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A Smithean Perspective on Increasing Returns

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  • Buchanan, James M.
  • Yoon, Yong J.

Abstract

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this idea (or set of ideas) might have been quite different if Adam Smith's explanation of the origins of trade had not been replaced by that of David Ricardo.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.

Suggested Citation

  • Buchanan, James M. & Yoon, Yong J., 2000. "A Smithean Perspective on Increasing Returns," Journal of the History of Economic Thought, Cambridge University Press, vol. 22(1), pages 43-48, March.
    • Handle: RePEc:cup:jhisec:v:22:y:2000:i:01:p:43-48_00
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    Cited by:

    1. Oldřich Krpec & Vladan Hodulák, 2013. "Konkurenceschopnost národních ekonomik - kritická reflexe konceptu [Competitiveness of National Economy: Critical Reflection]," Politická ekonomie, Prague University of Economics and Business, vol. 2013(6), pages 752-769.
    2. Ramesh Chandra & Roger J. Sandilands, 2021. "Nicholas Kaldor, increasing returns and Verdoorn’s Law," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 44(2), pages 315-339, April.
    3. Ramesh Chandra & Roger Sandilands, 2006. "The role of pecuniary external economies and economies of scale in the theory of increasing returns," Review of Political Economy, Taylor & Francis Journals, vol. 18(2), pages 193-208.
    4. Ramesh Chandra, 2006. "Currie's 'leading sector' strategy of growth: an appraisal," Journal of Development Studies, Taylor & Francis Journals, vol. 42(3), pages 490-508.
    5. Michael Munger, 2020. "Moral community and moral order: Buchanan’s theory of obligation," Public Choice, Springer, vol. 183(3), pages 509-521, June.
    6. Alberto Battistini, 2019. "Appearances do mislead: Marxist economic theory and the demise of labour theory of value.Part two: Das Kapital au contraire," Department of Economics University of Siena 817, Department of Economics, University of Siena.
    7. Erik W. Matson, 2022. "What is liberal about Adam Smith's “liberal plan”?," Southern Economic Journal, John Wiley & Sons, vol. 89(2), pages 593-610, October.
    8. Peter J. Boettke & Rosolino A. Candela, 2020. "Productive specialization, peaceful cooperation and the problem of the predatory state: lessons from comparative historical political economy," Public Choice, Springer, vol. 182(3), pages 331-352, March.
    9. Ramesh Chandra & Roger Sandilands, 2010. "Reply to Roy H. Grieve on Increasing Returns," Review of Political Economy, Taylor & Francis Journals, vol. 22(1), pages 141-150.
    10. Folasade Bosede Adegboye & Romanus Osabohien & Felicia O. Olokoyo & Oluwatoyin Matthew & Oluwasogo Adediran, 2020. "Institutional quality, foreign direct investment, and economic development in sub-Saharan Africa," Palgrave Communications, Palgrave Macmillan, vol. 7(1), pages 1-9, December.

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