Increasing Returns Cumulative Causation

Knowledge Knowledge• Each increment doesn’t diminish the value of what’s already known• Each increment can amplify the effectiveness of existing techniques

“Standing on the shoulders of giants...”

Knowledge as a Public Good• Non – rival / Non – exclusion• Social Return > Private Return• Acquisition of knowledge requires

Private Return > Threshold

Riding a Virtuous Circle—Development Returns to acquisition of knowledge and skills

...if it substitutes for what’s in place diminishing returns

...if it complements what’s in place increasing returns

Evidence of increasing returns

“Silicon Valley”Stanford Google Stanford

“Wall Street”JP Morgan FRBNY JP Morgan-Chase

“Sin City”Bellagio Cirque de Solei Wynn/Encore/Venetian/Palazzo

• Agglomeration economies Urban rents• “Paradox” of factor flows

Winner – Take – All: Rewards disproportionate to advantage

Riding a Virtuous CircleMatches and Leaks

(Complements and Spillovers)• Production is social ... and so is consumption

“You didn’t build it (alone)”

It takes a village.

Prerequisite institutional framework– Secure property rights/Law’n’ Order/The Usual Suspects....

Cooperating inputs» Skill supports skill: Doctors need nurses» Innovation begets innovation»Genius spurs genius

Demonstration effects

Knowledge spreads

Cumulative Causation: Stuck in a Trap

Lack of social infrastructure• Low payoff to skill

Little skill acquisition

Lack of social infrastructure

Lack of skills/means to employ knowledge

Primary production

Primitive techniques

Stagnation

Poverty Trap

Cumulative CausationEscaping the Trap

Build social infrastructure• Subsidize/Tax consumption• Coordinate...industrial complex development...assure critical mass• “Great expectations” Self-fulfilling optimism

Technology LEAPS• Creation without destruction...when there’s nothing to destroy

Demography• Age and vested interest• Immigration: the future of the West

Creation without destruction• Complementary inventions and technologies

– Railroads and the steam engine/The internet and PCs

Increasing Returns