Economics vs. plutonomics: increasing returns

Diminishing returns

The “law of diminishing returns” is a concept from economics that many people learn from popular culture, even if they have no particular interest in economics.  This concept, like that of the “invisible hand” and many other concepts from economics, is almost as widely misunderstood and misapplied as it is known.  This concept can also be used in a comparison that helps to reveal a fundamental distinction between economics and plutonomics, demonstrating the inherent limitations and tendency toward oversimplification in the former.

Increasing returns

In plutonomics, since capacity is recognized as a factor in wealth, certain types of activities produce increasing, rather than decreasing, returns over the course of a sufficiently long period of time.  In particular, when an activity results in an increase in both enjoyment and an increase in the skills needed for that activity, each marginal unit of engagement with that activity will produce, over the longterm, increasing returns, as long as increasingly complex substrates for the activity are available.

Reading is a good example.  With each book one reads, one’s body of knowledge—including vocabulary and knowledge of historical facts, for instance—and one’s ability to read increases.  Over time, a reader finds that she can read a new book in less time and also gain as much or more from that new book as she would have at an earlier stage in her reading career. She has the ability to appreciate, for instance, many more allusions, literary devices, and so on that the book has to offer than she would have earlier in her career.

This very experience is often found when an avid reader reads a book as an adult that they had previously read as a child:  there is a lot more to the book than the reader had had the capacity to appreciate in the earlier stage of life.

This result can be, albeit imperfectly, translated into terms that an economist might understand: the increase in the “return” from the marginal book occurs because the “cost” in terms of time and effort has decreased while the “benefit” has remained constant or grown.

Note:  increasing returns will depend on availability of suitable substrates.

When time permits, this entry will expanded and supplemented with additional examples.