Two Concepts of External Economies

_HE concept of external economies is one of the most elusive in ecoI nomic literature. Our understanding of it has been greatly enhanced by the active controversy of the twenties over the nature of the "empty economic boxes"; but full clarity has never been achieved. Definitions of external economies are few and unsatisfactory. It is agreed that they mean services (and disservices) rendered free (without compensation) by one producer to another; but there is no agreement on the nature and form of these services or on the reasons for their being free. It is also agreed that external economies are a cause for divergence between private profit and social benefit and thus for the failure of perfect competition to lead to an optimum situation; but for this there are many reasons, and it is nowhere made clear how many and which of these reasons are subsumed under the heading of "external economies." Nor do examples help to clarify the concept. The literature contains many examples of external economies; but they are as varied and dissimilar as are discussions of the subject. Some give the impression that external economies are exceptional and unimportant; others suggest that they are important and ubiquitous. Indeed, one might be tempted to explain this strange dichotomy by ideological differences between the different authors; but