Tyler Cowen is worried:
Is it proper that Solow’s model should have so dominated in the economics profession?
You cannot understand or evaluate environmentalism without revisiting [the debates among competing growth models]. One reason many environmental critiques do not seem so strong is that they are trying to measure costs in a Solow-like framework, when in fact the underlying model might involve core non-substitutabilities, a’la the other thinkers.
The issue is this: when economists think about growth their ultimate conclusions are dominated by assumptions about how various factors of production come into play. For classical economists, there were three important factors: land, labor, and capital. Land was crucial for agricultural production and economic and political power was dominated by an aristocracy that derived its power from the ownership of land.
By the time Solow wrote down his model, however, land was becoming less important. The economy had shifted dramatically away from agriculture and the idea that owning farmland was a source of great wealth & power seemed outmoded. So Solow dropped land from his most basic model. This had some fairly dramatic consequences, most notably that as long as the market for capital was open and competitive all the wealth in the economy would eventually accumulate to labor. Wages would rise forever and what was good for the worker was good for the economy.
It also meant that issues like environmental degradation could be thought of as simply another part of consumption. In a sense, everything in the world was ultimately “owned” by the workforce whether they were the literal owners or not. Thus the choice of higher wages vs a better environment perfectly encapsulated the problem. The only issue was to have workers internalize the collectively owned environment the same way they did their privately owned wage stream.
The real world, however, is a bit more complex. A poor environment has feedbacks that affect the productivity of work. Land, in particular urban land, is a crucial factor of production. Knowledge forms a sort of private capital that can only be utilized when workers are in close proximity.
These issues are profound and overturn many of the simple conclusions. Unlike Tyler seems to be, I am not worried that economics has been snookered by the Solow model. Its a jumping off point that is still highly relevant and the more profound issues are widely discussed. Even when it comes to environmentalism itself — the issue that promoted Tyler’s post — I see more concern for the profound issues than I see faithfulness to Solow.
Quite to contrary, I think most takes could benefit from a bit more grounding in a Solow-like framework. For example, though the rents to land are too damn high, labor still does capture most of the rents in the economy.