Saturday, October 25, 2014

Dietz Vollrath — Scale, Profits, and Inequality

But if we take seriously the incentives behind innovation, then it isn’t simply the genius of the individual that matters for growth. The scale of the economy is equally relevant.
I would say that scale is much more relevant than innovation. Innovation is not new. What is new is population size and mass markets that serve either the entire market or major segments. There is still significant innovation in niche markets, but the innovators are not rewarded anywhere near like those who can capture market share in a mass market. It's the existence of mass markets (scale) that results in the level of inequality that prevails and promises to be become the norm as more an more niches are absorbed into conglomerates and smaller less efficient firms merged and consolidated. You know, "the economies of scale." Do we need unlimited inequality to incentive innovation in this environment? Why? Most of the gains are simply rents that are extracted because they can be.

The Growth Economics Blog
Scale, Profits, and Inequality
Dietz Vollrath | Associate Professor of Economics at the University of Houston
h/t Mark Thoma at Economist's View

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