Did you define your functions folder as netlify/functions? As of this week, the default folder for functions is functions (in your repo’s root folder), so if you want to go for zero configuration, I advise you to get rid of the netlify folder.
Thank you. I renamed the netlify/functions folder to functions. Still no luck though. netlify dev does not run lambda by itself. I have to use the -functions switch.
Did you specify a functions directory in your netlify.toml file? I think the functions should be picked up, or so I assume from the docs: File-based configuration | Netlify Docs
Personally, I haven’t encountered this problem before so it might be a configuration issue perhaps?