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Original Research Articles

Vol. 14 (2026): Continuous Publication

INCREASING RETURNS, PRODUCTIVE SPECIALIZATION, AND THE THEORY OF THE FIRM.

DOI
https://doi.org/10.30800/mises.2026.v14.1631
Submitted
October 23, 2025
Published
2026-08-24

Abstract

Theorizing on increasing returns is both promise and paradox. Positive feedback may drive explosive dynamics, while focus on decreasing returns excludes coherent accounts of innovation. This article examines how increasing-returns processes shape market evolution and firm organization, integrating insights from complexity and Austrian economics. Firms and entrepreneurs emerge as key generators of returns, since “islands of specialization” internalize specific, complementary tasks that spot markets cannot coordinate. By capturing productive specialization, firms drive intra-firm growth and industry transformation. Yet beyond a certain scale they face calculational limits from the absence of external price signals for goods. Thus, external benchmarks impose a ceiling on expansion, introducing stabilizing catallactic feedback. Our analysis explains why firms arise, grow, and confront limits, enriching both traditions and offering a coherent view of organizational boundaries.

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