The introduction continues as it give us the basic building blocks of economic theory that came about in the seventeenth century. It was thought that these “factors of production,” land, labor, and capital, left nothing out. However, we will see that certain conditions of this time were indeed left out. These conditions were deemed as noneconomic forces and were treated as being exogenous to, or outside of, the economic system. One example the author gives is human knowledge; a second, where the author expands, is “increasing returns.”
It was simple to understand decreasing or diminishing returns during this time. The author gives us an example with a coal mine, it was more difficult and more costly to extract coal as time went on. Eventually, the mine would run out. Increasing returns are the opposite and eventually could no longer be ignored as they change the very building blocks of economic theory.
A for Tom.
ReplyDeleteI would classify knowledge and increasing returns as different things.
Knowledge is a factor of production - like labor, land or capital. You combine it with the others to make output.
On the other hand, increasing returns is a measure or property of (some types) of production. It's a description of the "black box" of production - it relates how much goes in to how much comes out.
So, why could increasing returns no longer be ignored?
Ignored is probably a bad term to use. My understanding was that historically it had a lesser role in economic theory than it has in the later half of the 20th century. The author did use examples in types of production and monopolies, however I thought the author was basically saying it has become increasingly more important to economic theory. Increasing returns changed as simply being a measure of outputs of machines to being recognized any time that little or no cost led to greater output (no just in machinery or production).
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