Reflections on Recent Developments in the Concept of External Effects

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Abstract
An all-pervading interdependence is what makes economics so intractable a subject. Walras' algebra, which represented the relationships between prices and quantities as a system of equations, was one of the first explicit demonstrations of how everything could depend on everything without entailing circular reasoning. So far as positive economics is concerned the only relationships to be considered are those which are believed to be operative; that a man feels worse off in consequence of the change of fortune or behaviour of other men is by itself nothing to the purpose of positive economics. In order for such facts to qualify as agenda for an economics that seeks to formulate predictive hypotheses these feelings must have some impact on observable economic magnitudes—on the prices and the quantities of goods and factors. But for a normative study, at any rate for a study that is manifestly concerned with human welfare, such reactions of men to the behaviour of others are no less relevant simply because they do not register on the existing economic mechanisms. Indeed, it is just because these reactions fail to influence the working of the market that they are of particular interest to economists concerned with resource allocation.

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