Abstract
We explore the intersection of growth theory and the theory of the firm with an experiment. Economic growth is possible in our experiment when agents specialize to exploit increasing returns. We find that low opportunity costs are sufficient for Marshallian internal economies, but that Marshallian external economies are slow to emerge in four probing treatment conditions. Transaction costs do not hamper external economies as we anticipated prior to collecting data. When external economies falter, it is because new ideas of more extensive specialization fail to emerge. Ideas make further divisions of the division of labor—and thus economic growth—possible. Conversely, a lack of ideas make further divisions of labor and economic growth impossible. Synthesized, our data reveal how the likelihood of new ideas is inseparably tied to the existing extent of specialization.
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