“Conventional economic theory is built is built on the assumption of diminishing returns. Economic actions engender a negative feedback that leads to a predictable equilibrium for prices and market shares. Such feedback tends to stabilize the economy because any major changes will be offset by the very reactions they generate. The high oil prices of the 1970s encouraged energy conservation and increased oil exploration, precipitating a predictable drop in prices by the early 1980s. According to conventional theory, the equilibrium marks the “best” outcome possible under the circumstances: the most efﬁcient use and allocation of resources.”

— W. Brian Arthur

Source: Increasing Returns and Path Dependence in the Economy, (1994), p. 1: Chapter 1. Positive feedback in economics

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W. Brian Arthur 16

American economist 1946

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“In many parts of the economy, stabilizing forces appear not to operate. Instead, positive feedback magniﬁes the effects of small economic shifts; the economic models that describe such effects differ vastly from the conventional ones. Diminishing returns imply a single equilibrium point for the economy, but positive feedback – increasing returns – makes for many possible equilibrium points. There is no guarantee that the particular economic outcome selected from among the many alternatives will be the “best” one.”

W. Brian Arthur (1946) American economist

Source: Increasing Returns and Path Dependence in the Economy, (1994), p. 1: Chapter 1. Positive feedback in economics

“Our understanding of how markets and businesses operate was passed down to us more than a century ago by a handful of European economists — Alfred Marshall in England and a few of his contemporaries on the continent. It is an understanding based squarely upon the assumption of diminishing returns: products or companies that get ahead in a market eventually run into limitations, so that a predictable equilibrium of prices and market shares is reached. The theory was roughly valid for the bulk-processing, smokestack economy of Marshall’s day. And it still thrives in today’s economics textbooks. But steadily and continuously in this century, Western economies have undergone a transformation from bulk - material manufacturing to design and use of technology — from processing of resources to processing of information, from application of raw energy to application of ideas. As this shift has occurred, the underlying mechanisms that determine economic behavior have shifted from ones of diminishing to ones of increasing returns.”

W. Brian Arthur (1946) American economist

Arthur, W. Brian. "Increasing Returns and the New World of Business." Harvard business review 74.4 (1996): p. 100

“In traditional economic writings dealing with the economy as a whole, it is usually assumed that prices are highly flexible and that economic adjustment is brought about through price changes. We are going to examine inflexible prices.”

Gardiner C. Means (1896–1988) American economist

Gardiner C. Means, "Price inflexibility and the requirements of a stabilizing monetary policy." Journal of the American Statistical Association 30.190 (1935): 401-413.

“Real economic growth emanates from increased productivity, which tends to hold prices down.”

Peter D. Schiff (1963) American entrepreneur, economist and author

Quotes from Crash Proof (2006)

“Could my right hon. Friend explain why the increase in oil prices is deflationary but the increase in all other international prices has apparently been inflationary?”

Enoch Powell (1912–1998) British politician

Question http://hansard.millbanksystems.com/commons/1974/feb/06/industrial-and-economic-situation#column_1232 to the Chancellor of the Exchequer Anthony Barber in the House of Commons (6 February 1974)
1970s

“The centrally planned economies, dissatisfied with the outcome of their own efforts to achieve good economic growth performance, have changed strategy and decided to import high technology from the West. as well as necessary grains to supplement their domestic agicultural supplies. This new approach has opened their economies to Western inflation because imports have been reflecting rising world price. Gold and oil sales at correspondingly rising prices have been used by the Soviet Union to finance part of their import needs. but they are fully enmeshed in world inflation accounting in balancing rising export prices.”

Lawrence Klein (1920–2013) American economist

"Some Economic Scenarios for the 1980's," 1980

“Is precisely in market dealings that market prices are formed for all kinds of goods and services, which will be taken as the bases of calculation. Where there is no free market, there is no pricing mechanism; without a pricing mechanism, there is no economic calculation.”

Ludwig von Mises (1881–1973) austrian economist

“Economists’ instincts are that uncertainty about current prices, future prices, and the real meaning of nominal trade-offs between the present and the future; distortions introduced by the failure of government finance to be inflation-neutral; windfall redistributions; and the focusing of attention not on preferences, factors of production, and technologies but on predicting the future evolution of nominal magnitudes must degrade the functioning of the price system and reduce the effectiveness of the market economy at providing consumer utility. The cumulative jump in the price level as a result of the inflation of the 1970s may have been very expensive to the United States in terms of the associated reduction in human welfare.”

J. Bradford DeLong (1960) American economist

Ch. 6 : "America’s Peacetime Inflation: The 1970s" in Reducing Inflation: Motivation and Strategy (1997) edited by Christina D. Romer and David H. Romer

“Market economy implies a self-regulating system of markets; in slightly more technical terms, it is an economy directed by market prices and nothing but market prices.”

Karl Polanyi book The Great Transformation

The Great Transformation (1944), Ch. 4 : Societies and Economic Systems

“The critical oil and natural gas producing region that we fought so many wars to try and protect our economy from the adverse impact of losing that supply or having it available only at very high prices.”

John R. Bolton (1948) American lawyer and diplomat

John Bolton Admits All Of These Wars Are For Oil http://www.youtube.com/watch?v=rAgv6HaOHzM, interview on Fox News, October 22, 2011

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