THE PROSPECTS FOR THE COMPETITIVE ORDER
Two Marshalls - one the abstract theorist, the other the practical observer of everyday economic life - were blended in all of his writing. This duality was most conspicuous in his treatment of market structures and the competitive process.
As a formal theorist Marshall saw the potential danger to the competitive order latent in the growth of large productive units with considerable market power. But as an observer of events he argued that a number of factors tended to moderate the social and economic consequences of such concentrations. Characteristically, Marshall maintained that when analytical tidiness and descriptive realism appeared to be at odds with one another ordinary observation should claim precedence. Theory might be indispensable but it also had inherent limitations. No theoretical construction could embrace 'all the conditions of real life' for then 'the problem is too heavy to be handled'; but he feared that if only a few aspects were selected for study, then 'long-drawn-out and subtle reasonings with regard to them become scientific toys rather than engines for practical work'.16
At the descriptive level Marshall distinguished between two types of market structure. One he described as the 'special' market, a sphere in which individual firms could operate largely in isolation from immediate competitors. These circumstances might arise, for example, through geographical isolation or as a by-product of the existence of a special clientele served by a particular seller. But the ‘special' market was also surrounded by a larger and more embracing ‘general' market. Marshall invoked these distinctions in an attempt to reconcile the world of business behaviour with a model in which effective competition was an analytical requirement.
Marshall's strategy for salvaging his competitive plan from the threats implied by the technology of increasing returns also rested on presuppositions about the nature of business enterprises - and, most importantly, his view that firms could be likened to biological organisms.
Both had a life cycle which included phases of expansion (and perhaps even of supremacy), and phases of decline, decay and - ultimately - death. Ownership and control of business enterprises might be handed down over the generations, but in the process the vigour of those who led it during dynamic periods was unlikely to be perpetuated. Marshall depicted the situation as follows:Nature still presses on the private business by limiting the length of the life of its original founders, and by limiting even more narrowly that part of their lives in which their faculties retain full vigour. And so, after a while, the guidance of the business falls into the hands of people with less energy and less creative genius, if not with less active interest in its prosperity. If it is turned into a joint-stock company, it may retain the advantages of division of labour, of specialized skill and machinery: it may even increase them by a further increase of its capital; and under favourable conditions it may secure a permanent and prominent place in the work of production. But it is likely to have lost so much of its elasticity and progressive force, that the advantages are no longer exclusively on its side in its competition with younger and smaller rivals. 17
These 'natural' factors were not the only ones checking the growth of firms and limiting the exercise of market power. Other constraints were inherent in the make-up of the ‘special' markets within which firms could enjoy unique privileges. Marshall insisted that these advantages could not long be retained by an expanding firm. In this connexion he wrote:
.... many commodities with regard to which the tendency to increasing return acts strongly are, more or less, specialities: some of them aim at creating a new want, or at meeting an old want in a new way. Some of them are adapted to special tastes, and can never have a very large market; and some have merits that are not easily tested, and must win their way to general favour slowly.
In all such cases the sales of each business are limited, more or less according to circumstances, to the particular market which it has slowly and expensively acquired; and though the production itself might be economically increased very fast the sale could not.18Or, as Marshall again emphasized the point: ‘There are many trades in which an individual producer could secure much increased "internal" economies by a great increase of his output; and there are many in which he could market that output easily; yet there are few in which he could do both. And this is not an accidental, but almost a necessary result.'19 Expansion of a firm beyond the confines of its special market would also expose it to the competition of rivals. The market protection it had formerly enjoyed would be sacrificed as producers from the 'general' market checked its economic power.
These considerations led Marshall to the optimistic conclusion that economies of scale
were unlikely to present a severe challenge to the maintenance of a competitive order. The same factors which enabled firms to enjoy a limited degree of market power (the existence of 'special' markets) also restrained the trend toward bigness. From purely theoretical considerations, a quite different conclusion might be drawn. Characteristically, Marshall cautioned against judgements based solely on a priori reasoning and recommended 'treating each important concrete case very much as an independent problem, under the guidance of staple general reasonings. Attempts so to enlarge the direct applications of general propositions as to enable them to supply adequate solutions of all difficulties, would make them so cumbrous as to be of little service for their main work. The "principles" of economics must aim at affording guidance to an entry on problems of life, without making claim to be a substitute for independent study and thought.' 20
While Marshall was not prepared to buy analytical rigour at the price of contact with reality, his institutional portrait of business behaviour was not without limitations.
The picture he offered of the restraints to expansion of firms might have been reasonably accurate in late nineteenth and early twentieth century England. His notion of the life cycle of firms, however, is much less plausible when applied to the modern corporation. Its institutional structure, in which management and ownership are largely divorced, creates a survival power that may approach immortality. Nor is Marshall's argument well-suited to production for mass markets. The 'special' markets he had in mind were built on Edwardian 'custom' tastes. In an era of mass consumption, in which the tastes of the public for a wide range of consumer outputs are not highly differentiated by social status, Marshall's views of the exclusiveness and selectivity of elite special markets must be considerably qualified.Marshall's approach to the theory of the firm has left a dual legacy. Parts of his analysis have been elaborated into formal models of the equilibrium conditions generated by a regime of perfectly competitive firms. Other portions have provided a springboard for the more institutionally-oriented doctrines of workable competition in which it is held that the important results of a perfectly competitive system can be approximated even in a market structure which is not dominated by a large number of small firms.
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