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By Root 474 0

‘diminishing returns’ is such a cliché that few give it much thought. Picking out the pecans from a bowl of salted nuts (a vice of mine) gives diminishing returns: the pieces of pecan in the bowl get rarer and smaller. The fingers keep finding almonds, hazelnuts, cashews or even – God forbid – Brazil nuts. Gradually the bowl, like a moribund gold mine, ceases to yield decent returns of pecan. Now imagine a bowl of nuts that had the opposite character. The more pecans you took, the larger and more numerous they grew. Implausible, I admit. Yet that is precisely the character of the human experience since 100,000 years ago. Inexorably, the global nut bowl has yielded ever more pecans, however many get used. The pace of acceleration of returns lurched upwards around 10,000 years ago in the agricultural revolution. It then lurched upwards again in AD 1800 and the acceleration continued in the twentieth century. The most fundamental feature of the modern world since 1800 – more profound than flight, radio, nuclear weapons or websites, more momentous than science, health, or material well-being – has been the continuing discovery of ‘increasing returns’ so rapid that they outpaced even the population explosion.

The more you prosper, the more you can prosper. The more you invent, the more inventions become possible. How can this be possible? The world of things – of pecans or power stations – is indeed often subject to diminishing returns. But the world of ideas is not. The more knowledge you generate, the more you can generate. And the engine that is driving prosperity in the modern world is the accelerating generation of useful knowledge. So, for example, a bicycle is a thing and is subject to diminishing returns. One bicycle is very useful, but there is not much extra gain in having two, let alone three. But the idea ‘bicycle’ does not diminish in value. No matter how many times you tell somebody how to make or ride a bicycle, the idea will not grow stale or useless or fray at the edges. Like Thomas Jefferson’s candle flame, it gives without losing. Indeed, the very opposite happens. The more people you tell about bicycles, the more people will come back with useful new features for bicycles – mudguards, lighter frames, racing tyres, child seats, electric motors. The dissemination of useful knowledge causes that useful knowledge to breed more useful knowledge.

Nobody predicted this. The pioneers of political economy expected eventual stagnation. Adam Smith, David Ricardo and Robert Malthus all foresaw that diminishing returns would eventually set in, that the improvement in living standards they were seeing would peter out. ‘The discovery, and useful application of machinery, always leads to the increase of the net produce of the country, although it may not, and will not, after an inconsiderable interval, increase the value of that net produce,’ said Ricardo: all tends towards what he called a ‘stationary state’. Even John Stuart Mill, conceding that returns were showing no signs of diminishing in the 1840s, put it down to a miracle, innovation, he said, was an external factor, a cause but not an effect of economic growth, an inexplicable slice of luck. And Mill’s optimism was not shared by his successors. As discovery began to slow, so competition would drive the profits of enterprise out of the increasingly perfect market till all that was left was rent and monopoly. With Smith’s invisible hand guiding infinite market participants possessed of perfect information to profitless equilibria and vanishing returns, neo-classical economics gloomily forecast the end of growth.

It was a description of an entirely fictional world. The concept of a steady final state, applied to a dynamic system like the economy, is as wrong as any philosophical abstraction can be. It is Pareto piffle. As the economist Eamonn Butler puts it, the ‘perfect market is not just an abstraction; it’s plain daft ... Whenever you see the word equilibrium in a textbook, blot it out.’ It is wrong because it assumes perfect competition, perfect knowledge and