The Solow–Swan model attributes sustained long-run growth in output per person to technological progress rather than endlessly accumulating capital.
Robert Solow and Trevor Swan independently developed the model in 1956. It combines capital accumulation, labor or population growth and productivity growth in an aggregate production function. Saving raises investment and the capital stock, but diminishing returns mean that each additional unit of capital eventually adds less output when labor and technology are held constant.
This produces a steady state. Higher saving can raise the economy’s level of output per person, but in the standard model it cannot permanently raise its long-run growth rate. Technological progress, usually treated as exogenous, keeps increasing effective labor and allows output per worker to continue growing.
The model’s unexplained productivity component is commonly called the Solow residual or total factor productivity growth. It includes more than inventions alone: better organization, management and efficiency can also appear in it. The theory is therefore different from endogenous growth theory, which explains technological progress through choices such as research, education and innovation. It also improved on the Harrod–Domar model by allowing more flexible substitution between capital and labor.