On the Economics and Analysis of Diversity

A review of the literature reveals that the concept of diversity (and especially technological diversity) is of considerable general significance in economics. Diversity is variously argued to be a major factor in the fostering of innovation and growth, an important strategy for hedging against intractable uncertainty and ignorance, the principal means to mitigate the effects of 'lock-in' under increasing returns and a potentially effective response to some fundamental problems of social choice. Recognition of the countervailing costs and wider disadvantages associated with diversification simply compounds the case for the development of a clear, comprehensive and systematic general operational characterisation of diversity in economics. Perhaps surprisingly, then, it is found that existing approaches to the analysis of technological and wider economic diversity tend either to be rather rudimentary or quite circumscribed in character. Drawing on analytical approaches to the concept of diversity undertaken in a range of disciplines (including economics, ecology, palaeontology, archaeology, psychology and chemistry), this article sets out a formal threefold general characterisation of diversity. A variety of quantitative indices are examined and a novel integrated index of 'multi-criteria diversity' is developed and evaluated under this framework. The potential utility of this index is assessed in a more practical (but still hypothetical) exercise which seeks to illustrate how trade-offs might systematically be explored between diversity and wider economic performance in real portfolios of technologies, such as those employed in the electricity supply industry.