The unintended consequences of increasing returns to scale in geographical economics

Abstract

Increasing returns to scale is the basis for many powerful results in economics and economic geography. But the limitations of assumptions about returns to scale in economic growth theories are often ignored when applied to geography. This leads to an unintentional bias favoring scale and mistaken conclusions about geography, scale and growth. Alternatively, this bias is used as a convenient modeling trick by urban economists to describe agglomeration economies for innovation without examining the spatial mechanisms that actually create agglomeration economies. I discuss techniques to focus on the distinctly geographic mechanisms that define returns to scale at appropriate spatial scales.

Diversifying Hawai‘i's Specialized Economy: A Spatial Economic Perspective

“…This implies that larger firms are more productive than smaller firms, that larger local industries are more productive relative to other places, and that larger cities are more productive than smaller cities. There are several mechanisms that generate returns to scale with implications for the location of economic activity (Bond-Smith, 2021). Globalization and Internet technologies allow industries to leverage local scale (firm, industry, and city) to now supply the world from large, well-connected cities.…”