Formalizing “external economies”: Viner, Chipman, and Krugman

• Published in: OEconomia Vol. 5; no. 5-3; pp. 331 - 362
• Main Author: Gehrke, Christian
• Format: Journal Article
• Language: English
• Published: Association Œconomia 01.09.2015
• Subjects: Chipman; economies of scale; externalities; Krugman; parametric external economies; Viner; économies d’échelle; économies d’échelle paramétriques; externalities; Viner; Chipman; Krugman; economies of scale; parametric external economies; externalités
• ISSN: 2113-5207; 2269-8450
• DOI: 10.4000/oeconomia.2115

The paper traces the developments in the formal treatment of “external economies” from the seminal contribution of Jacob Viner via John Chipman’s introduction of the concept of “parametric external economies” through to Paul Krugman’s modelling of external economies in his contributions to development, geography, and trade. The main focus is on clarifying the existing relationships between the different conceptualizations. It is first shown that Viner’s formalization of Marshall’s concept was originally conducted in a “Ricardo-Marshall framework” with perfectly elastic factor supplies, and that Viner derived a negatively inclined long-run industry supply curve by invoking primarily pecuniary net external economies, because he considered the concept of technological external economies as empirically vacuous. Chipman’s concept of “parametric external economies” concentrates instead on the formalization of technological external economies. Moreover, in order to rehabilitate the Marshallian tax/subsidy analysis, Chipman adopted a specific general equilibrium model, with a single primary factor in inelastic supply and no inter-industry linkages, in which pecuniary external economies in Viner’s sense cannot possibly occur. Finally, it is shown that Krugman’s conceptualization of external economies is—from an analytical point of view—closely related to Viner’s graphical representation. In Krugman’s models, pecuniary external economies arise from introducing either inter-industry linkages or, alternatively, labour migration (or, more generally, international or interregional factor mobility) into a simplified general equilibrium model of monopolistic competition with firm-internal increasing returns.