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Smithian Growth through Creative Organization

Patrick Legros1; Andrew F. Newman2,1; Eugenio Proto3

1 Center for Economic and Policy Research · 2 Boston University · 3 University of Warwick

The Review of Economics and Statistics 2014 open access

We model technological progress as an external effect of organizational design, focusing on how factories, based on labor division, could spawn the Industrial Revolution. Dividing labor, as Adam Smith argued, facilitates invention by observers of production processes. However, entrepreneurs cannot internalize this benefit and choose labor division to facilitate monitoring. Equilibrium with few entrepreneurs features low wage shares, and high specialization, but a limited market for innovations. Conversely, with many entrepreneurs, there is a large market for innovation but little specialization because of high wage shares. Technological progress therefore occurs with a moderate scarcity of entrepreneurs. Institutional improvements affect growth ambiguously.

DOI
10.1162/rest_a_00421
Volume
96 (5)
Pages
796-811
Language
en
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BibTeX
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