Technological Progress,Increasing Returns And Disequilibrium

Modern western economics studies the optimization problem under the premise of diminishing returns.However,in real economic activities,the Matthew effect caused by increasing returns seems to be widespread,especially in the era of digital economy.The purpose of this paper is how to explain the contradiction between these phenomena and traditional economic theory.After reviewing and combing the relevant literature in the fields of diminishing returns,increasing returns and digital economy,and analyzing its internal logical relationship,this paper focuses on the evidence of increasing returns: increasing returns lead to the Matthew effect.These sources of evidence include:(1)Paul Romer compares the economic growth rates of different groups of countries and believes that the gap between different groups of countries is not narrowing,but expanding,so he comes to the conclusion that increasing returns are common;(2)The same is true at the enterprise level.The data from the capital market show that the proportion of head companies in the overall economy continues to rise,and the smaller the sample range is,the faster the growth rate is.The average growth rate of the top 5 companies is higher than that of the top 10,and the growth rate of the top 10 is higher than that of the top 500,which also proves the Matthew effect caused by increasing returns;(3)Although Thomas Piketty did not pay attention to the problem of increasing returns,he used data to prove that the personal income gap also shows the Matthew effec.Obviously,whether from the national,enterprise or individual level,the fact of increasing returns is everywhere.On the basis of understanding the factual evidence,this paper further studies the preconditions for the establishment of increasing return and decreasing return.Diminishing returns is a hypothesis under the premise of technology neutrality,which is rooted in the constraints of the scarcity of natural resources.Once technological progress is taken into account,diminishing returns no longer exist.Technological progress is the source of increasing returns,because technology is a lever,which will aggravate the polarization between the rich and the poor and lead to the strong becoming stronger.In these aspects,several economic giants have provided very important theoretical enlightenment for our research.In fact,Adam Smith has observed the relationship between technological progress,increasing returns and growth earlier.Smith pointed out that technological progress and division of labor will lead to increasing returns and monopoly.At the same time,he also pointed out that division of labor and technological progress are the source of efficiency and the basis of economic growth.Obviously,increasing returns,monopoly and growth appear at the same time,which are Trinity and inseparable.Division of labor and technological progress lead to monopoly,monopoly generates profits,profits promote innovation,and innovation promotes growth.This is the core logic behind Smith’s division of labor theory.The underlying logic is that the market will not spontaneously reach equilibrium,but will continue to divide.However,Smith also believes that the "invisible hand" of the market will spontaneously reach the optimal equilibrium.He may not be aware of the contradiction between his two views.Alfred Marshall consciously abandoned Smith’s theory of division of labor and increasing returns,which contradicted market efficiency,and chose the theory of market efficiency,but at the same time,he also gave up the research on economic growth.He classified Smith’s thought that technological progress and division of labor will lead to increasing returns as external economy,and established a set of static equilibrium theory based on the constraints of internal economy(natural factors).In the equilibrium world of Marshall’s diminishing returns,there is no profit,no division of labor,no technological progress,no monopoly,no innovation and growth.Since the establishment of Marshall equilibrium theory,the only task of economists is to prove the effectiveness of the market,because the market can solve all problems by itself and is the most perfect means of resource allocation.Coase put forward the market failure caused by externality,but pointed out that the error is not in the market,but in the unclear property rights.As long as the property rights are clear,the market can still achieve the optimal allocation of resources.Keynes actually created a new economic theory.He believed that the market will not achieve equilibrium spontaneously in the short term because the expectation change will lead to the decline of investment and consumption.However,he still focused on avoiding the ups and downs of production caused by the expectations change under the condition of technology neutrality,rather than the core growth problem,Moreover,Keynes did not deny that the market would reach equilibrium in the long run.He just thought that the long run was too long,"in the long run,we will all die".It was not until Romer returned to Smith’s theory that division of labor would promote economic growth.However,it is a pity that although he acknowledged the increasing returns,he did not dare to question the equilibrium theory and the liberalism behind it.Instead,he tried to reconstruct the equilibrium on the basis of increasing returns by assuming the decreasing private returns and increasing social returns of knowledge in Marshall’s equilibrium framework and using Marshall’s internal and external economic theory,However,the market has proved that this hypothesis is not tenable,otherwise it can not explain the growing Matthew effect.Next,this paper studies the relationship between digital economy and increasing returns.The premise of diminishing returns is technological neutrality,and the premise of increasing returns is technological progress.The emergence of digital economy makes the Matthew effect caused by increasing income increasingly obvious,because under the action of Moore’s law,the speed of technological progress of digital economy changes from linear to exponential,which makes increasing returns everywhere.As for the policy meaning of increasing returns,this paper holds that economy is an information processing system,which means that division of labor and technological progress are the premise of economic growth.At the same time,division of labor and technology will also lead to increasing returns,which will lead to monopoly.Therefore,monopoly has obvious two sides.On the one hand,it is the driving force of economic growth and the source of innovation.On the other hand,it will also lead to the widening gap between the rich and the poor.On the one hand,the policy design should face up to the positive role of monopoly on innovation and economic growth and maintain prudent supervision.On the other hand,we should avoid the income differentiation caused by monopoly and affect social stability through redistribution policies such as taxation;Economic growth is manifested in the improvement of information processing capacity.As long as technological progress does not stagnate,economic growth will not stagnate,and economic development has no limit.At the same time,technological progress will bring more technological progress,the economy will show significant imbalance,economic growth will continue to accelerate,and Keynes’ s long-term stagnation theory may face challenges,As short-term expectation adjustment ways,the role of monetary policy and fiscal policy will also decline with the acceleration of technological progress.The policy focus should be on how to promote technological progress.The reason is that the speed of technological progress exceeds the general expectation,resulting in a significant decline in the impact of expectation on credit fluctuations;Increasing returns means that the strong will becomes stronger,and the first mover advantage becomes crucial.Industrial policy may be inevitable,especially for late developing countries.Japan and South Korea are two very typical cases.Finally,this paper also makes some preliminary thoughts on the paradigm of new economics.This paper holds that the new economic paradigm should start from the most basic definition and regard the economy as an "information processing system" rather than just a "resource allocation system".On the basis of philosophy,this paradigm should break the fetters of ideology and pay more attention to institutional flexibility;In terms of research methods,we should abandon the mechanical equilibrium physics paradigm and turn to the biological evolution paradigm of complex systems;In terms of research objectives,we should continue Smith’s tradition that division of labor and technological progress will promote growth,change from the previous static optimization to dynamic unbalanced growth,and study the unbalanced growth of economy,monopoly and innovation,the relationship between growth,industrial policy and trade friction,the change of economic cycle,technological progress and the gap between the rich and the poor.