. Where it has not stood up – as in
the work of Alwyn Young [1995], Jong Il Kim and Larry Lau [1994], Sue
Collins and Barry Bosworth [1996] on the four Asian Tigers – it has been
fascinating and you actually learn a great deal (assuming it is all true, of
course); they have recorded staggeringly rapid growth but not in the same
way as the historical capitalist economies. That basic distinction between
capital accumulation and the residual has proved to be very informative. We
have also learned a lot about the importance of human capital, as distinct
from tangible capital, but the relative importance of each is still not settled.
You still find what look like perfectly sound empirical papers which come
up with conflicting results about the importance of human capital, depending
on the time period, the model and other factors, especially the way
‘human capital’ is measured. I was delighted to learn after the fact that in
my 1957 paper, at the very beginning, I said that what I called technical
change included a lot of things such as human capital, although I did not
have that language then. But the work on growth accounting, beginning
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with Edward Denison and then continuing on, has taught us a great deal
about the nature of growth. I would say that the fact that the growth of the
current advanced industrial economies only owes a little to the exploitation
of natural resources is very interesting and this too has come out of growth
accounting methods.
In 1970 the first edition of your book, Growth Theory: An Exposition, was
published. Following that, for the next 16 years, the interest of macroeconomists
in the issue of economic growth, or more accurately growth theory, went into
relative decline. Why do you think that happened?
I think it happened because the profession ran out of ideas and you cannot
maintain interest in any subject simply on the basis of looking more and more
closely into the existing ideas. Edward Denison was still writing his books
during this period, all of which I read and admired. But there were no new
ideas. The merit of the contributions from Paul Romer [1986] and Bob Lucas
[1988] – I do not know how to divide it up between them – is that they
renewed interest in the subject by bringing in new ideas. That always attracts
people to any branch of economics, and I presume the same thing is true of
chemistry. So it was just a case of intellectual diminishing returns. Around
1970 we simply ran out of new ideas.
The first paper on endogenous growth in the new phase of interest in economic
growth was Paul Romer’s [1986] ‘Increasing Returns and Long-Run
Growth’. What do you think inspired the new research? Was it the convergence
controversy issue which also emerged about the same time with the
contributions of Abramovitz [1986] and Baumol [1986]?
Well, you are going to have to ask Lucas and Romer that question.
OK, we will ask Paul Romer that question when we interview him tomorrow.
I would have said, just from the second-hand evidence of reading their
papers, that the convergence issue was more of a stimulus to Bob Lucas than
it was to Paul Romer. It may have influenced Paul Romer as well, but I do not
remember anything in that 1986 paper which suggests that, though I could
easily have forgotten. I am inclined to think that Paul Romer had an idea,
found it exciting and followed it. But Lucas gave more signs of having been
fascinated by the international comparisons.
What are your views on the convergence issue? Your 1956 model predicts
conditional convergence and this prediction seems to fit reasonably well to a
group of countries, a ‘convergence club’. Yet there are other poor countries
which are showing little sign of catching up with the rich industrialized
countries.
Robert M. Solow 667
I have no independent thoughts on this at all. I just read the literature, not all
of it because there is so much. But I read enough of it to develop opinions and
these go roughly like this. First of all I am at heart very suspicious of all this
international cross-section research. I read it, sometimes it is interesting and
sometimes it is not, but in the back of my mind there is always a question as
to whether I should believe it. The fundamental reason why I am dubious
about it is that there is no solution to the inverse causation issue. The more
right-hand-side variables that go into those regressions, the more they seem
to me to be just as likely the consequences of success or failure of long-term
economic growth as the cause. The second reason I am suspicious is that I
learned from Ross Levine at the World Bank a long time ago that most of
those results are not robust. They do not stand up if you make minor variations.
The third reason I am suspicious is that I keep asking myself, do I
really believe that there is a surface out there in space whose axes are labelled
with all the things Robert Barro and company put on them? Do I believe that
there is such a surface, and countries or points on that surface could in
principle move from one place to another on it and then move back to where
they began by changing their form of government or by having more or fewer
assassinations? A small voice says maybe, but I would not bet anything on
the existence of that surface. So I am dubious about that whole line of
research. If you look at it as a pure time series problem, the way Danny Quah
(1993) does, if you look at conditional convergence – and conditional convergence
is the only version of this that makes sense – then the evidence does
look more or less as if there really is something to the distinction between
growth and development. There is a group of countries, which for one reason
or another do not catch on to the railroad train as it goes by and I am inclined
to attribute that to their lacking some institutional infrastructure, some sociological
infrastructure, whatever. If I had to throw in my lot with one camp or
the other I would support the convergence club.
Another factor which has contributed to the reawakening of interest in the
growth issue has been the so-called productivity slowdown which began in
the late 1960s/early 1970s. Do you believe there was a productivity slowdown
and, if so, what were the possible causes?
Yes, I do believe that there was a productivity slowdown. All the debate
about price indices does not seem to me to produce a convincing case
against the observation that there has been a productivity slowdown. There
is no reason to suppose that if you made the same corrections on price
indices before 1970 you would not have at least as much overstatement of
inflation. So I think there was a productivity slowdown, I think it had an
international character, it happened as much in Japan as it did in the USA,
and I think that as far as anyone can tell at least half or more of it is a
668 Modern macroeconomics
mystery still. But when I say mystery I think we should distinguish between
two senses of the word inexplicable (or mystery, for that matter).
When I say something is inexplicable or a mystery I could mean that I
cannot pin down in detail the causes of the phenomenon. But inexplicable
may also mean that it is utterly shocking! How could such a thing happen? I
think the productivity slowdown is inexplicable only in the first of those
two senses. There is nothing in any piece of growth economics, theoretical
or empirical, which says that the rate of growth of the residual is an
invariant, that it cannot change from one period of time to the next. We
know by the usual backward extrapolation that there cannot have been
productivity growth at 1 or 2 per cent a year forever or else Oliver Cromwell
would have been crawling around in skins. By the way, this goes back to a
significant analytical issue. When I say that in my work in the 1950s I
treated technical change as exogenous, that does not mean that I really
believed at the time that it had no internal economic causes. In the very
same papers I always treated population growth as exogenous, but I did
know about Malthus, and there is clearly a connection between economic
development and demographic patterns. What I meant by saying something
is exogenous was that I do not pretend to understand this; I have nothing
worthwhile to say on this so I might as well take technical change as given
for reasons which are inexplicable in the first sense I mentioned before. I do
not know what the determinants of technical change are in any useful
detail. But technical change is not inexplicable in the second sense. I am
not shocked to learn that productivity growth after 1973 is slower than
before 1973, nor would I have been shocked in this sense if it had been
higher.
If we take a longer-term view, going back a hundred years or so, perhaps the
bigger puzzle is the above trend productivity performance of the post-war
period up until the 1970s.
Exactly. I do believe that. It is a hypothesis that makes sense to me; and I can
even tell a story that makes sense to explain it. But keep in mind that I am, so
to speak, estimating one parameter with one degree of freedom, so there is no
real test being made. The story I tell myself is as follows: from 1930 to 1947
or so, a certain amount of technological change and other improvements in
productive knowledge were taking place, but could not be incorporated into
the real economy, first because of the Great Depression and then because of
the war. So beginning around 1950 the world had a 20-year backlog of
technological improvements to incorporate into practice. After 1950 this
began to happen. That seems to make perfectly good sense; but I do not
believe that it is possible to test the hypothesis because there is nothing to
compare it with.
Robert M. Solow 669
Are there any strong theoretical or empirical reasons for believing that moderate
inflations of less than 10 per cent have any significant adverse effects
on economic growth?
I am not up on all the literature on this topic. But what I have gathered is that,
at least empirically, the evidence is that rapid inflation is unconditionally bad
for economic growth, but relatively slow inflation, even perhaps averaging 10
per cent annually, has no visible correlation with economic performance. I
doubt that theory compels that view; but I can easily imagine that theory
would be compatible with that view.
The modern phase of endogenous growth theory has now been with us for
just over ten years. What do you think have been the most important developments
or insights which have emerged from this research programme? Have
we learned anything useful?
Less than I had hoped. My own opinion, which I think is now shared by Paul
Romer, is that the early developments – the so-called AK models which
simply amounted to saying let us assume that there are exactly constant
returns to the collection of accumulatable factors of production, human and
physical – all that led nowhere because it was not robust theory. It is very
unlikely that growth could happen that way. If you adopt the AK view, it is
the simplest thing in the world to say: I can show you how reducing a tax on
capital will increase the growth rate, or I can show you how making leisure
less attractive will increase the growth rate. But that sort of stuff went nowhere
and added no real insights because it rested entirely on a linearity
which is so unlikely to be true. But then when you start asking questions
about what does govern the accumulation of technical knowledge, how could
you model the accumulation of human capital, then you begin to get into
really interesting issues. That is what I like about all that literature.
The current crisis involving the so-called ‘Asian Tiger’ economies is making
big news. Their success in the past has been identified with, among other
factors, export performance. What in your view is the relationship between
foreign trade and growth? Has the East Asian growth ‘miracle’ been exportled?
Well, I am uncertain about the relationship between trade and growth. Empirically
there does seem to be a relationship. I have lots of friends who have
worked on this empirically and while their results differ, and some of them
come up empty-handed, it appears that openness to trade favours economic
performance. It is a bit less clear, at least in the literature I have read, what
the source of that relationship is. The very important distinction needs to be
made between factors that have growth effects and factors that have level
effects. Imagine exponential growth as a linear trend on semi-log paper. You
670 Modern macroeconomics
can ask: are there forces that take a country’s trend line and lift it without
changing its slope, a level effect, shifting the trend roughly parallel? It is
clear that anything that improves economic efficiency can do that. So trade
which increases economic efficiency can almost certainly do that. If what you
are looking for is something that will change the slope of the trend line, the
rate of growth, then sheer efficiency gains from trade cannot do that except
temporarily, not over a very long period of time. The only way you can make
sense of trade having an effect on the long-term growth rate is not so much
whether the country is export-led, but whether the country is in contact with
the rest of the world.
So the important factor for growth is the degree of openness of an economy?
Yes, openness in general and especially the will and the capacity to pick up
new technology and new ideas from the rest of the world. I am absolutely
clear that a positive impact from trade on efficiency and the level of output
happens, and that those countries that went in for export-led growth rather
than import substitution integrated themselves with the world economy and
learned things. Some of it they learned from transplants, from direct foreign
investment and multinationals. But whether or not there are any cases of
really long-term changes in growth rates as a consequence of trade is I think
very uncertain. I can easily imagine a country breaking out from being an
underdeveloped stagnant economy and getting on the growth train as a result
of trade. That I can easily see. But whether a country that is already growing
at the same sort of rate as the OECD economies can improve its growth rate
over a period of many decades by virtue of openness or trade, that seems to
me to be unproved.
There were some interesting papers published in the first issue of the Journal
of Economic Growth [1996] by Robert Barro, Alberto Alesina and others on
the relationship between democracy and economic growth, and political
instability and economic growth. Barro, for example, suggests that the best
way we can help poor countries is to export our economic system to them and
if, as a result, their economies improve, they will tend to become more
democratic. In other words economic freedom, by promoting economic growth,
will eventually lead to more democratic outcomes in today’s poor countries.
Have you looked at this literature and developed any ideas on these issues?
That gets into questions that are too big for little old me [laughter]. But my
reaction to that kind of literature has always been as follows. I can easily see
that if you compare a democratically organized country with a country which
is really tightly oligarchically organized, then the democratically organized
economy is going to tap the bigger store of entrepreneurship, whereas the
oligarchs in the non-democratic countries pretty soon give up any entrepreRobert
M. Solow 671
neurial pretensions they ever had in favour of wine, women and song or
whatever [laughter]. There is also the question of whether you can run a
modern economy in a tightly authoritarian regime or whether these are incompatible.
What happens next in China is going to be the big example of
this dilemma. I can understand this kind of difference. But the notion that if
you could take roughly democratic countries and order them on a scale from
zero to one, that going from 0.5 to 0.6 on a measure of democracy gets you a
big or detectable difference in growth rate or even the level of output, that
seems to be much less likely.
The greens and environmentalists are always warning everyone that the costs
of economic growth will eventually outweigh the benefits. Do you ever worry
about the environmental consequences of growth? Can the world sustain
OECD levels of output per capita for China, South Asia, Africa and Latin
America?
Yes, I worry first of all that rapid population growth will begin to encroach on
the possibilities of improving productivity and on the environment. Furthermore,
one of my sons is interested in these issues professionally; he likes to
say that China is made of coal, that China is just one large coal deposit. Now
if they were simply to burn that coal, while it might not have any effect on the
growth rate of GDP as we measure GDP, it would certainly have a big effect
on the growth of some rough welfare equivalent of GDP. Yes, of course I
worry about these things. I worry more about that than I do about resource
exhaustion, simply because we seem to be a lot further from resource exhaustion.
By the way, I do think that the issue of the relationship between economic
growth and the environment is, to put it crudely, probably going to boil down
to a race between technology and pollution. We do not have much of a grip
on the likely outcome of that issue and possibly cannot get much of a grip on
it. It is foolish to be a fatuous optimist on these issues, but it is equally foolish
to believe that we have come to the end of our capacity to overcome resource
limitations technologically.
What sort of issues are you currently working on?
Well, not much. I am going on 74 years old and travelling a lot, as you have
noticed. I do not have a long, active research agenda at the moment, although
I would like to get back to one if I can. I still intend to do work in macroeconomics.
The main thing that I want to work further on is what macroeconomics
looks like when it takes imperfect competition seriously. Frank Hahn and I
wrote an approximately unreadable book [1995] which was published a
couple of years ago. There we made an attempt to outline how you might
make a macro model that takes imperfect competition seriously, and possibly
also takes increasing returns seriously, because increasing returns to scale are
672 Modern macroeconomics
a standard reason why competition is imperfect. We might have done reasonably
well in that particular chapter, but we did not carry the model nearly far
enough. In particular we did not develop it to the point where you could
sensibly ask what the appropriate values are for the main parameters, if the
model is to be roughly in the ball park for the US, British or German
economy. I would like to go back and develop that model further. I also have
a couple of ideas on growth theory, but that is another story.