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

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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

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

Volume (Year): 18 (2006)
Issue (Month): 2 (April)
Pages: 193-208
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Handle: RePEc:taf:revpoe:v:18:y:2006:i:2:p:193-208

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References listed on IDEAS
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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. [Downloadable!] (restricted)
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).
James M. Buchanan, Yong J. Yoon, 2000. "A Smithean Perspective on Increasing Returns," Journal of the History of Economic Thought, Taylor and Francis Journals, vol. 22(1), pages 43-48, March. [Downloadable!] (restricted)
Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Industrialization and the Big Push," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1003-26, October. [Downloadable!] (restricted)
Other versions:
- Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1988. "Industrialization and the Big Push," NBER Working Papers 2708, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Roger J. Sandilands, 2000. "Perspectives on Allyn Young in Theories of Endogenous Growth," Journal of the History of Economic Thought, Taylor and Francis Journals, vol. 22(3), pages 309-328, September. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July. [Downloadable!] (restricted)

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