RC Question 19 Explanation
DISCUSSION: Railroads are an example of an industry with increasing returns to scale, i.e. the pin factory idea.
The example shows that economists were aware that increasing returns existed. They just didn’t pay much attention to increasing returns because they couldn’t model them.
___________
- There’s no ambiguity in the invisible hand. It’s perfectly clear. And, railroads referred to the pin factory idea, not the invisible hand.
- We have no idea why the pin factory was hard to model.
- Railroads are just an example of increasing returns. The passage doesn’t say that such industries are becoming more common.
- CORRECT. Yes. The pin factory model is a better description of railroads. They don’t follow the invisible hand model, because railroads tend towards monopoly.
- Increasing returns often lead to monopoly, not competition (third sentence of paragraph 3).
The text both before and after the railroad reference discusses the pin factory model, and how it could not be mathematically modeled sufficiently. Here, railroads are characterized as a pin factory model. Nowhere here is there an allusion to the invisible hand model, even if railroads have a monopolistic proliferative attribute, that isn’t how the railroads are mentioned in this passage. Monopoly relates to the invisible hand model topically, but they are separate ideas which are not automatically invoked if one or the other is referenced.
Even the discussion section for the explanation, which is correct, does not mention anything similar to what the correct answer for this question contains. While this answer does qualify as the correct answer by being the least wrong, or in other words, “answers the question best” the statement “the reference to railroads (line 51) serves to point to an industry that illustrates the shortcomings of economists emphasis on the Invisible Hand” is not accurate or correct.
I could be wrong, I welcome any disagreement.
Just prior to this line, the passage says: “Diminishing returns lend themselves readily to elegant formalism”
The invisible hand is diminishing returns, where we don’t see monopoly. Whereas the railroads had increasing returns, meaning they tended towards monopoly. But economists resisted analyzing railroads in this way because it was hard to model increasing returns formally.
On RC you have to make links between concepts and figure out which seemingly different terms are synonyms for each other.
Note: This is an old comment but I wanted to clarify the point.