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Increasing Returns  Cumulative Causation

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

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Increasing Returns  Cumulative Causation

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  1. 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

  2. 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

  3. 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

  4. 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

  5. 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

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