The 1956 contribution to economic growth theory by Robert Solow: a major landmark and some of its undiscovered riches

The famous ‘1956’ contribution by Robert Solow was always thought to be central to positive, or descriptive, economic growth theory. We show that it is also at the core of optimal growth, because the Fisher equation of competitive equilibrium is nothing short of an Euler equation; it corresponds to the maximization of the sum of discounted consumption flows. From this equation an optimal savings rate results with reasonable, very reachable values. We also show the importance of the elasticity of substitution: there is a threshold value of this parameter leading to a permanent growth rate of income per person that is above the labour-augmenting rate of technical progress, and that rate does depend upon the investment–saving ratio.