Economics, Department of

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A Reconsideration of the Theory of Non-Linear Scale Effects: The Sources of Varying Returns to, and Economies of, Scale

Author: 
Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2017-09
Abstract: 

The main thrust of this paper is a critical assessment of the theory and evidence concerning the sources of scale effects. It is argued that the analysis of static scale effects is important because scale effects are embedding in our world and new technologies associated with an evolving economy often allow their exploitation when they cannot be exploited in less technically advanced and smaller economies. So, although static equilibrium theory is not a good vehicle for studying economic growth, showing how scale effects operate when output varies with given technology helps us to understand the scale effects that occur when output rises as a result of economic growth, even though that is typically driven by technological change. The set of production functions that are consistent with Viner’s treatment of long run cost curves are distinguished from the single production function that is found in virtually all modern microeconomic textbooks. It is argued that the inconsistencies and ambiguities relating to the use of such a single production function to cover all possible scales of a firm’s operations are such that it is an imperfect tool for analysing the scale effects that firms actually face. The relation between scale effects and the size of the firm are discussed. It is shown that under certain commonly occurring circumstances the ability to replicate production facilities is consistent with short ranges of diseconomies of scale and an indefinite range of increasing returns. Next comes a detailed analysis of the sources of positive scale effects and a critical assessment of the treatment of these in a large sample of the existing literature. It is argued that the nature of our world, with its 3-dimensions, its physical laws and the many random elements in its behaviour, is such that when the scale of anything changes, we should always expect to encounter non-linear scale effects. Most authors list a series of examples of sources that are assumed to give rise to scale effects but seldom attempt to show in any detail how these are supposed to work. When we do this, some alleged sources are found not to give rise to scale effects at all, while others have effects that differ from what has been assumed. Furthermore, there is seldom agreement among authors whether a particular source is a cause of varying returns to scale or economies of scale. Most authors argue that indivisibilities are an important source of scale effects, although these are seldom well defined, nor are the precise ways in which these are supposed to work typically analysed. When we do this, we identify two basic types of indivisibilities, ex post and ex ante, plus several variations of each of these main types. We then argue that the discussion of indivisibilities has been confused by use of different implicit definitions of the term and also that only one of these types of indivisibility can be a source of scale effects. Constant returns production functions are found to be inconsistent with much that is known about actual production techniques, even when firms expand by duplicating identical plants. Unless ruled out by definition, diseconomies of scale are found to be a real possibility in many circumstances. When these occur in some parts of complex capital goods or plants, they limit the extent to which economies in other parts can be exploited by increasing the scale of the whole operation. Finally, brief consideration is given to the literature concerning the factors that limit the exploitation of the scale effects that are ubiquitous in the real world and to the consequences of their exploitation.

Document type: 
Book chapter

General Purpose Technologies in Theory, Applications and Controversy: A Review

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2017-07-17
Abstract: 

Distinguishing characteristics of General Purpose Technologies (GPTs) are identified and definitions discussed. Our definition includes multipurpose and single-purpose technologies, defining them according to their micro-technological characteristics, not their macro-economic effects. Identifying technologies as GPTs requires recognizing their evolutionary nature, and accepting possible uncertainties concerning marginal cases. Many of the existing ‘tests’ of whether particular technologies are GPTs are based on misunderstandings either of what GPT theory predicts or what such tests can establish. The development of formal GPT theories is outlined, showing that only the early theories predicted the inevitability of GPT-induced showdown and surges. More recent GPT theories, designed to model the characteristics of GPTs, do not imply the necessity of specific macro effects. We show that GPTs can rejuvenate the growth process without causing slowdowns or surges. We conclude that existing criticisms of GPT theory can be resolved and that the concept remains useful for economic theory.

Document type: 
Article

Generality Versus Context Specificity: First, Second and Third Best in Theory and Policy

Author: 
Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2016-09-06
Abstract: 

Second-best theory established that a policy's effect on community welfare (or any other objective function) varies with its specific context. In contrast, Ng argues that fulfilling first-best conditions piecemeal is optimal whenever the policy maker's information is insufficient to determine the direction of the change in the variable under consideration that will raise welfare, irrespective of the conditions in that market. We argue: (1) that Ng's own assumptions imply not that first-best conditions should be established under these circumstances, but that the status quo should be maintained; (2) that when Ng's key assumption is altered to be empirically relevant, all policy decisions become fully context-specific; (3) that Woo's argument for accepting Ng's conclusions in spite of point (2) is incorrect. The conclusion discusses valid uses of piecemeal welfare theory in spite of second best.

Document type: 
Article
File(s): 

Economic Policy with and Without Maximizing Rules

Author: 
Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2017-01-11
Abstract: 

This paper contrasts the static neoclassical and the evolutionary views of the economy and economic policy. It responds to Ng's comments on Lipsey's original criticism of third-best theory. Under a relevant definition of informational poverty and Ng's other assumptions, the expected value of any policy-created divergence from the status quo is negative: If there is not enough known to determine what to do, nothing should be done, rather than establishing first-best conditions as Ng's analysis has it. It is argued that Ng's analysis of his two other information states adds little to what common sense suggests. To address Ng's argument that policies using context-specific objective functions lack the required welfare basis, the paper studies how economic policy is actually pursued absent guides provided by welfare economics. Policies that follow from evolutionary economic theory imply that what are seen as 'distortions' in welfare economics are actually desirable forces that drive economic growth.

Document type: 
Article
File(s): 

Joseph Agassi, the M2t Seminar, and His Influence on My Work

Author: 
Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2017-01-12
Abstract: 

This paper discusses the influence on my research and writings of several methodological principles that we, the members of the LSE Staff Seminar on Methodology, Measurement and Testing learned directly from Joseph Agassi and indirectly from Karl Popper. It begins  with the origins of the seminar and my text book, An Introduction to Positive Economics. It goes on to cover methodological issues that arose in my subsequent papers including: the importance of having empirical content in economic theories, the poverty of theories that are built only to pass sunrise tests, why non-robust assumptions need to be tested, the concept of refutability, the fussy distinction between normative and positive statements, the impossibility of giving purely positive policy advice, the testing of existential statements, fallacious attempts to deduce empirical propositions from definitional identities, the distinction between internally and externally driven research programs, the poverty of modern welfare economics as a guide  to policy and the possibility of deriving policy advice without such guidance. It concludes with a short discussion of the revolutionary implications of accepting technological change as being generated endogenously under conditions of genuine uncertainty rather than measurable risk.

Document type: 
Book chapter
File(s): 

What is the Optimal Trading Frequency in Financial Markets?

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2016-12
Abstract: 

This paper studies the impact of increasing trading frequency in financial markets on allocative efficiency. We build and solve a dynamic model of sequential double auctions in which traders trade strategically with demand schedules. Trading needs are generated by time-varying private information about the asset value and private values for owning the asset, as well as quadratic inventory costs. We characterize a linear equilibrium with stationary strategies and its efficiency properties in closed form. Frequent trading (more double auctions per unit of time) allows more immediate asset reallocation after new information arrives, at the cost of a lower volume of beneficial trades in each double auction. Under stated conditions, the trading frequency that maximizes allocative efficiency coincides with the information arrival frequency for scheduled information releases, but can far exceed the information arrival frequency if new information arrives stochastically.  A simple calibration of the model suggests that a moderate market slowdown to the level of seconds or minutes per double auction can improve allocative efficiency for assets with relatively narrow investor participation and relatively infrequent news, such as small- and micro-cap stocks.

Document type: 
Article
File(s): 

Policies for Green Growth Versus Policies for No Growth: A Matter of Timing

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2016-12
Abstract: 

Advocates of green-growth policies and those who advocate policies to stop growth both accept that the world faces serious environmental problems. They disagree on and debate about appropriate remedies. Green-growth advocates argue that it is possible to create a green economy compatible with sustained growth. The no-growth advocates argue that the whole growth process must be stopped if the planet is to be saved from catastrophe. This short paper argues that choosing the optimal policy for dealing with these serious problems does not require deciding which group is right. Instead it is argued that the optimal policy is to act as if the green-growth advocates are right and only if they are proved wrong by the failure of their policies to do the job, should no-growth policies be attempted.

Document type: 
Book chapter
File(s): 

Joint Tax Evasion

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2002
Document type: 
Article
File(s): 

Dissuasion du crime et concurrence entre juridictions

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2002
Document type: 
Article
File(s): 

Dissuasion du Crime: un Survol

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2000
Document type: 
Article
File(s):