Re: [PEN-L] Is Krugman right here?

[Eugene Coyle]

Jim Devine wrote: On 5/8/06, Julio Huato <[EMAIL PROTECTED]> wrote: ... How can you have decreasing returns to scale?  You can't!  Say k = 2. If you are really doubling *all* of your inputs, then the least that you can get is double your output.  That should be obvious.  The typical textbook example of decreasing returns to scale is that too large a productive unit becomes harder to manage or runs into resource scarcity.  Well, then you are not doubling your managerial input or your raw materials along with the other inputs, are you? In his intro textbook, David Colander proposes two sociological reasons for diminishing returns to scale: 1. monitoring cost: it's hard to supervise all those people [especially as the sociological complications rise] 2. a large size business can undermine team spirit and morale, as people feel that they are mere cogs in a big machine. It's probably true that what economists see as "diminishing and increasing returns to scale" are really sociological (institutional, organizational) phenomena. -- Jim Devine / "Sanity is a madness put to good use." -- George Santayana. There is an excellent book on the growth of firms -- by Penrose.  My memory is that it is Edith Penrose. The finance constraint on the rate of growth (as distinct from being large) is that the financial markets begin to see higher and higher financial risk -- going up faster than the rate of growth -- as the rate of growth increases.  That is why one firm doesn't own everything. Gene Coyle