With the benefit of hindsight, it is obvious that growth theorists would
eventually have to do what economists working at the industry and firm level
have done: abandon the assumption of price-taking competition. Otherwise,
there is no hope of capturing fact 5. Even at the time, the point received at least
some attention. In his 1956 paper, Solow remarked in a footnote on the
desirability of extending the model to allow for monopolistic competition. One
of his students, William Nordhaus (1969), subsequently outlined a growth
model that did have patents, monopoly power, and many firms. For technical
reasons, this model still invoked exogenous technological change, so it is not
strictly speaking a model of endogenous growth-but it could have been
extended to become one. Because a general formal treatment of monopolistic
competition was not available at the time, little progress in this direction took
place for the next 20 years.