Stubborn Attachments: A Vision for a Society of Free, Prosperous, and Responsible Individuals

by Tyler Cowen

In contrast to the Solow model, the increasing returns model suggests that growth begets more growth. In this view, larger economies should grow more rapidly than smaller economies, and growth rates should continue to increase over time. Improvements beget further improvements and negative events are likewise cumulative, thus the moniker “increasing returns.” Ideas, and their non-rival nature, are often cited as the fundamental source of increasing returns. Once an idea has been generated, it can be used many times by many different people at very low marginal cost. The first idea spreads, begets subsequent ideas, and so growth increases. Or there’s another way to look at increasing returns. Larger markets generate stronger incentives for idea production because innovators can sell their product to a larger market (e.g., it would not be worth inventing the iPhone for customers in New Zealand alone). That means large economies can grow more rapidly than small economies. The more the economy grows, the greater the incentive for subsequent new ideas, which in turn reinforces the incentive for growth. New ideas will lead to more growth, which encourages more new ideas, and so on. The increasing returns model is most commonly associated with the economist Paul Romer, but it can be traced back to Adam Smith and the very beginning of economics as a systematic object of study. In Smith’s implicit model, a larger market size supports a greater division of labor, which in turn makes...

increasing returns model.