172 The Political Economy of Resource Use 



diseconomies — contingent on expansion of output in the economy as 

 a whole. 



It is important to distinguish between technological and pecuniary 

 economies which, in fact, are not economies at all. In an interdepend- 

 ent system an expansion or contraction of output in any sector is 

 bound to affect prices and incomes in other sectors. These effects in- 

 volve income transfers that are sometimes called pecuniary economies 

 or diseconomies. But a firm's expansion of output can also affect the 

 physical conditions of production for other firms. An expansion of 

 output in one sector, for example, may create demands for the prod- 

 ucts of other sectors that permit scale economies to be attained. Ex- 

 ternal consequences affecting outputs that can be obtained from given 

 inputs are true economies (or diseconomies). 



It is also important to distinguish static external economies from 

 dynamic. With a given supply of factors of production, expansion of 

 output in one sector will inevitably withdraw inputs from others. Ex- 

 pansion in certain areas may be accompanied by external economies; 

 expansion in others may induce external diseconomies. Since, by defi- 

 nition, these economies are independent of the action of individual 

 firms (or households), if they are large a prima facie case is estab- 

 lished for public intervention to induce the economies or avoid the 

 diseconomies. The problem posed by static external economies is 

 whether a rearrangement of inputs brought about by some kind of 

 government action will increase total output. 



If the assumption of a fixed quantity of factors is abandoned a dif- 

 ferent aspect of the problem of external economies emerges. The ques- 

 tion now is whether in establishing the direction and scale of new 

 investment, important external economies are possible and should be 

 taken into account in making the investment decision. A certain type 

 of investment may contribute to the creation of a trained labor supply 

 that becomes available to other industries and areas. It is also pos- 

 sible that, beyond a certain "critical minimum," large-scale economies 

 appear, outside the area of initial investment, that should be taken 

 into account in determining the level of investment. ^^ 



There is no reason to believe that if important external economies 



^^ The phrase is Harvey Leibenstein's. Cf. his Economic Backwardness and 

 Economic Growth (New York: John Wiley, 1957). 



