learning-we have learned how to increase productivity, the outputs that can be...

learning-we have learned how to increase productivity, the outputs that can be produced with any inputs. There are two aspects of learning that we can distinguish: an improvement in best practices, reflected in increases in productivity of firms that marshal all available knowledge and technology, and improvements in the productivity of firms as they catch up to best practices. In fact, the distinction may be somewhat artificial; there may be no firm that has employed best practices in every aspect of its activities. One firm may be catching up with another in some dimension, but the second firm may be catching up with the first in others. In developing countries, almost all firms may be catching up with global best practices; but the real difference between developing and developed countries is the larger fraction of firms that are significantly below global best practices and the larger gap between their productivity and that of the best-performing firms. While we are concerned in this book with both aspects of learning, it is especially the learning associated with catching up that we believe has been given short shrift in the economics literature, and which is central to improvements in standards of living, especially in developing countries. But as we noted in chapter 1, the two are closely related; because of the improvements in best practices by the most innovative firms, most other firms are always engaged in a process of catching up. While the evidence of Solow and the work that followed demonstrated {what to many seems obvious} the importance of learning for increases in standards of living, to further explicate the role of learning, the first three sections of this chapter marshal other macro- and microeconomic evidence. In particular, we stress the pervasive gap between best practices and the productivity of most firms. We argue that this gap is far more important than the traditional allocative inefficiencies upon which most of economics has focused and is related to learning-or more accurately, the lack of learning. The final section provides a theoretical context within which to think about the sources of sustained increases in standards of living, employing the familiar distinction of movements of the production possibilities curve and movements toward the production possibilities curve. Using this framework, we explain why it is that we ascribe such importance to learning. Macroeconomic Perspectives There are several empirical arguments that can be brought to bear to support our conclusion concerning the importance of learning. The first is a simple argument: In theory, leading-edge technology is globally available. Thus, with sufficient capital and trained labor {or sufficient mobility for capital and trained labor}, all countries should enjoy comparable standards of living. The only difference would be the rents associated with ownership of intellectual property rights and factor supplies. Yet there is an enormous divergence in economic performance and standards of living across national economies, far greater than can be explained by differences in factor supplies.1 And this includes many low-performing economies with high levels of capital intensity {especially among formerly socialist economies} and highly trained labor forces. Table 2.1 presents a comparison of formerly socialist countries with similar nonsocialist economies in the immediate aftermath of the collapse of the state-controlled model of economic activity. TABLE 2.1 Quality of Life Comparisons, 1992–1994 {U.S. $} Source: Greenwald and Khan {2009}, p. 30. In most of these cases, at the time communism was imposed after World War II, the subsequently socialist economies enjoyed higher levels of economic development than

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