EXTERNAL ECONOMIES AND MARSHALLIAN PARTIAL EQUILIBRIUM ANALYSIS

SUMMARY Although external economies play a key role in A lfred M arshall 'S theory of production, his analysis of it is felt to be rather inadequate. Regarding its importance in the Marshallian schema, we have only to remember that it is the existence of external economies, and not, as D ennis R obertson suggests, the representative firm, which reconciles declining long‐run average cost and pure competition. Yet there has been virtually nothing done to empirically test for the existence or significance of such external economies. In a way, this is not surprising since it is, in fact, very difficult to even theoretically conceive of, let alone test for, examples of external economies that are compatible or consistent with the Marshallian partial equilibrium approach. Professor J acob V iner , and later Professor H aberler , offer as a partial defense of M arshall 'S theory a rather amorphous type of external economy which may be characterized as ‘institutional’, viz ., the ‘case of laborers (and this may also be true of capitalists) who have a preference, rational or otherwise, for working in a large industry’. What is done in this paper is to test for the presence of this ‘institutional’ external economy within a multiple correlation framework. The study concludes that there is generally not evidence of significant external economies operating through the ‘institutional’ factor of industry size. Instead there is evidence of external diseconomies.