All economists are obsessed with growth; and this particular measure is used to denote success or failure of any economy. Traditionally, it was felt that everything happened due to labour and its productivity, and hence, there was the emergence of the labour theory of value. Subsequently, as societies evolved, the role of capital increased as machines made more goods than human beings. This was the conventional thinking after the onset of the industrial revolution. A breath of fresh air came in when Robert Solow argued that there were limits here too, and the only way out was technological progress. This was a very strong argument.
Winner of the 1987 Nobel Prize in economics, Robert Solow had his finger on the right switch when he put forward his theory on growth. The production function, which had only labour and capital as determinants, had technology as the overriding factor. This idea evolved in the 1960s, and hence, it can be said that he had great foresight and was far ahead of times. Today, all economic policies are wedded to technology. Even the highest valuations are of the tech stocks and the traditional field of banking has been taken over completely by technology.
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His theory was founded on the premise that putting in substantial doses of capital will witness diminishing returns at a certain point of time and hence cannot be relied upon to drive economies. The stronger takeaway is that while savings and investment can keep increasing—which can lead to higher incomes for the capitalist—diminishing returns cannot be eschewed. There would be a need for technology to step in and take over.
Also Read A prudent move Harvesting Hope: Unity, action, and delivery at COP 28 Panic no, caution yes India and IPEF This was called the ‘Solow residual’ that added the delta to growth. His mathematical analysis showed that only half of growth over a long period of time could be accounted for by labour and capital productivity. And even the capital he referred to assumed that there was a case of differentiation based on vintage. The newer capital had to be more modern and up-to-date than the older ones. This may sound like a truism, but is significant nonetheless.
Solow was more Keynesian than a free-market addict and advised governments to spend more on research and development. This is something that can give an edge to the growth process. If one looks at the total spending of governments on research and juxtaposes the same with the pace of economic growth, it can be seen that those who invested more have also benefited. Also, it has been seen that companies that invest more in R&D tend to do better in terms of investor interest.
At present, the talk is centred on how the digital economy will reach 20-30% of India’s GDP. This means that a lot of growth that will take place will be riding on technology. The rapid growth of the IT sector since the 1980s and 1990s is a good example of what Solow had prophesised. The sector has grown manifold and provided a lot of support to the current account balance. The growth has been quite remarkable and closely competes with exports of goods. Therefore, technology has been a tool harnessed well by India.
The indirect impact of technology is also equally important. The starkest example is the digital payments mode, which now pervades every facet of financial transactions. Ultimately, economies work on myriads of transactions, and if these are run by technology, the pace improves. Having machines do the work scores over human beings doing the same. But, the sophistication of the same is due to the advancement of technology which makes economies grow faster. This is natural as everyone demands quality, which is enhanced through better technology. We have also seen that resource allocation by government becomes more effective with the use of technology—the JAM trinity is a manifestation of the same.
Therefore, things are happening fast, and everything is moving together at different speeds. Hence, it could be hard at times to distinguish between growth caused by capital deepening and that because of technology. India’s case points to this dilemma. Given the lacunae in sectors such as infrastructure, capital deepening is required for accelerated growth and hence cannot be ignored. The Solow prescription would work directly better for countries that are already in an advanced stage where scope for capital deepening is limited.
Solow’s belief was that the ascent of capitalism was mainly due to technological process and this factor will continue to be the overriding differentiator in the next couple of decades. A factor that Solow had not quite conceptualised however was the dangers of having too much technology. While the use of AI-ML today looks more appropriate for countries which have a smaller working population and a larger share of the ageing population, it can be counterproductive in labour-surplus countries like India where technology can be labour displacing.
It would have been interesting to have his take on AI as this is considered to be one of the biggest disruptions that cannot be avoided. The question that would remain will be whether unbridled use of technology can really be relied upon by countries when there is an employment consideration. This will hold not just for emerging markets like India but also Western nations where the recent slump in the last few years have made them closed to even immigration. But politics and political economy were different in Solow’s time.
Madan Sabnavis, Chief economist, Bank of Baroda. Views are personal.
All economists are obsessed with growth; and this particular measure is used to denote success or failure of any economy. Traditionally, it was felt that everything happened due to labour and its productivity, and hence, there was the emergence of the labour theory of value. Subsequently, as societies evolved, the role of capital increased as machines made more goods than human beings. This was the conventional thinking after the onset of the industrial revolution. A breath of fresh air came in when Robert Solow argued that there were limits here too, and the only way out was technological progress. This was a very strong argument.
Winner of the 1987 Nobel Prize in economics, Robert Solow had his finger on the right switch when he put forward his theory on growth. The production function, which had only labour and capital as determinants, had technology as the overriding factor. This idea evolved in the 1960s, and hence, it can be said that he had great foresight and was far ahead of times. Today, all economic policies are wedded to technology. Even the highest valuations are of the tech stocks and the traditional field of banking has been taken over completely by technology.
His theory was founded on the premise that putting in substantial doses of capital will witness diminishing returns at a certain point of time and hence cannot be relied upon to drive economies. The stronger takeaway is that while savings and investment can keep increasing—which can lead to higher incomes for the capitalist—diminishing returns cannot be eschewed. There would be a need for technology to step in and take over.
This was called the ‘Solow residual’ that added the delta to growth. His mathematical analysis showed that only half of growth over a long period of time could be accounted for by labour and capital productivity. And even the capital he referred to assumed that there was a case of differentiation based on vintage. The newer capital had to be more modern and up-to-date than the older ones. This may sound like a truism, but is significant nonetheless.
Solow was more Keynesian than a free-market addict and advised governments to spend more on research and development. This is something that can give an edge to the growth process. If one looks at the total spending of governments on research and juxtaposes the same with the pace of economic growth, it can be seen that those who invested more have also benefited. Also, it has been seen that companies that invest more in R&D tend to do better in terms of investor interest.
At present, the talk is centred on how the digital economy will reach 20-30% of India’s GDP. This means that a lot of growth that will take place will be riding on technology. The rapid growth of the IT sector since the 1980s and 1990s is a good example of what Solow had prophesised. The sector has grown manifold and provided a lot of support to the current account balance. The growth has been quite remarkable and closely competes with exports of goods. Therefore, technology has been a tool harnessed well by India.
The indirect impact of technology is also equally important. The starkest example is the digital payments mode, which now pervades every facet of financial transactions. Ultimately, economies work on myriads of transactions, and if these are run by technology, the pace improves. Having machines do the work scores over human beings doing the same. But, the sophistication of the same is due to the advancement of technology which makes economies grow faster. This is natural as everyone demands quality, which is enhanced through better technology. We have also seen that resource allocation by government becomes more effective with the use of technology—the JAM trinity is a manifestation of the same.
Therefore, things are happening fast, and everything is moving together at different speeds. Hence, it could be hard at times to distinguish between growth caused by capital deepening and that because of technology. India’s case points to this dilemma. Given the lacunae in sectors such as infrastructure, capital deepening is required for accelerated growth and hence cannot be ignored. The Solow prescription would work directly better for countries that are already in an advanced stage where scope for capital deepening is limited.
Solow’s belief was that the ascent of capitalism was mainly due to technological process and this factor will continue to be the overriding differentiator in the next couple of decades. A factor that Solow had not quite conceptualised however was the dangers of having too much technology. While the use of AI-ML today looks more appropriate for countries which have a smaller working population and a larger share of the ageing population, it can be counterproductive in labour-surplus countries like India where technology can be labour displacing.
It would have been interesting to have his take on AI as this is considered to be one of the biggest disruptions that cannot be avoided. The question that would remain will be whether unbridled use of technology can really be relied upon by countries when there is an employment consideration. This will hold not just for emerging markets like India but also Western nations where the recent slump in the last few years have made them closed to even immigration. But politics and political economy were different in Solow’s time.
Madan Sabnavis, Chief economist, Bank of Baroda. Views are personal.
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