Learning by Doing: Who's Learning? Who's Doing? and Other Production Function Myths


The success of endogenous growth models has led to the wide acceptance that increasing returns to scale (IRS) and the positive externalities of knowledge creation are inherent features of technology. This acceptance has lent justification to stylized models that espouse protectionist trade policies in order to generate economic growth. The justification for these policies, however, stems from a deeply flawed understanding of what a production function represents and the institutional conditions necessary for IRS to be present. Distinguishing between physical and institutional technology allows us to conclude that IRS are not inherent features of physical production processes, but represent the emergent outcome of entrepreneurial choices within certain institutional arrangements. We conclude by showing that IRS are not invariant with respect to protectionist policies because they hamper the institutional technology that leads to IRS and knowledge creation, and are thus unsuitable growth policies.