Marshall’s External Economies: Economic Evolution and Patterns of Development

Unless otherwise noted, all references to Marshall’s Principles of Economics (Marshall 1920) refer to the eighth edition as published by Macmillan in 1920.

Similarly, Romer (1986: 1004–5) contended that ‘With the introduction by Alfred Marshall of the distinction between internal and external economies, it appeared that this [increasing returns] explanation could be given a consistent, competitive equilibrium interpretation’.

Much of the ‘new view’ has been inspired by Whitaker’s (1975) edited volumes of Marshall’s early economic writings, Raffaelli’s (1994) edited collection of Marshall’s philosophical papers and Groenewegen’s (1995) definitive Marshall biography. Many of the central themes are presented in the edited volumes Arena and Quéré (2003), Raffaelli et al. (2006, 2011), and Hart (2012).

Prendergast (1992; 2006: 383) does not support the ‘traditional’ interpretation, concluding instead that both the life-cycle and external economies were ‘necessary for the reconciliation of increasing returns and competition’. The rather different reasons for rejecting the ‘traditional view’, along the lines argued in this section, are discussed in more detail in Hart (1996).

Pigou (1928: 195), for example, stated ‘The [Marshall’s] representative firm must be conceived as one for which, under competitive conditions, there is, at each scale of aggregate output, a certain optimum size, trespass beyond which yields no further internal economies’. Sraffa’s perspective was stated most directly in his earlier 1925 paper: ‘But when he [Marshall] noticed that a decrease in cost, deriving from the increase in the size of the factories and from a larger division of labour, was incompatible with free competition, he abandoned his original point of view, and instead expanded his theory of external economies, to the extent of considering these as the sole cause of decreasing costs in a regime of competition’ (Sraffa 1925: 346–7, emphasis added).

See, for example, Principles: 35, and most notably in Chapter III of Book V, where it is explicitly stated that ‘of course Normal does not mean Competitive’, with both market and normal prices ‘brought about by a multitude of influences, of which some rest on a moral and some on a physical; of which some are competitive and some are not’ (Principles: 347–8). In a note found in an 1886 printing of Alfred and Mary Paley Marshall’s Economics of Industry [Marshall and Marshall (1879)] annotated for an envisaged revision, Marshall commented: ‘Be careful to strike out everything wh. implies that normal value = competitive value’. Whitaker (1975: 73), Becattini and Dardi (2006: 55–6).

The nature of these issues is discussed further in Appendix H of the Principles where Marshall draws a distinction between the ‘true’ industry supply curve and the ‘particular expenses curve’. Here the economies associated with organisation and production on a large scale are explicitly taken as fixed and constant throughout. Movements along such curves, in response to shifts in demand schedules, could occur through time, as the irreversibilities associated with organisation and production would not be encountered. Marshall then proceeded to argue that curves drawn under such assumptions had no operational role to play, as it ‘is not a true supply curve adapted to the conditions of the world in which we live, but it has properties which are often erroneously attributed to such a curve’ (Principles: 810). The source of these difficulties is discussed in more detail in Marshall (1898).

Among those who participated in the Marshallian value theory debates of the late 1920s, the nature of these difficulties was most clearly recognised by Allyn Young (1928). Interpretation and the resolution of these difficulties within an evolutionary setting have been developed by writers such as Dardi (2003), Niman (2004), Metcalfe (2007), and Raffaelli (2011).

While the term external economies was not used explicitly in Marshall’s early writing, a clear distinction is made between these economies and internal economies. See, for example, in Pure Theory of Domestic Values, where Marshall challenges the proposition that the most important of the advantages of the division of labour can only be obtained by the concentration of large numbers of workmen in vast establishments:

…an increase in the total amount of a commodity manufactured can scarcely fail to occasion increased economies in production, whether the task of production is distributed among a large number of small capitalists, or is concentrated in the hands of a comparatively small number of large firms. (Whitaker 1975, II: 198)

See Groenewegen (2009), where the possible influence of W. E. Hearn’s Plutology is also noted, along with R. M. C. Taylor’s writings devoted to the factory system.

See also in the Marshalls’ Economics of Industry, where, for example, it is stated that while some of the advantages of the division of labour can be obtained only in large factories, many ‘can be secured by small factories and workshops, provided there are a very great number of them in the same trade’ (Marshall and Marshall 1879: 52, emphasis added).

Storper’s own contributions to the geography of economic development have been significant; see, for example, Storper (2013).

Similar arguments were developed assertively by Wilkinson (1983), who observed that sociopolitical forces are either assumed not to affect outcomes or are held to distort the operation of the market, in which case they need to be adjusted to make them compatible with the postulates of economic theory. As a result, the traditional approaches fail to recognise the central role of institutions in economic development and the inextricable link between social, political and economic forces in determining how economies function. The influence of the historical and institutionalist schools of economic thought on Marshall’s industrial economics is noted. The latter point is considered in some detail in Jensen (1990).

See the edited volumes Boschma (2012), Kogler (2016), along with Frenken (2007), for an overview of the evolutionary economic geography literature.

Much of Becattini’s early work was published in Italian, however, the nature of his contributions can be observed in Becattini (1990, 2004). A comprehensive overview of the literature has been provided by the contributors to Becattini et al. (2009) and Konzelmann and Wilkinson (2016). García‐Lillo et al.’s (2018) bibliometric review is indicative of the growth in subsequent research on this and related themes. Interesting examples of recent work include Bellandi et al.’s (2018) development of a conceptual framework on knowledge accumulation and depletion in industrial districts.

A more detailed discussion of the connections between the industrial districts literature and Marshall’s external economies is developed in Raffaelli (2003b), Bellandi (2003), Belussi and Caldari (2009), Hart (2009) and Loasby (2009).

The work of Porter and his followers on industrial clusters should also be recognised; see Porter and Ketels (2009) for a discussion of the similarities and differences between Porter’s treatment of industrial clusters and the themes emphasised by Marshall and in the subsequent industrial district literature.