My central takeaway from learning the Solow growth model as an undergrad was not the limits of investment but the idea that long term, sustainable growth depends ultimately on “total factor productivity” growth, which is most easily thought of as exogenous technology improvements.
In my mind, China didn’t grow its economy over the last two decades just been building a lot of physical capital but also by copying technology left and right. It will continue to do so. Meanwhile, it is now publishing more technical papers than the US and is innovating in its own right. Solow’s model would predict much more growth to come for China.
Weirdly, I learned this in grade school playing Sid Meier's Alpha Centauri. It also teaches that this same lesson applies to both military forces and territorial expansion: "more stuff" means more expenses, and expanding *anything* too far eventually exceeds your ability to economically support it. That game was genuinely quite a teaching tool.
Learning a lot about the state-of-the-art in economic modeling from your columns. As a technologist looking from the outside, there seems to be a big hole in economic theories around handling technology. As you said, "A mysterious quantity called “total factor productivity” (TFP), usually abbreviated as “A”, which some people associate with technology" well said.
It appears most economic theories build models with the core idea of conservation of capital/labor with a more or less static mapping between inputs and outputs. This works ok when looking backwards as the rate of change due to technology looking back is always a slower rate. However, it does not work too well looking forward...especially when technologies introduce large non-linearities into the economy.
Hopefully someone in the economics research realm is thinking about this issue because it seems to be the key issue in meaningfully building predictive models of future growth.
The personal experience version of the theory: As you start adding property to your life, you will increasingly lack time to enjoy it, since you are busy with maintenance.
“ . . . the easiest type of physical capital to imagine is a machine tool — a sewing machine, or a drill press, or a lathe, or a nanolithography machine.”
I first invested in ASML in 2013. Its EUV machines are the only way to make AI widely adaptable. The amount of compute power required for training AI modeling is multiples more than exists today. The payback in much higher productivity of repetitive tasks makes this affordable.
Canon’s cheaper chip lithography machine would be a significant leap forward. I wouldn’t underestimate Canon’s CEO or its expertise. It could play a crucial role in the future of EUV-produced chips for smaller market niches — a startup or developer’s dream. Imagine the knock-on effects of making production affordable for all the lone geniuses designing their own bespoke chips. Inevitably, EUV-produced chips will become affordable for nano-caps, micro-caps, and mid-caps. This would, of course, level the playing field and stimulate exponential growth of more companies in the lower tiers of the high-tech sector.
ASML owns the market in EUV, but Canon could create its own market with a cheaper machine.
China, which the pundits predicted would dominate AI/ML, isn’t even in the game.
Could this also apply to all that military buildup? The zillions of ships they’re building could be a long term maintenance burden, since nothing is more expensive to maintain that a boat.
“The general rule is that technology transfer is overwhelmingly difficult without and even with extensive written documentation, and usually requires skilled and knowledgeable people with a deep understanding of the processes being adopted. The Soviet government before WWII could not set up its machine tools that it had bought from the U.S. auto industry without the comprehensive and hands-on direction and help from American engineers.”
-- Brad DeLong
This sounds like what’s happening with TSMC’s build out of a chip fab in Arizona. American engineers have little experience building a chip fab housing an ASML 3nm machine, nor building at the pace of East Asia countries.
Does the Solow model also suggest the potential impact of AI? For example, one ostensibly straightforward application of AI would be to increase marginal returns to capital (e.g., self-driving cars), and potential future applications could mitigate depreciation (maintenance robots).
When I see the word ‘savings’ I think of personal saving accounts and the like. Where do Chinese savings in the context of your explanation get extracted from and reside?
Ouch. Doesn't bode well for Indonesia - the last decade under Jokowi they've built a lot of physical stuff. Hopefully it doesn't get caught in this deprecation trap!
A nice explanation of the Solow model and a nice tribute to a great economist. But the basic point was made by Ricardo, and was a standard feature of classical economics. Given diminishing marginal rates, and *no technological change*, capital accumulation eventually leads to the stationary state.
Things are much less clear with endogenous growth theory. At least in some versions, a country could invest lots of capital to dominate industries with lots of growth potential, and then capture the resulting technological advances.
Nice explanation of Solow's model. Charles Hall, a founder of Biophysical Economics (could be called, Economics as if there is a real world with laws of physics), ran regressions adding fossil fuel consumption and found most of the huge Solow residual went away. A lot of economic growth is explained by exploiting new energy sources. The ratio of energy in to energy out or EROI energy return on investment, is a determinant of standard of living or per capita output. The energy slaves idea reveals this: Americans have the fossil fuel energy output equal to a couple of hundred human slaves working for each of us. That's why we are rich. Luckily, EROI of solar and wind aren't bad, so the world can stay prosperous if we don't wreck it by climate change, extinctions, etc.
My central takeaway from learning the Solow growth model as an undergrad was not the limits of investment but the idea that long term, sustainable growth depends ultimately on “total factor productivity” growth, which is most easily thought of as exogenous technology improvements.
In my mind, China didn’t grow its economy over the last two decades just been building a lot of physical capital but also by copying technology left and right. It will continue to do so. Meanwhile, it is now publishing more technical papers than the US and is innovating in its own right. Solow’s model would predict much more growth to come for China.
Weirdly, I learned this in grade school playing Sid Meier's Alpha Centauri. It also teaches that this same lesson applies to both military forces and territorial expansion: "more stuff" means more expenses, and expanding *anything* too far eventually exceeds your ability to economically support it. That game was genuinely quite a teaching tool.
Learning a lot about the state-of-the-art in economic modeling from your columns. As a technologist looking from the outside, there seems to be a big hole in economic theories around handling technology. As you said, "A mysterious quantity called “total factor productivity” (TFP), usually abbreviated as “A”, which some people associate with technology" well said.
It appears most economic theories build models with the core idea of conservation of capital/labor with a more or less static mapping between inputs and outputs. This works ok when looking backwards as the rate of change due to technology looking back is always a slower rate. However, it does not work too well looking forward...especially when technologies introduce large non-linearities into the economy.
Hopefully someone in the economics research realm is thinking about this issue because it seems to be the key issue in meaningfully building predictive models of future growth.
The personal experience version of the theory: As you start adding property to your life, you will increasingly lack time to enjoy it, since you are busy with maintenance.
“ . . . the easiest type of physical capital to imagine is a machine tool — a sewing machine, or a drill press, or a lathe, or a nanolithography machine.”
I first invested in ASML in 2013. Its EUV machines are the only way to make AI widely adaptable. The amount of compute power required for training AI modeling is multiples more than exists today. The payback in much higher productivity of repetitive tasks makes this affordable.
Canon’s cheaper chip lithography machine would be a significant leap forward. I wouldn’t underestimate Canon’s CEO or its expertise. It could play a crucial role in the future of EUV-produced chips for smaller market niches — a startup or developer’s dream. Imagine the knock-on effects of making production affordable for all the lone geniuses designing their own bespoke chips. Inevitably, EUV-produced chips will become affordable for nano-caps, micro-caps, and mid-caps. This would, of course, level the playing field and stimulate exponential growth of more companies in the lower tiers of the high-tech sector.
ASML owns the market in EUV, but Canon could create its own market with a cheaper machine.
China, which the pundits predicted would dominate AI/ML, isn’t even in the game.
Could this also apply to all that military buildup? The zillions of ships they’re building could be a long term maintenance burden, since nothing is more expensive to maintain that a boat.
“The general rule is that technology transfer is overwhelmingly difficult without and even with extensive written documentation, and usually requires skilled and knowledgeable people with a deep understanding of the processes being adopted. The Soviet government before WWII could not set up its machine tools that it had bought from the U.S. auto industry without the comprehensive and hands-on direction and help from American engineers.”
-- Brad DeLong
This sounds like what’s happening with TSMC’s build out of a chip fab in Arizona. American engineers have little experience building a chip fab housing an ASML 3nm machine, nor building at the pace of East Asia countries.
Does the Solow model also suggest the potential impact of AI? For example, one ostensibly straightforward application of AI would be to increase marginal returns to capital (e.g., self-driving cars), and potential future applications could mitigate depreciation (maintenance robots).
Triple play post! Homage, exposition, thoughtful diagnosis of China woes. Rest in power, Prof Solow.
When I see the word ‘savings’ I think of personal saving accounts and the like. Where do Chinese savings in the context of your explanation get extracted from and reside?
Ouch. Doesn't bode well for Indonesia - the last decade under Jokowi they've built a lot of physical stuff. Hopefully it doesn't get caught in this deprecation trap!
A nice explanation of the Solow model and a nice tribute to a great economist. But the basic point was made by Ricardo, and was a standard feature of classical economics. Given diminishing marginal rates, and *no technological change*, capital accumulation eventually leads to the stationary state.
Thanks for this fascinating article!
Things are much less clear with endogenous growth theory. At least in some versions, a country could invest lots of capital to dominate industries with lots of growth potential, and then capture the resulting technological advances.
I appreciate these occasional lessons in proper economic theory. Not as a full time thing, but like every couple months. Thanks!
Nice explanation of Solow's model. Charles Hall, a founder of Biophysical Economics (could be called, Economics as if there is a real world with laws of physics), ran regressions adding fossil fuel consumption and found most of the huge Solow residual went away. A lot of economic growth is explained by exploiting new energy sources. The ratio of energy in to energy out or EROI energy return on investment, is a determinant of standard of living or per capita output. The energy slaves idea reveals this: Americans have the fossil fuel energy output equal to a couple of hundred human slaves working for each of us. That's why we are rich. Luckily, EROI of solar and wind aren't bad, so the world can stay prosperous if we don't wreck it by climate change, extinctions, etc.