Topic: Increasing Returns

Quotes

Adam Smith, Lectures on Jurisprudence (1763)

• Till some stock be produced there can be no division of labour, and before a division of labour take place there can be very little accumulation of stock.#Quoted in Barry Weingast, “Adam Smith’s Theory of Violence and the Political Economics of Development” (2017)

Sam Bowles & Herbert Gintis, A Cooperative Species (2011)

• Consistent with the “strength in numbers” and “divide and rule” maxims, punishment is characterized by increasing returns to scale, so the total cost of punishing a particular target declines as the number of punishers increases.#

Ross Levine, “Financial Development and Economic Growth: Views and Agenda” (1997)

• More specialization requires more transactions. Because each transaction is costly, financial arrangements that lower transaction costs will facilitate greater specialization. In this way, markets that promote exchange encourage productivity gains.#

Ludwig Lachmann, Capital and Its Structure (1956)

• Böhm-Bawerk also made it clear that his thesis did not mean that capital could not be increased in any other way than by ‘lengthening’, but only that, where this is possible, we would soon encounter diminishing returns. . . . Where existing capital is merely duplicated (‘widened’), operated by a given labour force, diminishing returns will soon appear. Where new capital resources, but of the type employed before, are being substituted for existing labour (‘deepened’), we may have to wait a little longer for diminishing returns to make their appearance, depending on the elasticity of substitution, but appear they will in the end. The only way in which we can hope to resist the pressure of diminishing returns is by changing the composition of capital and enlisting an indivisibility which, with fewer complementary capital resources, could not have been used. ‘Higher roundabout productivity’ therefore has to be interpreted in terms of this case. The only circumstances which permit it are those circumstances which permit a higher degree of division of capital.#
• For Adam Smith the division of labour was the most important source of progress. The same principle can be applied to capital. As capital accumulates there takes place a ‘division of capital’, a specialization of individual capital items, which enables us to resist the law of diminishing returns. As capital becomes more plentiful its accumulation does not take the form of multiplication of existing items, but that of a change in the composition of capital combinations. . . . Complementarity plus indivisibility are the essence of the matter. It will not pay to install an indivisible capital good unless there are enough complementary capital goods to justify it. Until the quantity of goods in transit has reached a certain size it does not pay to build a railway. A poor society therefore often uses costlier (at the margin) means of transport than a wealthy one. The accumulation of capital does not merely provide us with the means to build power stations, it also provides us with enough factories to make them pay and enough coal to make them work. Economic progress thus requires a continuously changing composition of the social capital. The new indivisibilities account for the increasing returns.#

James Buchanan, The Logical Foundations of Constitutional Liberty (1998)

• If the extent of the market limits the potential for deriving the advantages of specialization, at least one industry in the totality that describes the production-exchange nexus must exhibit increasing returns of the sort indicated.#
• For the increase in the extent of the market, for all tradeable goods, to generate increases in economic value, properly measured, returns must be increasing (costs must decrease) somewhere in the economy, but the identification of the location of this source of gain may not be possible until after the expansion of demand that calls additional production (in such an industry and elsewhere) into being.#

Adam Przeworski, Democracy and the Market (1991)

• Successful democracies are those in which the institutions make it difficult to fortify a temporary advantage. Unless the increasing returns to power are institutionally mitigated, losers must fight the first time they lose, for waiting makes it less likely that they will ever succeed.#Quoted in Barry Weingast, “The Political Foundations of Democracy and the Rule of Law” (1997)

Allyn Young, “Increasing Returns and Economic Progress” (1928)

• The mechanism of increasing returns is not to be discerned adequately by observing the effects of variations in the size of an individual firm or of a particular industry, for the progressive division and specialisation of industries is an essential part of the process by which increasing returns are realised.#

James Buchanan, Economic Inquiry and its Logic (2000)

• If the extent of the market limits the potential for deriving the advantages of specialization, at least one industry in the totality that describes the production-exchange nexus must exhibit increasing returns.#

Doug North, Understanding the Process of Economic Change (2005)

• When economic markets are so structured that the players compete via price and quality rather than at non-productive margins then the Smithian result [division of labor and increasing returns] ensues.#

Nicholas Kaldor, “The Irrelevance of Equilibrium Economics” (1972)

• For [Adam] Smith the existence of a “social economy” and the existence of increasing returns were closely related phenomena.#
• The existence of a non-linear relationship between costs and capacity is inherent in the nature of space, and there is nothing “indivisible” about space as such.#
• There is no reason to suppose that “economies of scale” become inoperative above certain levels of production.#
• If indivisibilities were the sole cause of increasing returns, there would always be some level of production at which such scale economies were exhausted and “optimum scale” production reached.#
• The sharp distinction made by Keynes between a “full employment” situation where real income is confined by resource-endowment, and an unemployment situation where it is limited by effective demand, disappears in the presence of increasing returns.#
• It is a hen-and-egg question whether historically it was the growth of commerce which continually enlarged “the size of the market” and thereby enabled increasing returns to be realised, or whether it was the improvement of techniques of production and the improvement in communication which led to the growth of commerce. In the process of the development of capitalism the two operated side by side. And it involved a tendency for a continual rise in the value (and not just the volume) of stock carried by traders in the markets, which meant in turn that the growth of production resulting from any favourable change on the supply side led to a growth in incomes which in turn generated an increase in effective demand for commodities.#
• Once we allow for increasing returns, the forces making for continuous changes are endogenous—”they are engendered from within the economic system”—and the actual state of the economy during any one “period” cannot be predicted except as a result of the sequence of events in previous periods which led up to it.#
• The extent to which capital is used in relation to labour is predominantly a matter of the scale of operations—the capital/labour ratio in production is a function of the extent of the market rather than of relative factor prices.#