1. Increasing Returns  Cumulative Causation Knowledge  Knowledge Each increment doesn’t diminish the value of what’s already known Each increment can amplify the effectiveness of existing techniques “Standing on the shoulders of giants...” Knowledge as a Public Good Non – rival / Non – exclusion Social Return > Private Return Acquisition of knowledge requires Private Return > Threshold

2. Riding a Virtuous Circle—Development Returns to acquisition of knowledge and skills...if it substitutes for what’s in place  diminishing returns...if it complements what’s in place  increasing returns Evidence of increasing returns “Silicon Valley” Stanford  Google  Stanford “Wall Street” JP Morgan  FRBNY  JP Morgan-Chase “Sin City” Bellagio  Cirque de Solei  Wynn/Encore/Venetian/Palazzo Agglomeration economies  Urban rents “Paradox” of factor flows Winner – Take – All: Rewards disproportionate to advantage

3. Riding a Virtuous Circle Matches and Leaks (Complements and Spillovers) Production is social... and so is consumption “You didn’t build it (alone)” It takes a village. Prerequisite institutional framework – Secure property rights/Law’n’ Order/The Usual Suspects.... Cooperating inputs » Skill supports skill: Doctors need nurses » Innovation begets innovation » Genius spurs genius Demonstration effects Knowledge spreads

4. Cumulative Causation: Stuck in a Trap Lack of social infrastructure Low payoff to skill  Little skill acquisition  Lack of social infrastructure Lack of skills/means to employ knowledge  Primary production  Primitive techniques  Stagnation  Poverty Trap

5. Cumulative Causation Escaping the Trap Build social infrastructure Subsidize/Tax consumption Coordinate...industrial complex development...assure critical mass “Great expectations”  Self-fulfilling optimism Technology LEAPS Creation without destruction...when there’s nothing to destroy Demography Age and vested interest Immigration: the future of the West Creation without destruction Complementary inventions and technologies – Railroads and the steam engine/The internet and PCs  Increasing Returns