Learning-by-doing (economics)
Learning-by-doing is an economic theory that explains how systems, such as factories or labor forces, improve their efficiency over time through accumulated experience rather than through intentional training or new technology. This concept emerged as a significant finding in economic theory, illustrating that individuals and organizations enhance their operational capabilities simply by repeating tasks. A key measure used to assess the impact of learning-by-doing is the progress ratio, which compares production costs at two different output levels, providing insights into efficiency gains over time.
The theory posits that workers acquire skills passively as they repeatedly perform their jobs, leading to gradual improvements in productivity. However, economists recognize limitations to passive learning, and there is ongoing debate about the extent of its effects and how to classify different learning activities. Factors such as employee turnover also complicate the dynamics of learning-by-doing, as departing employees take knowledge with them, while new hires bring varying levels of experience. Consequently, these changes can alter the progress ratio, affecting overall productivity and costs in a business context. Understanding learning-by-doing is essential for managers as it informs predictions about production costs and overall economic performance.
Learning-by-doing (economics)
Learning-by-doing is a theory that seeks to describe the way that a system, such as a factory producing goods or a labor force engaged in the assembly of products, becomes more efficient over time. This increase in efficiency was at one time puzzling to scientists because it appeared that the systems being studied gradually improved their own operations even when no outside force was exerted upon them—no extra training was provided to workers, no new equipment was purchased to help them do their jobs better, and so on. Eventually it became clear that the reason for the improvements being observed was that the system as a whole (the individuals that composed the system, as well as the overall organization) was learning by acquiring experience. This may seem an obvious conclusion in hindsight, but for students of economic theory, it represented a breakthrough in the ability to quantify the effects of learning and experience on productivity.
Brief History
One measure that is used by economists to track the effects of learning-by-doing is known as the progress ratio. This ratio is expressed as a percentage, and it indicates how much it costs to produce goods. More specifically, the progress ratio compares the initial cost to produce goods-—when production begins—with the cost to produce the goods at a later point in time, when the output of the goods has doubled. For example, a factory might start producing widgets in year one and produce fifty thousand widgets per year at a cost of ten cents per widget. Later, as the factory gets up to speed and the employees learn how to perform their duties more efficiently, they will be able to produce more widgets at a lower price per widget. When the factory reaches the point of producing one hundred thousand widgets per year (at a cost of, perhaps, eight cents per widget), then production will have doubled. It would then be possible to calculate the progress ratio for the widgets by using a ratio of the initial price to the doubled production price. In this example, this ratio would be ten to eight. This means that the progress ratio is 80 percent.
Economists and businesspersons find the progress ratio extremely useful because it can help them predict costs and forecast how businesses and whole sectors of the economy will perform. Thus, if labor costs in a certain economic sector are expected to rise due to new legislation requiring a set minimum wage, then it would be natural to assume that profits in that sector would fall as more of them are used to pay the higher wages. However, if the factory’s production costs are forecasted to decrease due to the effects of learning-by-doing, then it is quite possible that this decrease in costs could offset the increase in labor costs, allowing profits to remain steady. Having this type of information available is absolutely vital to business managers.
Overview
Most economists describe the type of learning at work in learning-by-doing as passive learning. This means that the workforce is not actively engaged in some type of professional development activity, nor is it receiving a formal training program designed to improve workers’ skills. Instead, the workers are simply acquiring additional expertise through repeatedly performing the tasks associated with their jobs. Because they are not deliberately trying to improve their skills, the improvement that they experience is thought of as passive. There is general agreement that there are limits to how much improvement can be achieved through passive learning such as this. What economists tend to disagree on is determining which types of activities should be described as passive and which should be defined as active learning. There is also considerable difference of opinion about where the limits of passive learning are; in other words, in a given type of work, is a progress ratio of 60 percent the most that can be achieved through passive learning, or is 70 percent a more realistic figure?
An additional factor that complicates the calculation of progress ratios and the effects of learning-by-doing is the rate of turnover within the organization, meaning the number of employees leaving (either voluntarily or involuntarily) and the number of employees joining the organization during a given time period, such as a year. Employees who depart the organization take with them the knowledge they possess, which, over time, decreases the amount of organizational knowledge available to be applied to solve problems that arise. New employees joining the organization are especially challenging to factor into the learning-by-doing calculations because they bring with them such a wide variety of experience levels. Some arrive with decades of relevant experience under their belts, while others are only beginning their careers and arrive at the organization with almost no understanding of the specific demands that will be placed on them.
Both arriving and departing employees affect the organization’s progress ratio. Those who depart tend to increase the ratio because the absence of their expertise will tend to increase the costs of production; a progress ratio of 80 percent might become a ratio of 83 percent due to the retirement of several veteran employees, for example. New employees affect the ratio in more complicated ways; because many of them start out at a lower level of knowledge about work tasks, they appear to learn quickly, which one would expect to improve the progress ratio. However, because the information that the new employees are quickly learning is rather basic to the task (as opposed to more advanced insights, which can have more dramatic effects on production efficiency), the savings actually realized from the learning-by-doing of new employees is less than that which is derived from the learning-by-doing of employees with more experience.
In other words, as an employee acquires more experience, the incremental benefit of each learning-by-doing "step" achieved becomes greater, but the steps become less frequent. One way to think of this is through the example of a master electrician with thirty years of experience—it is not very often that they see something they have not encountered before, but when they do, they learn a great deal from it.
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