A structural theory of increasing returns

Abstract

The long-standing interest in increasing returns stems from the attempt to identify causal relationships internal to the production system that would provide adequate explanations for the improvement of technical practice and production organization. What is missing both in classical and modern literature is an explicit discussion of (i) whether a general causal principle may be identified behind Smith's classical trio of advantages, and (ii) whether those advantages may be realized independently of specific conditions of the behavioural or institutional type. This paper addresses those issues by outlining a structural theory of increasing returns based on Babbage's law of multiples. The paper explores the implications of the law of multiples for decomposition or integration of production units and outlines the distinction between enabling conditions for increasing returns and their realization. The argument paves the way for the design and implementation of increasing returns policies, which are discussed in the concluding section.