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A Smithean Perspective on Increasing Returns

  • James M. Buchanan (a1) and Yong J. Yoon (a1)

Despite its recent re-emergence to analytical importance, the phenomenon of increasing returns remains outside the central core of neoclassical economics. The history of this idea (or set of ideas) might have been quite different if Adam Smith's explanation of the origins of trade had not been replaced by that of David Ricardo. To Adam Smith, mutually beneficial exchange emerges because of specialization, which, in its turn, implies the presence of increasing returns to the size of the exchange nexus. Even in a world of equals, trade offers mutuality of gain. There is no need for participants in the economic nexus to differ one from another. In the Ricardian logic, by contrast, trade presumably emerges because productive resources differ in their capacities to create economic value, at least among separate “goods.” Specialization is a “natural” feature of resource endowments—a feature that is exploited by trade. Comparative advantage ensures the mutuality of gain. But, in this explanation, there is no direct linkage between the size of the exchange network and the degree of specialization that is viable. There is no need to introduce increasing returns. Comparative advantage may be present even if there are constant returns to scale, both for the economy and for its separate productive sectors.

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W. Brian Arthur . 1994. Increasing Returns and Path Dependence in the Economy. Ann Arbor: University of Michigan Press.

James M. Buchanan and Yong J. Yoon , eds. 1994b. “Increasing Returns, Parametric Work-Supply Adjustment, and the Work Ethic.” In Return to Increasing Returns. Ann Arbor: University of Michigan Press.

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Piero Sraffa . 1926. “The Laws of Returns under Competitive Conditions.” Economic Journal 36 (12): 535–50.

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Journal of the History of Economic Thought
  • ISSN: 1053-8372
  • EISSN: 1469-9656
  • URL: /core/journals/journal-of-the-history-of-economic-thought
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