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April 3, 2008
Why teach the Solow model?
John Palmer asks this question in response to yesterday's post.
My response was:
Same reason we teach the Ricardian model of comparative advantage.
Even though it oversimplifies reality to nearly the point of absurdity, it contains many useful insights that are vital to understanding more sophisticated models and policy discussions.
It introduces a way of organizing one's thinking about the topic at hand. (Growth accounting, in Solow's case... a very important concept.)
It is a touchstone in the literature for an entire field. One cannot be considered to be educated in that field without an understanding of it.
It can be augmented and extended fairly easily to obtain more interesting and potentially useful results.
Despite all that, we know that it is a bit too simple to be the only tool in our arsenal. Indeed, to use it as the only tool in our arsenal would be dangerous.
Would not each of these statement apply to the Ricardian model as well as the Solow model? (Readers are invited to suggest others.)
John responds:
Recently a colleague asked me if I teach anything about growth in my intro course. I replied that I teach nothing explicit about growth theories, but I do teach the Coase theorem and the importance of property rights and transaction costs in understanding exchange and growth.
In contrast, Ricardian comparative advantage lies at the heart of exchange; some would argue it is the only argument we have in favour of free trade. It is indeed based on heroic assumptions, but in many instances these assumptions do not detract from the usefulness of the concept. And at least comparative advantage depends on such basic concepts as opportunity costs and relative prices.
I wholeheartedly agree with the emphasis on the Coase theorem--which may be one of the most important ideas in economics. And yes, the Ricardian model is where we show off our propensity to make opportunity cost and relative prices the cornerstone of the entire edifice of our theory. The Solow model does not give opportunity cost and relative prices the same central role. Indeed, they play almost no role (unless you count the rental rate being the marginal product of capital, but one could overlook that if one is not careful).
But the successors of the Solow model do give prices that role. And so again I go back to my assertion that Solow's model provides the basic framework for thinking about the problem of growth accounting, for taking a measure of our ignorance, and for laying the foundation for half-a-century of research. Not a bad record.
And let's be honest. Any model that can get our attention and cause us to take stock of the measure of our ignorance about a problem as deadly serious as economic growth and development is very much worth teaching.
Gabriel M. also comments.
Posted by William Polley at April 3, 2008 2:44 AM
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