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The Division of Labor and Knowledge is Limited by the Division of Ownership Over the Ultimate Resource: The Role of Economies of Scope in Julian Simon

Abstract

Julian Simon famously argued that economic growth is correlated with population growth. The basis for this correlation is what Simon refers to as the “ultimate resource,” namely the human mind and the collective stock of dispersed, tacit, and inarticulate knowledge among individuals. Though not incorrect, this simple rendition of his argument does not do full justice to the inspiration that Simon took from the mainline of economic thought. The purpose of this paper is to situate Julian Simon’s The Ultimate Resource as part of the mainline of development economics. I do so by developing an implicit and underappreciated relationship between entrepreneurship and economic growth in Simon’s The Ultimate Resource. I argue that this correlation between economic growth and population growth is predicated on what Simon refers to as “economies of scope.” This implies twofold. First, that a Smithian division of labor and a Hayekian division of knowledge emerge simultaneously, but are inherently predicated on a Misesian division of private property rights. Secondly, population growth is a proximate cause of economic growth, and therefore a by-product of a more fundamental institutional foundation: an ever-increasing scope in the ability of individuals to exchange ideas, goods, and services.

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Notes

  1. The term “mainline economics” (Boettke 2012) refers to the set of substantive propositions held in common among economists, which trace their origin back to Adam Smith. These include the following: “(1) there are limits to the benevolence that individuals can rely on and therefore they face cognitive and epistemic limits as they negotiate the social world, but (2) formal and informal institutions guide and direct human activity, and, so (3) social cooperation is possible without central direction” (Boettke, Haeffele-Balch, and Storr, 2016, p. 4).

  2. Building on Allyn Young (1928), this concept parallels what Buchanan and Yoon (1994, 1995, 1999) refer to as “generalized increasing returns.” See Boettke and Candela (2017, 2021) for an illustration of generalized increasing returns that closely overlaps Simon’s rendition of “economies of scope.”.

  3. According to Israel Kirzner (1973, p. 227), transaction costs entail the cost “of obtaining the information necessary to enter into and complete bargaining negotiations.” These entail not only the cost of defining property rights, but also the cost discovering the value of the goods being exchanged, as well as the cost of discovering willing trading partners.

  4. As an additional illustration of this point, Holcombe (1998, pp. 50–51) writes: “Henry Ford could not have succeeded in mass-producing automobiles until there was a substantial market, including infrastructure such as roads, gasoline stations, and repair facilities. Bill Gates could not have made his fortune had not Steve Jobs seen the opportunity to build and sell personal computers, and Steve Jobs could not have built a personal computer had not Gordon Moore invented the microprocessor. When entrepreneurs take advantage of profit opportunities, they create new entrepreneurial profit opportunities that others can act upon.”

  5. On this relationship between economic calculation, and the role that institutions and organizations play in reducing transaction costs, see Piano and Rouanet (2020).

  6. This is a restatement of Simon’s theory, which appears earlier in the book (see Simon 1981 [1996], p. 12), and later (1981 [1996], pp. 97–98, 382–383, 588).

  7. Simon defines wealth as “the capacity to control the forces of nature.” Moreover, “the extent of wealth depends upon the level of technology and the ability to create new knowledge” (1981 [1996], p.13).

  8. On Marshall’s understanding of economies of scope, see Langlois (emphasis added; 1992, p. 101), in which he states “Marshall’s vision of economic progress was basically a Smithian one…Economic progress, then, is for Marshall a matter of improvements in knowledge and organization as much as a matter of scale economies in the neoclassical sense. We can see this clearly in his ‘law of increasing return,’ which is distinctly not a law of increasing returns to scale.”.

  9. On Knight’s contribution to the relationship between economies of scope, industrial organization, and economic progress, see Boettke and Candela (2021).

  10. See also Koyama (2006).

  11. Though beyond the scope of this paper, it’s an important to note an extensive literature that has pointed out the theoretical anachronism with which the concept of increasing returns has been treated by filtering classical economists and early neoclassical economists through an equilibrium paradigm (see Kaldor 1972; Blitch, 1983; Currie, 1997; Sandilands 2000; Rima 2004).

  12. Admittedly, Kirzner restricted his analysis of the entrepreneurial market process to an institutional framework of given property rights, thereby raising a potential objection that my argument may misappropriate Kirzner’s theory outside the parameters in which it’s relevant. “Yet, on the other hand,” Kirzner concedes, “it might be argued that in the broad sense of the term the concept of entrepreneurship is not necessarily confined to capitalism” (emphasis added; Kirzner 1985, p. 167), one in which entrepreneurial discovery can be applied to the level of institutional analysis itself. On this point, see Boettke (2014).

  13. Agreement over time entails transactions costs, which were eroded by more accurate calculation of time through entrepreneurship. For example, in terms of increasing economies of scope, the invention of the clock in the late thirteenth century “had a subtle social importance, cultivating the sense of time to the organized collaboration of large number of people” (Rosenberg and Birdzell 1986, p. 58). The introduction of time zones by U.S. railroad companies in the nineteenth century also exemplify how crucial the accurate accounting time is to realizing economies of scope (see Bartky 1983, 1989).

  14. As Adam Smith states this direction of causality in economic development: “According to the natural course of things, therefore, the greater part of the capital of every growing society is, first, directed to agriculture, afterwards to manufacturers, and last of all to foreign commerce. This order of things is so very natural, that in every society that had any territory, it has always, I believe, been in some degree observed” (emphasis added; Smith 1776 [1981], p. 380). And as Julian Simon builds on this Smithian point, given that agricultural productivity has increased in China since the late 1970s, “it follows that the total amount of land use for crops in poor countries will eventually decline” (1981 [1996], p. 423), freeing up a larger amount of land available for other economic uses.

  15. As Armen Alchian states the point: “If ownership rights are transferable, then specialization of ownership will yield gains. People will concentrate their ownership in those areas in which they believe they have a comparative advantage, if they want to increase their wealth. Just as specialization in typing, music, or various types of labor is more productive so is specialization in ownership. Some people specialize in electronics industry knowledge, some in airlines, some in dairies, some in retailing, etc. Private property owners can specialize in knowledge about electronics, devoting much of their effort and study to learning which electronic devices show promise, which are now most efficient in various uses, which should be produced in larger numbers, where investment should take place, what kinds of research and development to finance, etc.” (1965, p. 825).

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Acknowledgements

I would like to thank Peter Boettke, Peter Jacobsen, and Louis Rouanet for their insightful comments and feedback, all of which much improved an earlier draft of this paper. Any remaining errors are entirely my own.

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Correspondence to Rosolino A. Candela.

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Candela, R.A. The Division of Labor and Knowledge is Limited by the Division of Ownership Over the Ultimate Resource: The Role of Economies of Scope in Julian Simon. Rev Austrian Econ (2022). https://doi.org/10.1007/s11138-022-00569-w

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Keywords

  • Julian Simon
  • Economies of Scope
  • Increasing Returns
  • Property Rights

JEL Classification

  • B53
  • N70
  • O31
  • R40