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This article provides three types of evidence for external economies of scale in the Lancashire cotton industry. Anglo-American productivity differences are used to demon-strate external economies at the industry level. Econometric evidence of dynamic (Marshall-Arrow-Romer) external economies of localization in spinning and weaving is provided using individual earnings data. A case study of a merchant firm demonstrates the build-up of dynamic (Jacobs) externalities of urbanization. It is argued that the persistence of a large merchant community generating external economies of scale helped to delay Britain’s loss of comparative advantage to low wage producers.