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Re the "externalities" discussion, may I reinforce Barkley Rosser's 
conclusion that there appears to be a positive and a negative sense in 
which apparently similar terms are used. There is a fundamental confusion 
between (i) externalities of the environmental type (pollution, 
congestion, etc), which are the proper subject of taxes and subsidies; and 
(ii) the social costs that Pigou included in his discussion of his "curve 
of marginal supply prices" (the S2 curve mentioned by Ellis and Fellner in 
1943). 
 
Allyn Young's review of Pigou's Wealth and Welfare (QJE 1913 -- reprinted 
as Chapter 8 of a substantial volume of Allyn Young's papers to be 
published this Spring by Routledge: "Money and Growth: Selected Papers of 
Allyn Abbott Young", edited by Perry Mehrling and myself) demolished 
Pigou's claim that he had shown that a bounty should be given to 
industries of increasing returns (where the S2 curve lay below the 
Marshallian "particular expenses" curve or ordinary long period 
competitive supply curve) and taxes levied on industries of diminishing 
returns (where S2 is above S1). Pigou eventually accepted Young's 
criticism. (Frank Knight was a student of Young's and his 1924 paper, 
while better known, did not advance beyond Young's critique.) 
 
[See Charles Blitch's biography of Young (Macmillan, 1995, p.39): "Pigou 
at first refused to concede his error. He attempted to refute Young in the 
revision of his book retitled "The Economics of Welfare". It was only 
after other trenchant and supporting criticisms by Frank H. Knight and 
Dennis H. Robertson that Pigou corrected his error in the 1924 edition of 
his book."] 
 
The criticism was based on the fact that Pigou saw no difference between 
a rise in the supply price of factors, particularly the rent of land, as 
an industry's output increased, and an increase in the marginal resource 
cost. The former increases entrepreneur's expenses but does not use up 
more resources. ("Increased prices for the use of land and the other 
factors in production do not represent an increased using up of resources 
in the work of production. They merely represent transferences of 
purchasing power.") 
 
Paul Rosenstein-Rodan (who knew Young at the LSE in the late 1920s), in 
his famous 1943 EJ article, "Problems of Industrialisation of Eastern and 
South-Eastern Europe" refered to Allyn Young's "celebrated example" of a 
Tube line [does anyone know where Young mentioned this "celebrated 
case"?] and his criticism of Pigou. When there is an  increase of land 
values along a railway line, he asked, "is it desirable that this form of 
capital gain (external economy) be included as an item in the calculus of 
profitability, or is it not? Allyn Young hints that it is not..." 
 
Rosenstein-Rodan also alluded to Marshallian external economies, as well 
as to his own concept of external economy that may arise from the 
coordinated expansion of industry to take advantage of reciprocal demands 
(another Youngian insight) via his Big Push strategy. (Close, I think, to 
Scitovsky's concept of "pecuniary externalities".) 
 
Barkley Rosser mentions Krugman on agglomeration economies. Krugman also 
has a sniffy article on Rosenstein-Rodan's Big Push in Proceedings of the 
World Bank Conference on Development Economics, 1992: "Toward a 
Counter-Counter Revolution in Development Theory" in which he tries to 
formalise R-R. In my opinion he fails because he sees it all in terms of 
supply-side internal economies of scale. Allyn Young explicitly rejects 
this as his main point: "... these economies lie under our eyes, but we 
may miss them if we try to make of LARGE-SCALE production (in the sense of 
production by large firms or large industries), as contrasted with LARGE 
production, any more than an incident in the general process by which 
increasing returns are secured and if accordingly we look too much at the 
individual firm or even, as I shall suggest presently, at the individual 
industry.") The Smith-Young focus on macroeconomic increasing returns 
limited by the size of the market is more of a demand-side than a 
supply-side insight, and I think this is how Rosenstein-Rodan also saw 
things. 
 
Marshall presented his distinction between internal and external 
economies in The Economics of Industry, 3rd edition, 1899, p.150; I do not 
know whether it was in the first edition, 1892, nor whether this predates 
the reference Ross Emmett gave from his "Principles". 
 
In any case, I would also caution against regarding Allyn Young's famous 
1928 paper on "Increasing Returns and Economic Progress" as an example of 
the concept of "externalities" in the sense of neighbourhood effects, 
etc, nor, indeed, as identical to Marshall's use of the terms. He 
explicitly warns that although Marshall's distinction between internal and 
external economies is a fruitful one, nevertheless he has a broader 
perspective in discussing the increasing returns that accompany economic 
growth, with the increasing specialisation and division of labour between 
as well as within firms as the market expands. (Thus "The division of 
labour is limited by the division of labour", etc.) 
 
(Barkley Rosser refered to Clapham's empty economic boxes. Note that 
Young explicitly states that his paper is not concerned with that debate, 
"alluring" though it was.) 
 
Roger Sandilands 
 
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