Table of Contents

Famous Figures and Diagrams in Economics

Famous Figures and Diagrams in Economics

Edited by Mark Blaug and Peter Lloyd

This is a unique account of the role played by 58 figures and diagrams commonly used in economic theory. These cover a large part of mainstream economic analysis, both microeconomics and macroeconomics and also general equilibrium theory.

Chapter 56: The Diagrams of the Solow-Swan Growth Model

Barbara J. Spencer and Robert W. Dimand

Subjects: economics and finance, economic psychology, history of economic thought

Extract

Barbara J. Spencer and Robert W. Dimand INTRODUCTION Robert M. Solow (1956) and Trevor W. Swan (1956, 2002) independently developed the neoclassical growth model. Swan (1956) was published ten months later than Solow (1956), but involved a more complete analysis of technical progress, which Solow treated separately in Solow (1957). The distinguishing feature of the neoclassical growth model is the assumption that inputs are substitutable in production. The earlier growth models of Harrod (1939) and Domar (1946) were interpreted by Solow (1956, p. 65) as assuming fixed-coefficient production technologies that gave their models ‘knife-edge’ equilibria, with the implausible implication that any deviation at all from equilibrium would cause the model to diverge further and further away from equilibrium. However, Swan (1956, p. 343) regretted that ‘some of his [Harrod’s] readers seem to have been misled into the belief that, in Harrod’s model, equality between the warranted and the natural rates of growth can occur only “by a fluke”’ and insisted that his own model only made explicit the implications of a mechanism that Harrod (1948) had ‘stated very clearly’.1 Swan went on to quote Harrod (1948, p. 96) on how a progressive decline in the interest rate (and hence of the marginal product of capital as capital accumulated) would equate the natural and warranted growth rates. Although the models of Solow (1956) and Swan (1956) are fundamentally the same, there are some significant differences, including differences in the diagrams that illustrate the model. The Solow diagram highlights the substitutability...

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