Specialization and Market Development as Engines of Growth

This paper constructs an original model of growth based on Adam Smith's notions of specialization and extent of the market. Growth depends on the specialization of labor in market production and learning-by-doing in transactions services. It is a model of sustained, but not infinite, growth. We seek to explain the following stylized facts. 1) The share of household production in total output has fallen over time as the economy has grown. 2) Services as a percent of GDP have risen at the same time. The model can replicate the above stylized facts for reasonable parameterizations. This paper shows that it is possible to build growth models that match the historic experience without relying in unbounded growth. Models like this may be very useful in understanding the processes that drive growth