Returns to Scale, Asymmetric

BIBLIOGRAPHY

The forces which make for Increasing Return are not of the same order as those that make for Diminishing Return: and there are undoubtedly cases in which it is better to emphasize this difference by describing causes rather than results. (Marshall 1890, p. 266)

Asymmetric returns to scale are defined in three ways in economics. The first is the one referred to in the above quote, which is an asymmetry among increasing, constant, and decreasing returns to scale that may exist because decreasing returns to scale are thought by many to be implausible if the theoretical exercise concerning returns to scale is conducted properly. Therefore, there may be no symmetric counterpart to the increasing returns portion of production so that long run average cost curves are not symmetrically U-shaped. (Notice that the existence of decreasing returns does not necessarily imply exact symmetry in the shape of the cost curve and so this concept defined in this way is perhaps inappropriately labeled.) The a priori argument for the lack of decreasing returns is that observed apparent decreasing returns to scale actually depends on the existence of a hidden or fixed factor such as managerial or entrepreneurial capacity so that the required scaling of all factors is not actually occurring.

One counterargument to the existence of asymmetry under the first definition was provided in 2004 by Kenneth Carlaw. In his work Carlaw showed that scale effects result from the complementarities among components that make up capital goods and the risk associated with how long each component will last. The cost minimizing agent will create more durability of components than is needed for one period’s final production in order to exploit the scale effects inherent in the nature of multiple component systems and environmental uncertainty. However, at some point decreasing returns to scale set in for the durability of the capital good that is obtained from the scaling up of the durability of its components. Thus in such cases returns to scale are symmetric in the sense that increasing and then decreasing returns to scale are encountered as production with multicomponent capital goods is scaled up.

In 2005 Richard Lipsey, Kenneth Carlaw, and Clifford Bekar introduced another argument justifying the existence of diminishing returns to scale: Because real world production takes place in spatial contexts duplication may not always be possible. When and where it is possible must then be determined on empirical not a priori grounds.

A second definition of asymmetric returns to scale is that they are encountered when new technologies are applied in varying contexts. The same technology may be applied in a variety of different production, market, and institutional contexts as it emerges and is diffused across different economies. For example, lean or “just-in-time” production applied in North America is generating lower returns than in China. One suggested reason is that China has no pre-existing manufacturing infrastructure and managerial orthodoxy, whereas North American manufacturing has a solidified structure that has evolved out of the technology of mass production. It is therefore not a good fit for lean production techniques and is generating lower returns.

A third definition of asymmetric returns to scale is found in the arguments of Nicholas Kaldor. His view is that asymmetry in the returns to scale encountered in developed and developing economies arise because of differences in the goods they produce. The comparative advantage of developing economies leads them to specialize in production technologies that have decreasing returns to scale (e.g., agriculture) while developed economies specialize in technologies that have increasing returns to scale (e.g., manufacturing).

SEE ALSO Production Function; Returns; Returns to a Fixed Factor; Returns to Scale; Returns, Diminishing; Returns, Increasing

BIBLIOGRAPHY

Conway, P., and William Darity Jr. 1991. Growth and Trade with Asymmetric Returns to Scale: A Model for Nicholas Kaldor. Southern Economic Journal 57 (3): 745–759. http://cepa.newschool.edu/het/essays/product/returns.htm.

Kaldor, Nicholas. 1978. Further Essays on Economic Theory. London: Duckworth.

Lipsey, Richard G., Kenneth I. Carlaw, and Clifford T. Bekar. 2005. Economic Transformations. Oxford: Oxford University Press.

Marshall, Alfred. 1890. Principles of Economics. London: Macmillan and Co. Ltd.

Kenneth I. Carlaw

Richard G. Lipsey