Capital accumulation alone yields diminishing returns; sustained per-capita growth requires technological progress.
Solow's 1956 model, which won the 1987 Nobel. Its awkward finding is that the growth it set out to explain is left as a residual — technological progress enters as an unexplained input.
In practice
- Two countries with the same saving rate and the same population growth converge on the same income per head, and whichever pulls ahead did so for reasons the model books as a residual.
- A firm that doubles its equipment without changing its methods gets less than double the output, which is the diminishing-returns half everyone accepts.