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tely to l. If R is then changed to its optimal level for the new output
level, cost must rise even less.
We expect therefore that a firm with higher output will engage in
more research and development expenditures and secure greater cost
savings. The situation is analogous to the portfolio case. Since information
is about rates, its cost is independent of scale while its benefit
is proportional to scale. Therefore, it pays to buy more information at
higher scales of activity, and therefore the rates of return are higher at
higher level.
6. Implications of increasing returns due to information
We have seen one basic reason why considering knowledge or
information as an economic good leads to increasing returns: namely,
that much information is information about rates. This insight is present
in the early chapters of Adam Smith’s Wealth of Nations but disappears
as the book goes on and is certainly absent in his immediate
successors, such as Ricardo. Its continued reappearance and disappearance
from economic thought is itself an interesting phenomenon,
which I will not examine here.
I would argue that the implication that information frequently concerns
rates is the deepest connection between the economics of information
and increasing returns.
There are other connections, but they depend in one way or
another on increasing returns in the acquisition of information (Radner
and Stiglitz [1984], Arrow [1991]).
The increasing-return implication of information acquisition is
basic to the “new growth economics.” Roughly, the picture is that at
any given state of development (scale of economy), a certain amount
of investment in new knowledge is justified. When the new productive
knowledge is realized, the economy has been expanded; this jus-
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