Manufacturing Business
Andrews' first and most influential book appeared in 1949. It seems to have been written less for an academic readership than for an audience of economically literate business people.
‘It has been thought desirable', he wrote in the introduction, ‘not to obscure the text with any detailed discussion of finer points of economic theory' (Andrews 1949a: xvi). The discussion of the existing literature on competition and pricing is again sketchy and unsystematic, and it seems the word “oligopoly” never makes an appearance (shamefully the book has no index, so it is impossible to be sure). Instead, Andrews begins with an account of the various legal forms of business ownership and continues first with a defence of capitalism against economists who exaggerate its monopolistic nature and then with a description of basic accounting practices, from which the concept of “gross profits” is derived. Next, Andrews provides a simple version of the Oxford Economic Papers account of short-run costs, interspersed with much more complicated remarks on the concepts of reserve and excess capacity (ibid.: 88-93). This is followed by an analysis of long-run costs, again derived from the journal article but with the implications explained more carefully: as average costs do not normally increase with output, an expansion in demand will generally not lead the firm to raise prices (ibid.: 136-137).The core of the argument is set out in Chapter 5, where Andrews presents his price theory at some length. It is indeed a theory of oligopoly, in which firms are aware of their interdependence with their competitors, believe that they face a horizontal (perfectly elastic) long-run demand curve and are always concerned at the possibility of cross-entry by firms using similar materials or techniques. Under these conditions, the “costing-margin” that the firm adds to its “normal cost” of production to set the price is
arrived at by competition or, in the case of a business man producing what he believes to be a unique product, by his idea of the margin at which he would, in the long run, have to face competition.
It may formally be reached by quite elaborate calculations on the basis of existing costs, or it may be given by rule of thumb. But the consequences will be the same, in so far as, in either case, the level of the business man's average direct costs will determine his quoted price (ibid.: 158-159).Andrews insists that although oligopoly is pervasive,
the business world should be seen as competitive in the sense that in any market there will be a definite limit to the price which can be charged, and that any business man who exceeds this will lose his market, unless he is protected in some special way, as by legal restrictions (ibid.: 168).
The remainder of Manufacturing Business deals with selling costs, factor markets and a descriptive account of the business cycle, and is of much less theoretical interest.
The book was reviewed in four leading journals. In the American Economic Review, W Rupert Maclaurin (1950) appeared not to realise that the chief contribution of Manufacturing Business was its analysis of price determination, missing its whole point. Meanwhile, V.W. Bladen wrote in the Canadian Journal of Economics and Political Science that, ‘This is at the same time an exciting and a disappointing book. It is exciting in its origin and promise’ (Bladen 1950: 263). But it was disappointing that confidentiality requirements had prevented the publication of much of the detailed empirical research that it relied upon:
This absence of concrete material makes the book disappointing. One wonders, at times, whether it would have been very different if the author had not had this extraordinarily rich material available to him. It seems at times as theoretical as the theoretical treatises which it criticises. It is disappointing too because of its unduly polemical tone: it is too defensive, too worried about the attacks on “monopoly”. The result is just the opposite from what the author intends. He protests too much and thus raises doubts as to the validity of his interpretations.
Yet it is still a challenging book which should not be neglected by economists (ibid.).In Economica, LSE's Arnold Plant (1951) made the sardonic suggestion that it should be provided to students only along with a copy of George Stigler's impeccably neoclassical Theory of Price. Even less favourable was the ten-page review by Austin Robinson in the Economic Journal, which was harsh in tone and extremely critical of Andrews' thinking. Robinson regarded the normal-cost pricing principle as ‘a wholly irrational ritualistic system of pricing' (A. Robinson 1950: 774), and Manufacturing Business itself as ‘powerfully destructive not only of the newer accretions of imperfect competition but also of the whole body of economic reasoning' (ibid.: 771). Andrews' firms, he maintained, were actually engaged in long-term profit maximisation, which was a necessary condition for their survival; he had simply misinterpreted their price-fixing behaviour (see ibid.: 780). Robinson did not explain how Andrews could be ‘fundamentally destructive of all the concepts of economics' (ibid.: 774) and, at the same time, guilty of nothing more than a clumsy restatement of orthodox ideas. The Economic Journal offered Andrews nothing more than a very brief right of reply, which he declined (see King 1988: 196-197).
In addition to these formal reviews, reference was sometimes made to Andrews by other writers on the theory of pricing in the early 1950s. None was as hostile as Austin Robinson had been, though Joan Robinson came close with her claim (in a footnote) that Manufacturing Business was ‘full of dark sayings' (J. Robinson 1953: 590, fn. 2). Both Peter Wiles (1950) and
E. H. Chamberlin (1952) took basically the same position as Austin Robinson had done, while Andrews was defended by one of his students, M.J. Farrell (1951, 1952) and by H.R. Edwards (1952); Farrell's first paper drew a brief reply from Austin Robinson (1951). But the strongest defence of normal-cost pricing came from Elizabeth Brunner, who had been Andrews' assistant and collaborator since 1942.
She had a degree in English literature, and Brunner's very clear style of writing benefited their joint publications, which included books on the US Steel Company and the previously mentioned biography of Lord Nuffield (see Andrews and Brunner 1951, 1959). Two years after the appearance of Manufacturing Business, Brunner published a lengthy article in which she carefully and systematically explained what the normal-cost theory of pricing had in common with orthodox models and where it broke with them (see Brunner 1952). The article appeared at a point in time when there were moves afoot to take away Andrews' Nuffield College Fellowship, and seems to have been largely responsible for preserving it even though it was published in the Italian journal Economia Internazionale, which was not widely read by academic economists in Britain. The book itself continued to sell reasonably well, with reprints in 1955, 1959 and 1963, but Andrews declined to rewrite it, or even to add a substantial new introduction.4