ABSTRACT
In Marshall, external economies are classical counter-forces working unwittingly to defeat the forces which otherwise would be propelling the economy toward a Walrasian equilibrium. The three economies to which Marshall alluded have been neatly categorized by Blaug; they originate with the effects of growth on labour costs, knowledge, and the degree of specialization within the entire economy:
With the growth and localization of industry in a particular area, all firms eventually benefit from the development of a steady supply of skilled labor and a well-informed labor market. Thus, as new firms arrive in the area and draw in still more skilled labor, all the existing firms find that the cost of labor turnover and of labor training declines. The trade journal…, on the other hand, exemplifies external economies arising from improved [knowledge via] communication about market conditions. When the industry reaches a certain size, it becomes feasible to publish information and to make it cheaply available to all. Once again, the existing firms reap the benefits of cheaper information in the form of lower average costs of production. A third possible example…is that of the vertical disintegration that comes with a widened market. Since ‘the division of labor is limited by the extent of the market’, the growth of industry brings into being a host of specialized auxiliary industries to service the needs of the parent industry and the effect is to lower costs as a function of the output of the entire industry.
