I think ben Fine has exposed the shortcomings of endogenous growth. A friend called Romer's exercise in what Wade calls the art of paradigm maintenance, of saving assumptions, which is in effect what Krugman means when he says economics is advancing along the path of least mathematical resistance.
both can be right, because the cost structure will be heavily influenced by volume of production and therefore increasing returns. What they all seem to be missing here is that the pin factory also contained people with different skill levels. They introduce scale without introducing diversity, and therefore miss an important point in uneven development. Charles Babbage went into the English pin factory and shows that those persons tinning (whitening) the pins made 6 shillings a day, while those straightening the wire only made 1 shilling a day. So if you split up a production
process, as today e.g. with the Mexican maquilas, you put all the low skill, low-wage out to the third world. The knowledge-economy guys seem to me to miss that the potential for upgrading knowledge is different in the tinning of pins than in the straightening of wires. Clearly the poor countries could be better off if they had complete pin-factories, even though they might be less efficient than those in the rich world.
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