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The role of pecuniary external economies and economies of scale in the theory of increasing returns

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  • Ramesh Chandra
  • Roger Sandilands

Abstract

This paper investigates some issues relating to the phenomenon of increasing returns: (1) What is the role of economies of scale in the theory of increasing returns? (2) Do pecuniary external economies lead to market failure and justify intervention in the market mechanism? (3) Are increasing returns sector-specific or generalised, and if they are sector specific, is it possible to identify and promote these sectors from a policy point of view? We argue that economies of scale are incidental to the broader phenomenon of increasing returns and therefore cannot adequately explain their existence. On the second question, we argue that the presence of pecuniary external economies is characteristic of a well-functioning market system rather than an indication of its failure. Finally, increasing returns are generalised, so that policies intended to identify and promote specific sectors will tend to distort intersectoral relationships. Sector-specific polices should not be based on the logic of increasing returns, but should aim to correct sector-specific handicaps.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09538250600571361
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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal Review of Political Economy.

Volume (Year): 18 (2006)
Issue (Month): 2 ()
Pages: 193-208

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Handle: RePEc:taf:revpoe:v:18:y:2006:i:2:p:193-208

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  1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  2. Ramesh Chandra, 2006. "Currie's 'leading sector' strategy of growth: an appraisal," The Journal of Development Studies, Taylor and Francis Journals, vol. 42(3), pages 490-508.
  3. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1988. "Industrialization and the Big Push," NBER Working Papers 2708, National Bureau of Economic Research, Inc.
  4. Magnus Blomstrom & Robert E. Lipsey & Mario Zejan, 1996. "Is Fixed Investment the Key to Economic Growth?," NBER Working Papers 4436, National Bureau of Economic Research, Inc.
  5. Romer, P.M., 1988. "Capital Accumulation In The Theory Of Long Run Growth," RCER Working Papers 123, University of Rochester - Center for Economic Research (RCER).
  6. Sandilands, Roger J., 2000. "Perspectives on Allyn Young in Theories of Endogenous Growth," Journal of the History of Economic Thought, Cambridge University Press, vol. 22(03), pages 309-328, September.
  7. Ramesh Chandra & Roger J. Sandilands, 2005. "Does modern endogenous growth theory adequately represent Allyn Young?," Cambridge Journal of Economics, Oxford University Press, vol. 29(3), pages 463-473, May.
  8. Romer, Paul M, 1987. "Growth Based on Increasing Returns Due to Specialization," American Economic Review, American Economic Association, vol. 77(2), pages 56-62, May.
  9. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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