In the field of economics, where consensus can be elusive, plenty questioned whether the "riddle of growth" had really been solved by Solow's model. Keynesians in Cambridge, Schumpeterians at Harvard, and a pair at U.C. Berkeley all made attempts to go beyond the model, but it was the RAND corporation and frequent visitor Kenneth Arrow that went the furthest. Arrow provided two significant insights into the production of knowledge. First, knowledge isn't appropriable. Second, Arrow suggested that knowledge is indivisible, it is a good that is "either altogether present or it (is) not"
Arrow built his model based on knowledge accumulated through experience. By using the idea of rational expectations, he assumed that everyone already knew all there was to know, as soon as others came to know it. These external increasing returns prevented a firm from building a monopoly from its own learning. Due to certain inconsistencies in the model it never became widely used, but several of Arrow’s ideas grew to be very significant.
B for Jim - how about a title, or page numbers?
ReplyDeleteThere's two threads between the lines here that I need to clue you in on.
Theoretically, Arrow showed that increasing returns through learning-by-doing could explain a lot about growth. But, the roadblock was that in the 1960's no one understood how to get the math of learning-by-doing to work. So progress on that front stalled: the idea didn't go away because it was wrong, but because it was hard.
Empirically, learning-by-doing seems to pop up everywhere. It's still all over managerial economics and management texts. The thing is, most of the evidence falls apart when you look at it closely: this idea wouldn't go away when it was wrong, because it was easy.
Fifty years later we're still working through how the theory suggests that obvious but unimportant evidence of (endogenous technological improvement through) learning-by-doing should be common, while inobvious but important evidence of evidence of endogenous technological improvement is all around us, but somehow lost, hidden or missing.
In rereading this, I'd add that the sense of that last paragraph is similar to the disconnect that people have with the advantages of the modern world. We have the gall to complain about something like McDonald's, when McDonald's produces decent food, cheaply, while you wait in your car, and then hands it to you. Yet, the concept of McDonald's is inconceivable to a majority of people who have ever lived on Earth.
ReplyDeleteI have a great Louis K C video about this, but it isn't appropriate to show it for a few weeks.
"Decent food" is subjective. :)
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