Named after American economist Robert Solow (1924- ), Solow economic growth highlights the relationship of technological change to growth.
As the rate of return falls, firms turn to more capital intensive methods of production; therefore the rate of investment increases.
However, it is possible to show a situation in which the rate of return would be such that firms would reduce their level of capital intensity, causing investment and the rate of return to decline; this is called capital reswitching.
Also see: roundabout method of production
R M Solow, Growth Theory: an Exposition (Oxford, 1970)
The Solow–Swan model is an economic model of long-run economic growth set within the framework of neoclassical economics. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity, commonly referred to as technological progress. At its core is a neoclassical (aggregate) production function, often specified to be of Cobb–Douglas type, which enables the model “to make contact with microeconomics”.:26 The model was developed independently by Robert Solow and Trevor Swan in 1956,[note 1] and superseded the Keynesian Harrod–Domar model.
Mathematically, the Solow–Swan model is a nonlinear system consisting of a single ordinary differential equation that models the evolution of the per capita stock of capital. Due to its particularly attractive mathematical characteristics, Solow–Swan proved to be a convenient starting point for various extensions. For instance, in 1965, David Cass and Tjalling Koopmans integrated Frank Ramsey’s analysis of consumer optimization, thereby endogenizing the saving rate, to create what is now known as the Ramsey–Cass–Koopmans model.