Kenneth J. Arrow, a Nobel Laureate in economics, introduced the concept of ‘Learning by Doing’ to explain how technical change and productivity improvements emerge from practical experience in production. According to Arrow, as firms and workers produce goods, they don’t just repeat tasks—they gain knowledge, refine processes, and innovate. This hands-on experience leads to greater efficiency and technological advancement over time. It’s a dynamic process: the more you produce, the better you get at it through repetition and accumulating skills and insights.

When the U.S. offshored much of its manufacturing to countries like South Korea and China, it shifted the opportunity for this experiential learning overseas. These nations took on the production processes and, through “Learning by Doing,” transformed into manufacturing powerhouses. By consistently engaging in manufacturing, their workers and firms improved techniques, reduced costs, and innovated independently—eventually moving up the global value chain. Meanwhile, the U.S., by stepping back from production, may have relinquished some of the productivity gains and technological advancements that come from staying directly involved in the manufacturing process.

How Offshoring Impacted Domestic Manufacturing Technologies

Arrow’s concept highlights a critical trade-off in offshoring. While the U.S. may have benefited initially from lower labor costs abroad and the ability to focus on high-value activities like design, research, and branding, it lost the continuous learning embedded in production. Manufacturing isn’t just an endpoint—it’s a laboratory for improvement. For example:

• Efficiency Gains: Workers on the factory floor discover practical ways to streamline operations, often in ways that can’t be fully anticipated by engineers or designers alone.
• Process Innovation: Real-world production reveals opportunities for new tools, materials, or methods that theoretical planning might overlook.
• Skill Development: Over time, a workforce steeped in manufacturing builds expertise that can spill over into related industries or spark entirely new ones.

By offshoring, the U.S. handed these benefits to other countries. South Korea, for instance, evolved from assembling basic goods to leading in advanced electronics and shipbuilding. China went from low-cost production to dominating global supply chains, often improving upon the technologies it was initially tasked to use. This suggests that “Learning by Doing” doesn’t just maintain competence—it builds competitive advantage.

Improving Domestic Manufacturing Technologies Today

To strengthen domestic manufacturing technologies, the U.S. could leverage Arrow’s insights by re-emphasizing production as a source of innovation. Here’s how:

1. Reshoring Production: Returning manufacturing to the U.S. would restart the “Learning by Doing” cycle domestically. Even if labor costs are higher, the long-term gains in productivity and innovation could outweigh short-term expenses. Government incentives, like tax breaks or subsidies, could ease this transition.
2. Investing in Workforce Experience: Training programs alone aren’t enough—workers need real production environments to apply and expand their skills. Partnerships between firms, universities, and technical schools could ensure a steady pipeline of hands-on learning opportunities.
3. Fostering Incremental Innovation: Encourage firms to treat manufacturing as a testing ground for new ideas. This might involve funding pilot projects or rewarding companies that document and share process improvements gained through production.
4. Balancing Offshoring and Domestic Capacity: Rather than abandoning offshoring entirely, the U.S. could strategically retain key production activities at home, especially in emerging or high-tech sectors, ensuring that critical learning stays local.

Sources:

Arrow, K. J. (1962). The Economic Implications of Learning by Doing. The Review of Economic Studies, 29(3), 155–173. https://doi.org/10.2307/2295952