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Increasing Returns and Path Dependence in the Economy

W. Brian Arthur

Publication Year: 1994

This book brings together Professor Arthur’s pioneering article and provide a comprehensive presentation of his exciting vision of an economics that incorporates increasing returns. After a decade of resistance from economists, these ideas are now being widely discussed and adopted, as Kenneth Arrow recounts in his foreword. In fundamental ways they are changing our views of the working economy.

Published by: University of Michigan Press

Series: Economics, Cognition, and Society


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pp. vii

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pp. ix-x

The concept of increasing returns has had a long but uneasy presence in economic analysis. The opening chapters of Adam Smith's Wealth of Nations put great emphasis on increasing returns to explain both specialization and economic growth. Yet the object of study moves quickly to a competitive system and a cost-of-production theory of value, which cannot be made rigorous except by assuming constant returns. The English school (David...

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pp. xi-xx

When the University of Michigan Press approached me to bring out a book of collected papers on increasing returns in economics I was surprised. I had thought that only older researchers, venerable and near retirement, issued collected works. But Timur Kuran, my editor, and Colin Day, the Press's director, argued that although the papers collected here have been receiving...


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pp. xxi

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1. Positive Feedbacks in the Economy

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pp. 1-12

Conventional economic theory is built on the assumption of diminishing returns. Economic actions engender a negative feedback that leads to a predictable equilibrium for prices and market shares. Such feedback tends to stabilize the economy because any major changes will be offset by the very reactions they generate. The high oil prices of the 1970s encouraged energy...

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2. Competing Tecnologies, Increasing Returns, and Lock-in By Historical Small Events

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pp. 13-32

The statics of markets where commodities show increasing returns or decreasing supply costs are by now becoming familiar.1 It is well known that in such markets nonconvexities appear, so that multiple equilibria are called into being. These equilibria are typically "corner solutions" with one commodity or one firm monopolizing the market. But while information on preferences,...

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3. Path-Dependent Processes and the Emergence of Macrostructure

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pp. 33-48

Of recent fascination to physical chemists, biologists, and economists are nonlinear dynamical systems of the "dissipative" or "autocatalytic" or "self-organizing" type, where positive feedbacks may cause certain patterns or structures that emerge to be self-reinforcing. Such systems tend to be sensitive to early dynamical fluctuations. Often there is a multiplicity of patterns that...

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4. Industy Location Patterns and the Importance of History

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pp. 49-67

Two different world-views exist, interwoven, in the spatial economics literature. The first, which we might associate with the names of von Thunen (1826), the early Weber (1909), Predohl (1925), Christaller (1933), Losch (1944), and Isard (1956) tends to see the spatial ordering of industry as preordained—by geographical endowments, transport possibilities, and firms' needs. It stresses geographical differences, shipment costs, market...

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5. Information Contagion

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pp. 69-97

This paper explores a positive feedback mechanism quite different from the ones discussed earlier in this book. It works through the way information is transmitted in a typical technical-product market. When prospective buyers are making purchasing decisions among several available technically-based products, choosing among different computer workstations, say, they often augment whatever publicly available information...

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6. Urban Systems And Historical Path Dependence

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pp. 99-110

When does history make a difference in the formation of economic structures? Under some circumstances the small events of history are averaged away and an unavoidable outcome or structure is reached. Under other circumstances, differences in these chance events can steer the economy into potentially very different structures. ...

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7. Self-Reinforcing Mechanisms in Economics

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pp. 111-132

This paper was written for the 1987 conference on the economy as an evolving, complex system that brought together physicists and economists at the Santa Fe Institute for the first time. It surveys the increasing returns and positive feedback literature in economics as it stood in the late 1980s. Some of the material overlaps that of other chapters. But much of it is sufficiently...

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8. Path Dependence, Self-Reinforcement, and Human Learning

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pp. 133-158

On first thoughts it may appear that the subjects of learning in the economy and of increasing returns have little in common with each other. But in fact there is a strong connection between the two. I show in this paper that a very common context of learning can be viewed as competition among beliefs or actions, with inherent reinforcement of those that payoff well. But as such, ...

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9. Strategic Pricing in Markets with Increasing Returns

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pp. 159-184

Several of the papers in this book show that where products or technologies experience increasing returns to market share, markets can become unstable, so that in the long run one product or technology can come to dominate and drive out the others. But these assume the absence of strategic manipulation. Thus the question arises: If firms that lose market share (and hence the...

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10. Strong Laws for a Class of Path-Dependent Stochastic Processes

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pp. 185-202

In this 1984 paper, Yuri Ermoliev, Yuri Kaniovski, and I explore a class of nonlinear stochastic processes particularly applicable to positive-feedback problems in economics. We call them generalized urn schemes of the Polya kind, and investigate both their dynamics and long-run limiting behavior. Generalized urn schemes were discussed earlier, in chapter 3. This chapter...

E-ISBN-13: 9780472022403
E-ISBN-10: 0472022407
Print-ISBN-13: 9780472064960
Print-ISBN-10: 0472064967

Page Count: 224
Illustrations: figures, tables
Publication Year: 1994

Series Title: Economics, Cognition, and Society

Research Areas


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Subject Headings

  • Economics, Mathematical.
  • Economic development -- Mathematical models.
  • Economies of scale -- Mathematical models.
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