LOCALIZED COMPETITION AND THE AGGREGATION OF PLANT-LEVEL INCREASING RETURNS - BLAST-FURNACES, 1929-1935

A recent empirical literature has shaken economists' confidence in the value of aggregate (industry-level) data to illuminate production rel ationships. But the statistical finding ''you cannot aggregate,'' howe ver well documented, is not an economic explanation. Plant-level relat ionships do aggregate in Depression-era blast furnace operations despi te the presence of very substantial interplant heterogeneity, the most common economic cause of nonaggregability. The economic explanation o f this lies in poor short-run substitutability of one plant's output f or another's. Substitutability determines the importance of compositio n effects in understanding aggregate time series, constrains the poten tial cleansing effects of recessions, and therefore influences industr y evolution quite broadly.