Learning by Doing

Another kind of virtuous circle came into economic thinking about growth about 1960. It is a "commonsense" idea that was discovered by engineers and introduced into economic thinking by the Nobel Laureate Kenneth Arrow.

It seems that the more practice people have in doing a particular job, the better they get at the job, and labor productivity increases as a result. Everybody knows that "practice makes perfect," and Adam Smith had pointed out that increasing division of labor means more practice and thus more learning. But in the twentieth century, we found some hard evidence on how much difference it makes. For example:

Building aircraft in World War II

Engineers who studied this process found that the number of hours of labor required to build an aircraft of a particular model would decrease as the number of craft produced increased; so that, for example, the 100th aircraft build required less labor than the 99th, and so on.

The Horndal steel plant

At Horndal in Sweden, a steel plant operated for a decade with no investment or technological change. Labor productivity increased at 1.5% per year, all the same.

Israeli Kibbutzim

Farming settlements in Israel, often founded by people with no experience in farming, experienced gradual increases in labor productivity unrelated to any change in the inputs or technology they used.

Nicaraguan Cotton Farmers

Cotton farming was introduced in Nicaragua in the 1950's. Records from the government agency that lent them money for the purpose showed predictable increases in productivity in the years after cotton farming was introduced.