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While we have established (perhaps) that the term "externality" was first
used by Samuelson in the mid-1950s, the closely-related term "external
economies" is older still.
The term appears throughout Allyn A. Young's famous article "Increasing
Returns and Economic Progress," Economic Journal, volume 38 (1928), pp.
527-42, which can be accessed on-line at
http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/young/increas.html
Young attributes the distinction between internal and external economies
to Marshall, but, as was typical of that era, provided no direct citation
of Marshall.
Slightly earlier, Frank Knight used the term in "Some Fallacies in
the Interpretation of Social Cost" (QJE, 38, November 1924). Here is
the most important paragraph:
"The rejoinder to the above argument [that, when competition is effective,
all technical economies will be incorporated into enterprises' costs] is
the doctrine of 'external economies,' which surely rests upon a
misconception. Economies may be 'external' to a particular establishment
or technical production unit, but they are not external to the industry if
they affect its efficiency. The portion of the productive process carried
on in a particular unit is an accidental consideration. External economies
in one business unit are internal economies in some other, within the
industry. Any branch or stage in the creation of a product which offers
continuously a chance for technical economies with increase in the scale
of operations must eventuate either in monopoly or in leaving the tendency
behind and establishing the normal relation of increasing cost with
increasing size." [I don't have the page number, because this is copied
from my electronic version of the paper, and my copy is at home, where I
am correcting page proofs. However, the paragraph is from the second
section of the paper]
We await word regarding Marshall's use of the term "external economies"!
And might it go back beyond Marshall?
Ross B. Emmett
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