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Title: Smithian Growth through Creative Organization

Author(s): Patrick Legros, Andrew Newman and Eugenio Proto

Publication Date: June 2006

Keyword(s): division of labour, organization theory and technical change

Programme Area(s): Industrial Organization and Institutions and Economic Performance

Abstract: We consider an endogenous growth model in which appropriate organization fosters innovation, but because of contractibility problems, this benefit cannot be internalized. The organizational design element we focus on is the division of labour, which as Adam Smith argued, facilitates invention by observers of the production process. However, entrepreneurs choose its level only to facilitate monitoring their workers. Whether there is innovation and growth depends on the interaction of the markets for labour and for inventions. Because of a credit market imperfection, the relative scarcity of entrepreneurs and workers depends on the wealth distribution. A high level of specialization is chosen when the wage share is low, i.e. when there are few wealthy. But in this case there are also few entrepreneurs and a consequent small market for innovations, which discourages inventive activity. When there are many wealthy, the innovation market is large, but the rate of invention is low because there is little specialization. Sustained technological progress and economic growth therefore require only moderate levels of inequality. The model also suggests that the growth rate need not be monotonic in the "quality of institutions," such as the degree of credit market imperfection.

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Bibliographic Reference

Legros, P, Newman, A and Proto, E. 2006. 'Smithian Growth through Creative Organization'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5709