In “The Tales of Increasing Returns” Easterly explains increasing returns in a economy and its correlation with knowledge. Easterly points out that we have high incentives to gain the knowledge of what works in whatever industry we work in. A great aspect of ideas is that there is no limit to how many people use them. They provide increasing returns as opposed to diminishing returns like machines. Knowledge is based on skills that personnel share with each other in order to improve efficiencies, rather than physical items. Organizations with high knowledge capital may be more profitable or more productive than organizations with lower knowledge capital. Businesses develop knowledge capital by encouraging employees to share information through white papers, seminars and person-to-person communication. Knowledge capital is important because it reduces the odds that a company will have to "reinvent the wheel" each time a particular process is undertaken because its employees have access to documents detailing the necessary steps, and personnel who have undertaken similar activities.
Leaks: Easterly points out that knowledge leaks, in other words, it is transferable from one person to another. He gives the example of Noorul Quader who opened an apparel manufacturing plant in Bangladesh. He initially partnered with a company from South Korea that could provide him with the necessary technical knowledge to open a successful business. He learned how to obtain credit, how to work through the political system to reduce taxation, and how to produce the apparel itself. Mr. Quader’s company began to employee large numbers of Bangladeshis who in turn learned what he had learned from the Koreans and opened up their own companies. Within a decade the apparel business had become a multi-billion dollar exporting sector of the Bangladeshi economy. This story demonstrates the principle that knowledge leaks. Easterly writes that “useful knowledge about how to produce things at a low cost – that is, how to get rich – is hard to keep secret. People have a high incentive to observe what you are doing. People who work with you have a high incentive to leave and do what you were doing to get rich” (p. 150).
Another property of knowledge is that it builds on prior knowledge and becomes ever more valuable as it increases. “A new idea is worth more to the society the more the society already knows. This property of knowledge means that there are increasing returns to investment in knowledge” (p. 150). It also means, unfortunately, that countries with a pre-existing base of knowledge are more capable of producing more knowledge and therefore become richer while those countries with a low base of knowledge will be less capable of increasing it.
Matches: In the production of goods or in the...