The Abandonment of Marshall’s Programme and its Resurrection

After Marshall’s death, his research programme was abandoned in favour of more exact theorizing (Hart 2013). Pigou, unanimously considered the guardian of the Marshallian tradition, paid little attention to the limits of the “organon”.

His [Marshall’s] criticism of Pigou is directed against Pigou’s application of the statical method to the case of increasing returns without the qualifications that he himself had laid down His criticism raises questions which are not confined to Pigou’s application of the

statical method to the problem of welfare, but relate more generally to the validity of the statical approach to the theory of equilibrium itself. (Bharadwaj 1972: 44, 46)

Another episode, which shows Pigou’s disposition, is the substitution of the representa­tive firm with the equilibrium firm, defined in such a way that its marginal cost is equal to the supply price of the industry. This makes it easy to think of as if “all the firms contained in it [the industry] were individually in equilibrium” (Pigou 1928: 239). In a perfectly com­petitive market, the equilibrium firm has no internal economies and increasing returns are only due to the economies originating from the expansion of the output of the whole industry. When Robbins (1928) attacked the representative firm, it had already disap­peared from view. Loasby’s summary of the episode is worth quoting at length:

the representative firm is the device by which Marshall seeks to preserve the continuity between a process theory of the firm and an equilibrium analysis of price. Pigou’s decision to replace it by an equilibrium firm...

of Marshall’s ideas triumphed over their substance. (Loasby 1990: 124; see also Hart 2003; O’Brien 2006)

The substitution of the equilibrium firm for the representative firm can be seen as a typological fallacy. The two concepts answer different theoretical problems: whereas the former aims to explain how equilibrium holds notwithstanding the evolution of the industry, the latter focuses on the evolution of the industry, in which equilibrium consti­tutes but a provisional step.

Soon afterwards, the 1930 Economic Journal Symposium led the way to the replace­ment of Marshall’s equilibrium of the industry with the equilibrium of the firm which characterized the theories of imperfect and monopolistic competition. Sraffa (1926) had shown that Marshall’s partial equilibrium analysis was incompatible with static general equilibrium and increasing returns “incompatible with competitive conditions”. Robertson tried to rescue both internal economies and the representative firm from Robbins’s and Sraffa’s devastating critiques, as well as from Pigou’s concessions, but, without directly challenging the theory of the market for the competitive manufactur­ing business, he was “downed” by Sraffa (Andrews 1951: 157). As a result, “a whole department of economic analysis has disappeared into the gulf that he [Sraffa] opened up” (ibid.: 139).

Sraffa’s “destructive criticism” was followed by Shove’s “constructive sugges­tions”, which, though at the time quite uninfluential, set the pace for later attempts to rescue Marshall’s theory from oblivion. Market imperfections and time constraints take centre stage in Shove’s subdivision of internal economies into economies of individual expansion and concentration, with the former alone compatible with competitive equilibrium, as well as in his substitution of the representative firm with a stochastic theory of the distribution of firms, later revived by Newman and Wolfe (1961).

The resurrection of Marshall’s research programme came from two breakthroughs in industrial and economic analysis: the competence theory of the firm and the advent of evolutionary economics. As for the former, after Andrews (1951) had revived Marshall’s industrial analysis, dropping the assumptions for the individual firm of short-term decreasing returns and equality between marginal cost and price, Penrose’s (1959) theory focused on the inner structure of the firm, conceived as an evolving bundle of resources and competencies. This approach, developed by Richardson, is now a well-established trend of research — rightly labelled post-Marshallian - that complements Coase’s trans­action costs theory of the firm (Loasby 1999, Langlois 2011). The focus lies on the effort by the firm to build up a growing asset of capabilities, similar to what was achieved by Marshall’s ideal machine. This determines the competitive advantage of the firm that often depends on specific, non-transferable forms of cooperation between factors of production. As for evolutionary economics, Nelson and Winter (1982) can be taken as the turning point. Their hero, however, was Schumpeter, with Marshall in a subordinate position, as he had been in the heyday of general equilibrium. Since the evolutionary turn gained momentum, Marshall’s role has been reconsidered, and his evolutionary model given more credit as a source of inspiration. The alternation of innovation and routine, order and creativity, variation and standardization is the base element of modern evolu­tionary theories, as it was of Marshall’s. New mathematical tools help tackle some of the problems Marshall left unsolved (Foster 1993; Metcalfe 2007). The road to the Mecca has definitely reopened.

TιziANΘ Raffaelli

See also:

British marginalism (II); Cambridge School of economics (II); Francis Ysidro Edgeworth (I); Evolutionary economics (III); German and Austrian schools (II); Lausanne School (II); John Stuart Mill (I); Arthur Cecil Pigou (I); Marie-Esprit-Leon Walras (I).