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Increasing Returns and Economic Progress
Allyn Young
Economic Journal, Vol, 38, 1928, pp. 527-42
Summarized by: xiaoyang
Even though I read its Chinese version before, the impression came into mind when I read this paper again was intricate and complicated, even confusing, for this paper is not a formal academic article but Younger’s Presidential address to Section F of the British Association for the Advancement of Science,. To understand Young’s concept on division of labour and the combined increasing returns, and their implication to economic analysis, especially, to economic organizations, this paper much be studied word by word, some knowledge about history of economic thought is definitely helpful. Firstly, understanding of Smith’s theme is necessary.
1. Smithian Theorem
Adam Smith, a classical political economist held the faith in natural liberty, discussed straightforwardly the division of labour in the first 3 chapters in his 1776 book thought the whole work’s major focus is all concerning to this issue. He claimed the cause of national wealth lies in the division of labor which takes place in the occasion of inner firms (the famous nail factory example), so increasing returns take the form of internal economies because of job specification and the development of specialized crafts. Smith just argued the one-direction relationship between division of labour and the extent of market, the so called Smithian Theorem “the division of labour is limited by the extent of market” (Smith, 1776 [1812, p.29]). In his time, the industrial capital was infantile. So Smith was limited to the binding role the size of market played while ignored its facilitating one. Smith didn’t define the extent of market directly, but one concept he used might be appropriate to measure the size, that is ‘common stock’ (ibid, p27) composed by the ‘surplus part’ of produce of everyone’s labour. Obviously, transportation links scatter products together for all industries, so improvement in the means of transportation would make a more extensive market. Further, the growth of international trade leads to the enlargement of market and, then, development of division of labour and economic growth. Smith criticized the mercantile system which emphasizes trade policies to accumulate the trade surplus (the origin of wealth in mechanist’s eyes). In The National Wealth, Smith mainly discussed the institutional aspects, namely, institutional conditions which direct capital, which is the vehicle of the division of labour, into more productive activities.
In short, Smith’s main line can be generalized into two aspects: the division of labour is the cause of growth; the division of labour is limited by the extent of market.
2. Young’s contribution
Young was modest when concerning Adam Smith.
“as I am bound to confess, I am taking it as the text of paper, in much the way that some minor composer borrows a theme from one the masters and adds certain developments or variation of his own”.
Is Young’s above analogy to be so? Following comparison between Smith and Young would work out this quiz. To understand what Young tried to deliver by this paper, I think readers need to make clear the relationship between several key works as following: increasing returns, division of labour, and roundabout method of production or capitalistic production.
Young’s definition of increasing returns was made in the opening paragraph. “but as I have used them [economic growth], joined to the other half of my title, they are meant merely to dispel apprehensions, by suggesting that I do not propose to discuss any of those alluring but highly technical questions relating to the precise way in which some sort of equilibrium of supply and demand is achieved in the market for the products of industries which can increase their output without increasing their costs proportionately, or to the possible advantages of fostering the development of such industries while putting a handicap upon industries whose output can be increased only at the expense of a more than proportionate increase of costs.”
(1) Basic distinction between Smith and Young ---- Where is the division of labour in presence?
Just as mentioned above, the division of labour in Smith’s mind was splitting production into linked parts inner factory.
“This great increase of quantity of work, which, in consequence of the division of labour, the same number of people are capable of performing, is owing to three different circumstances; first, to the increase of dexterity in every particular workman; secondly to the saving of the time which is commonly lost in passing from one species of work to another; and lastly, to the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many”. (Smith, 1776[1812], p.22)
The advantage of the division of labour is making more specialized craftsmen who can produce more products with less labour. So, the growth of national wealth is the result of division of labour due to increasing returns though Smith didn’t use these words.
But for Young, he extended the division of labour to industrial level.
“I shall deal with two related aspects only: the growth of indirect or roundabout methods of production and the division of labour among industries”.
The fundamental distinction between Smith and Young is the occasion of the division of labour takes place. Young (the minor composer) borrowed the concept of the division of labour (“a theme”) from Smith (the master), and then what his own contributions were made?
Young stressed upon two points.
“The first point is that principal economies which manifest themselves in increasing returns are the economies of capitalistic or roundabout methods of production….The second point is that the economies of roundabout methods, even more than the economies of other forms of the division of labour, depend upon the extent of the market” .
The first point deals with the origin of increasing returns which are the breaking forces leads to economic growth. The later one concerns to the binding constraint on that ‘breaking forces’. Hence, with the intermediate concept of “roundabout method of production”, Young explained the following one-direction linkage:
INCREASING RETURNSßROUNDABOUTNESS (DoL)àTHE EXTENT OF MARKET
Figure 1
Scheme 1 leaves further two questions: how the roundabout method of production causes increasing returns and how the extent of market works?
(2) Internal and external economies----How are increasing returns produced?
With internal and external economies,
“In the first place it is, or ought to be, a safeguard against the common error if assuming that wherever increasing returns operate there is necessarily an effective tendency towards monopoly. In the second place it simplifies the analysis of the manner in which the prices of commodities produced under conditions of increasing returns are determined”.
Young thought that the distinction between internal and external distinction is not necessary to capture the nature of the processes of industrial progress, the change in this external field is qualitative as well as quantitative.
“With the extension of the division of labour among industries the representative firm, like the industry of which it is a part, loses its identity. Its internal economies dissolve into the internal and external economies of the more highly specialised undertakings which are its successors, and are supplemented by new economies. Insofar as it is an adjustment to a new situation created by the growth of the market for the final products of industry the division of labour among industries is a vehicle of increasing returns. It is more than a change of form incidental to the full securing of the advantages of capitalistic methods of production -- although it is largely that -- for it has some advantages of its own which are independent of changes in productive technique.”
The major advantage of division of labour lies in the roundabout method of production. Because the division of labour among industries is the carrier of increasing returns, it would be incapable to capture increasing returns form a representative firm in one industry. Increasing returns take the form of external rather than internal economies. Capitalistic production’s major feature is the fragmentation of industries, final goods industries are supplemented by lots of intermediate industries. A necessary condition for increase returns to be realized is whether the fixed costs are spread over the whole industry and large volume of final goods.
“This is true in a way, but misleading. The scale of their operations (which is only incidentally or under special conditions a matter of the size of the individual firm) merely reflects the size of the market for the final products of the industry or industries to whose operations their own are ancillary. And the principal advantage of large-scale operation at this stage is that it again makes methods economical which would be uneconomical if their benefits could not be diffused over a large final product.”
Does the firm's scale matter? The scale of individual firms often leads to the ruduction of unit costs, because the increasing returns are m
(3) Different definitions on the extent of market by Smith and Young----What’s the binding constraint on the division of labour?
Young opened a new door on Smithian Theorem.
“Taking a country’s economic endowment as given, however, the most important single of factor in determining the effectiveness of its industry appears to the size of the market. But just what constitutes a large market,…not area or population alone, but buying power, the capacity of absorb a large annual output of goods, …, namely, that capacity to buy depends upon capacity to produce. In an inclusive view, considering the market not as an outlet for the products of a particular industry, and therefore external to that industry, but as the outlet for goods in general, the size of the market is undermined and defined by the volume of production ”.
Young pusher further Smith’s description on the extent of market and introduced the Say’s Law. For Smith, the extent of market is the size of surplus goods with which one can change others’ surplus goods he needs. But the change in the extent of market is merely through transportation’s improvement and international trade. In my view, transportation links the scattered surplus products to be a integrated common market, the improvement in transportation is, in X.K. Yang’s term, enhancing transaction efficiency. This is still economies to scale. But this idea accords with Dutch experience of constructing canals and German history of “zollverein” (Friedrich List). Comparing with Smith, Young was much more concentrated on the extent of market and managed to make through by employing Say’s Law.
“If, nevertheless, one insists upon seeing just how far one can get into the problem by using the formulas of supply and demand, the simplest way, I suppose, is to begin by inquiring into the operations of reciprocal demand when the commodities exchanged are produced competitively under conditions of increasing returns and when the demand for each commodity is elastic, in the special sense that a small increase in its supply will be attended by an increase in the amounts of other commodities which can be had in exchange for it.(1*) Under such conditions an increase in the supply of one commodity is an increase in the demand for other commodities, and it must be supposed that every increase in demand will evoke an increase in supply. The rate at which any one industry grows is conditioned by the rate at which other industries grow, but since the elasticities of demand and of supply will differ for different products, some industries will grow faster than others. Even with a stationary population and in the absence of new discoveries (2*) in pure or applied science there are no limits to the process of expansion except the limits beyond which demand is not elastic and returns do not increase.”
So, Young created the so-called “Young’s Theorem”
“Modified, then, in the light of this broader conception of the market, Adam Smith’s dictum amounts to the theorem that the division of labour depends in large part upon the division of labour.”
(4) Endogenous growth
Young’s blueprint can be pictured in figure 2. This figure combines subsection (2) and (3) into an integrate framework and develops figure 1 to be a dual-direction relationship which implies endogenous growth.
Division of labour Extent of market Increasing returns supply demand Say’s Law Economic Organization
Figure 2
As we can see this closed loop, a cause, regardless significant or slight, no matter the improvement in organization of production or new technologies can be explored commercially will trigger a positive feedback (increasing returns?) then amplify itself, that means economic growth is cumulative. As Young discussed increasing returns are mainly origied from the division of labour among industries, specialization of individual firm and industry and the social model of division. Even thought there is no improvement in organizations and science, cumulative growth can also be reached through economies to speicalization.Young’s prudent deduction and careful definition shred a powerful counterforce against economic equilibrium, he prefer the concept of “moving equilibrium”.
Two major obstacles are resistant to support progress. first, “the human material”. In modern words, they are institutions more prone to ld institutional tradition. Young sometime is seemed as one member of American Institutionalism. “Second, the accumulation of the necessary capital takes time.” For developing countries, both institutional transition and capital accumulation are essential to “economic progress”.
3. Conclusions
Young concluded this paper in the last paragraph.
“In recapitulation of these variations on a theme from Adam Smith there are three points to be stressed. First, the mechanism of increasing returns is not to be discerned adequately by observing the effects of variations in the size of an individual firm or of a particular industry, for the progressive division and specialisation of industries is an essential part of the process by which increasing returns are realised. What is required is that industrial operations be seen as an interrelated whole. Second, the securing of increasing returns depends upon the progressive division of labour, and the principal economies of the division of labour, in its modern forms, are the economies which are to be had by using labour in roundabout or indirect ways. Third, the division of labour depends upon the extent of the market, but the extent of the market also depends upon the division of labour. In this circumstance lies the possibility of economic progress, apart from the progress which comes as a result of the new knowledge which men are able to gain, whether in the pursuit of their economic or of their noneconomic interests.”
4. My comments
Although this thesis tried to trace the outline of Young’s classic paper, I never too confident to claim I have understood Allyn Young completely. Lots of economic fields are related to Young (1928).
Young died in 1929 when the whole capitalist economies were in the trouble of the Great Depression, how to step out the recession was the hottest issue at the time. After the WW II, the neo-classical economics which based on equilibrium analysis became to he main stream of economics. The awareness on that increasing returns would lead to monopoly and undermine competition is also responsible for the disappearing of increasing returns. The problem of increasing returns, and Young’s Presidential address, has been forgotten for almost half a century until been rediscovered by some ‘new’ theories, such as new growth theory, new trade theory. At present, because I don’t have enough knowledge about those ‘new’ theories, I can’t make more comments on whether they are in the light of Young’s idea as Mr. Zhang talked about for several times.
Some immature impressions after reading as follows. First, the link between Young’s thought of increasing returns with economic organization, especially the institution of firm would be interesting. For example, when division of labour exists, rethinking the boundary of firm (Coase, 1937) and whether the scale of firm matters. Second, what impacts the industrial progress brings on economic geography and development economics.
[此贴子已经被作者于2007-12-25 15:51:22编辑过]
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