Knowledge, Consumption, and Endogenous Growth

Abstract

Formal theories of economic growth, including newly popular models of endogenous growth, rely on a conception of knowledge as explicit and costlessly transferable. Once created, knowledge can spill easily into the hands of others at zero marginal cost, a process of spillover that is the source of the increasing returns that generate economic growth. While not questioning some essential truth to this story, students of the process of technological change -- especially those who have not restricted themselves to theoretical models -- have expressed considerable doubt about the this picture of technological knowledge and its creation. Much technological knowledge cannot in fact be transmitted easily to others; much technological knowledge is inarticulate and tacit, and can be transmitted only at a cost through imitation and apprenticeship. To the extent that knowledge is tacit in this way, it behaves like an ordinary private good, and its role in generating increasing returns is lost. One response to the problem of tacit knowledge among sophisticated students of innovation has been to create a clear distinction between knowledge that is tacit and knowledge that is codified. Under this stratagem, the large place of tacit knowledge in social learning does not invalidate growth theory so long as there also exists codified knowledge in suitable quantities. Some writers would even go further, suggesting that technological change and economic growth have had the effect of tipping the balance between tacit and codified knowledge. More knowledge is becoming codified, implying (and perhaps explaining) an accelerated pace of social learning and economic growth. This essay takes a skeptical view of the proposition that we are experiencing greater codification hand in hand with modern technology and economic growth. But such skepticism need not have dire implications for (the theory of) economic growth. The essay takes an equally skeptical view of the proposition that only codified knowledge, and never tacit knowledge, can generate economic growth. Knowledge can be externalized and made less idiosyncratic in ways that do not necessarily involve codification. Knowledge is structure. And knowledge can be externalized beyond an individual creator by being imbedded either in machines and other physical technology or in various kinds of social or behavioral structures that I will broadly call institutions. Using a wonderful 1912 essay by Wesley Clair Mitchell as a starting point, I examine, as a kind of case study, the way in which knowledge is embedded and shared in consumption -- an important and neglected aspect of the process of economic growth.