Classical Economics and Modern Theory: Studies in long-period analysis by Heinz D. Kurz & Neri Salvadori

Author:Heinz D. Kurz & Neri Salvadori [Heinz D. Kurz, and Neri Salvadori]
Language: eng
Format: epub
Publisher: Routledge
Published: 2011-08-31T16:00:00+00:00

Figure 7.5 Increasing returns.

SMITH: This is indeed the case with regard to the models of Lucas (1988) and Romer (1986) which we must now investigate. But before we do that let me add a remark on Figure 7.5. In order to be able to preserve the notion of a uniform rate of profit, it has to be assumed that the increasing returns are external to the firm and exclusively connected with the expansion of the market as a whole and the social division of labour. This implies that whereas in the case of decreasing returns due to the scarcity of land (cf. Figures 7.1 and 7.4) the product was given by the area under the marginal productivity curve, now the product associated with any given amount of labour-cum-capital is larger than the area under that curve.5 The cases of decreasing and increasing returns are thus not symmetrical.

I begin with a first subgroup of models contemplating the role of positive externalities for economic growth, that is, models in the tradition of Lucas (1988), which emphasize spillovers from human capital formation.

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