While the idea of increasing returns—the tendency for what is ahead to get further ahead—has been part of economics since the pin factory, it was long resisted by economists. The reasons were both simple and profound.
For decades, economists had a strong preference for models with a single equilibrium. This preference was incompatible with the idea of increasing returns.
Imagine a farmer choosing whether to use her land to grow food or raise cattle. She begins by planting her most fertile land. When that runs out, she moves into worse land, where the returns for her efforts will decrease. Eventually, the next patch of land is not worth tilling so she dedicates it to cattle instead.
In this story, diminishing returns lead the farmer to allocate land optimally among crops and cattle. It follows that diminishing returns are the secret behind the invisible hand. They imply that economies allocate resources optimally among multiple activities, leading to a strong policy implication: markets find an equilibrium that is both efficient and fair.
The Complexity of Increasing Returns
César A. Hidalgo
NAE Reports, Winter Issue of The Bridge on Complex Unifiable Systems
Read the full article at: www.nae.edu