Increasing Returns to Scale
Source Julio Huato
Date 06/05/07/06:44

AT THE LEVEL OF our interaction with nature, there's no split between
pin-factory "increasing returns" and "gains from trade." At the level
of our interaction with one another, there's a split, but that's
because of ownership boundaries.

In our physical universe (at least in our human-scale physical world),
there are no true increasing returns -- or decreasing returns for that
matter. There are only constant returns. More output cannot result
from the same amount of inputs. That is inconsistent with the law of
matter/energy conservation. More output always results from the the
addition of *some* input. Increasing and decreasing returns are
accounting illusions and/or the conceptual result of not granting the
status of input to some input. (This much has been *somewhat* --
painstakingly -- clarified by the literature on the "residual," cf.
Denison, Solow, Griliches, Jorgenson, et alia.)

Usually the inputs that are not acknowledged as such are those that
are not priced in the market, mainly due to their nonrivalrous
properties (which tends to make their excludability costs steep). So
they appear as externalities in the process of production in either
the pin factory or socially (as "gains from trade"). Karl Marx
alluded to the "animal spirits" excited whenever human beings
cooperate. (Ask me about my Robert Heilbroner anecdote on "animal
spirits.") Arnold Harberger (a Chicago big shot) said there were
"1001 ways" in which cost is pushed down. Whatever.

All of them fall into a category that -- following Marx -- I'd call
"gains from cooperation" or "gains from socialization" (obviously,
socialization of production, not socialization of ownership, which --
ideally -- would only align the social structure with the state of
technology). (With private ownership and markets, the gains from
cooperation are appropriated privately. So they appear as pin-factory
"increasing returns" or as "gains from trade." But that's not in
human nature or in the nature of technology.)

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