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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.

Suggested Citation

  • Ramesh Chandra & Roger Sandilands, 2006. "The role of pecuniary external economies and economies of scale in the theory of increasing returns," Review of Political Economy, Taylor & Francis Journals, vol. 18(2), pages 193-208.
    • Handle: RePEc:taf:revpoe:v:18:y:2006:i:2:p:193-208
    DOI: 10.1080/09538250600571361
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    Cited by:

    1. Agnieszka Gehringer, 2011. "Pecuniary knowledge externalities and innovation: intersectoral linkages and their effects beyond technological spillovers," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 20(5), pages 495-515.
    2. Satya Prasad Padhi, 2015. "An Evaluation of Indian Manufacturing Exports Performance," Foreign Trade Review, , vol. 50(1), pages 41-52, February.
    3. Ramesh Chandra, 2022. "Was Allyn Young a Marshallian?," Australian Economic Papers, Wiley Blackwell, vol. 61(2), pages 258-279, June.
    4. Yao-Su Hu, 2019. "The Impact of Increasing Returns on Knowledge and Big Data: From Adam Smith and Allyn Young to the Age of Machine Learning and Digital Platforms," SPRU Working Paper Series 2019-14, SPRU - Science Policy Research Unit, University of Sussex Business School.
    5. Roy Grieve, 2010. "Pecuniary External Economies, Economies of Scale and Increasing Returns: A Note of Dissent," Review of Political Economy, Taylor & Francis Journals, vol. 22(1), pages 127-140.
    6. Roger J. Sandilands, 2009. "Solovian and New Growth Theory from the Perspective of Allyn Young on Macroeconomic Increasing Returns," History of Political Economy, Duke University Press, vol. 41(5), pages 285-303, Supplemen.
    7. repec:got:cegedp:100 is not listed on IDEAS
    8. Ramesh Chandra & Roger Sandilands, 2010. "Reply to Roy H. Grieve on Increasing Returns," Review of Political Economy, Taylor & Francis Journals, vol. 22(1), pages 141-150.

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