================= HES POSTING ================= 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 ============ FOOTER TO HES POSTING ============ For information, send the message "info HES" to [log in to unmask]