Whatever happened to Marshall's industrial economics?

Abstract

Industry and Trade and the works on industrial economics by the Cambridge school – Chapman, Macgregor, Robertson, Lavington, A. Robinson and Florence – are usually neglected as if they were devoid of theoretical relevance. By contrast, the author argues that Marshall's evolutionary model, centred on the continuous interplay between innovation and standardization, inspired original research on localization, business size, coordination costs and industrial combinations. The paper also suggests that Marshallian ideas on the growth of firms and the structure of industrial organization are coming back in contemporary evolutionary theories of the firm.

Keywords:

• The Cambridge School
• industrial organization
• coordination costs
• business size
• innovation
• standardization

Notes

*Earlier versions of the paper were presented at the 2002 UK History of Economic Thought Annual Conference (Stirling, September 2002), the workshop on ‘Cambridge economists in theory and policy’ (Hitotsubashi University, Tokyo, December 2002) and the VII Conference of the Associazione Italiana di Storia del Pensiero Economico (Brescia, February 2003). I wish to thank the discussants (Prof. T. Nishizawa and Prof. M. Kondo in Tokyo; dr. F. L. Viano in Brescia) and all those who took part in the discussion for valuable comments. Thanks are also due to two anonymous referees for their helpful suggestions. The usual disclaimer applies.

Earl (1993) extends the search to one of the leading post-Marshallians.

The connection of the concept of equilibrium of book V with Marshall's evolutionary views is well explained by Dardi (2003).

However, the contrast between Marshall's analysis and general equilibrium theory has often been stressed, from radically different perspectives. For instance, see Gerbier (1976) and De Vroey (1999).

Monetary economics, another subject outside the scope of Principles, was also taught by Marshall. The relevance of the themes dealt with in Industry and Trade can be gathered from Layton's lecture notes of 1905 – 6 and is confirmed by his own personal recollections: ‘he [Marshall] gave us the benefit of his current thinking on the book he was writing on Industry and Commerce’ (Layton Autobiography: 32). Becattini (1990: 299 – fll.) gives a brilliant and insightful account of the way in which Marshall's lectures crowned the Economics Tripos.

Both works came out of essays submitted to triennial Cambridge competitions. In 1900, Chapman's essay was awarded the Adam Smith prize, instituted by Marshall himself in the 1890s, while Macgregor's received ‘special commendation’ for the 1904 Cobden prize, notwithstanding Marshall's opinion – a minority opinion in a three members commission – that it deserved the prize (Whitaker 1996, III: 98 and 30 n. 11). See Cambridge University Reporter, 13.12.1904.

‘Marshall has said somewhere that the Mecca of the economist is biology. I accepted that and thought I understood it, but it was not until I had immersed myself in the Lancashire cotton industry that I really began to see the economic world as a system of systems … This … was a biological idea, and not merely a mechanical one’ (Chapman Autobiography: chapter 3).

Lee (1989) rightly insists that Macgregor's unit of analysis is the firm, not the individual. The difference is exemplified by the typological contrast between industrial and labour combinations (Macgregor 1906: 186).

Regulations of business combination and integration are dealt with in the last chapter of Macgregor (1906).

By lateral integration, Macgregor means the control of substitutes and/or complementary commodities.

‘The forms of bargaining are twofold. There is first the “higgling of the market,” by which the buyer or the seller endeavours to obtain for himself on that particular transaction the best terms possible, but in which each has to recognize the other's right of re-contract and alternative, neither having imposed on the other conditions which go beyond their own particular transaction; and there is bargaining within the terms of a wider contract, the particular transaction obtaining its right to observance and its precise terms from the terms of a general agreement, by which, for example, one party may restrict its right of re-contract, either in return for some concession, or under the stress of some compulsion’ (Macgregor 1906: 66 – 7).

Chapman also published Outlines of Political Economy (1911), a primer of political economy. For a brief account of his life and career, see the entry in The New Palgrave Dictionary of Economics. His unpublished Autobiography is a precious source of information on Cambridge and the Marshallian approach to economic science and teaching.

Industrial Combination was reissued in 1935, with a new introduction by the author, as the first of the LSE Series of Reprints of Scarce Works in Political Economy. The book is now available online, as is Macgregor's introduction to the English translation of Liefman's Kartelle, Konzerne und Trusts (1932). In 1911 Macgregor published The Evolution of Industry, which provides a survey of the condition of the British working classes. Though service in the army during the war and the death of his daughter enfeebled his energy (Lee 1989), he published some articles in The Economic Journal, of which he was co-editor, with Keynes, from 1925 to 1934, and contributed to the celebrations for the centenary of Marshall's birth with the article ‘Marshall and his book’ (Economica 1942). He also published a collection of essays on industry (Enterprise, Purpose and Profit, 1934) and Economic Thought and Policy (1949). It is to be regretted that he was given no entry in The New Palgrave Dictionary of Economics.

Lee's objective is the birth of the idea of the managed firm and he therefore insists on Macgregor's three-stage theory of the firm – individual enterprise, Marshall's representative firm, modern business combinations – and only peripherally refers to works by other Cambridge-trained economists, like Austin Robinson and Florence, sharply contrasting their approach – supposedly marginalist and neoclassical – with Macgregor's (Lee 1989: 39). Though in the main I agree with Lee's reconstruction (Raffaelli 2003b), in this paper I try to show that the Marshallians shared many general views, anyway more than Lee is prepared to accept.

Marshall's reference in the same letter to Chapman's missed application for the Cambridge Professorship – though accompanied by an implicit confirmation that in any case he would have supported Pigou – could strike a hidden note of regret. Marshall reports the episode after suggesting that Layton could replace Chapman as Professor of Political Economy at Manchester.

On Marshall's dissatisfaction with Pigou's style of analysis, see Bharadwaj (1972).

‘My chief interest was always in applied economics rather than in theory’ (Layton Autobiography: 45). This finds confirmation in the notes of his own lectures (Layton Papers: 14.3, 16.5, 20.2). The entries in The New Palgrave and DNB give an outline of Layton's life. His main contribution to economic thought is An Introduction to the Study of Prices (1912), which provides and elaborates data on price fluctuations from 1820. Hubback (1985) and Layton's Autobiography are mainly devoted to his successful career as politician, editor of The Economist and press magnate, but contain relevant information on his Cambridge years as well. His unpublished papers, in particular his 1905 – 6 lecture notes and exercises annotated by Marshall, are very helpful to form an idea of Marshall's style of teaching.

A more elementary course of economics of industry was usually given by Leonard Alston till 1921 and then, from 1924 till 1929, by Maurice Dobb.

After Lavington's death (1927), the subject was taught by Minors and John W. F. Rowe. Information on the courses of the Cambridge Tripos comes from the Cambridge University Reporter.

In the introduction to the LSE reprint of his book, Macgregor noticed the similarity between his 1906 approach and that supporting rationalization.

The episode, and its connection with The End of Laissez Faire, is examined by Marchionatti (1995).

The prolonged 1920s crisis of the Lancashire cotton industry also dealt a blow to earlier hopes in the future of industrial districts, whose original points of strength already seemed to be vanishing with the development of transportation facilities and the spread of information. Marshall's oscillations on issues bearing on business size (Pigou 1925: 279; Marshall 1920: 284, 316, 343) ended up in Industry and Trade with a clear-cut judgment on the increasing irrelevance of localized advantages for industrial development: ‘some of the old external economies have declined in importance; and many of those which have risen in their place are national, or even cosmopolitan, rather than local’ (Marshall 1919: 167), an opinion echoed by Chapman – ‘recent progress has tended to reduce the proportion of external economies which are narrowly local’ (Chapman 1929 [1911]: 104) - and later A. Robinson (1935 [1931]: 142). This progressive underrating of localized external economies has often been regretted by Becattini (for instance, see Becattini 2003: 22 – 4).

At the Hitotsubashi workshop (see above, note *), Prof. G. Peden suggested that the outcome could be explained also by the fact that business and industrial economics was of little concern to Cambridge students who were training themselves for the Civil Service. It is not by chance that scholars interested in the subject moved to Manchester, Leeds and, in the case of Florence, Birmingham, that is, three of the most important industrial cities of England. We might argue that Marshall's effort to root industrial economics in the unfriendly environment of Cambridge was doomed to failure.

The list should be extended to include a book which was never translated into English: Becattini (1962).

The scheme relates not only to supply, but also to demand: Florence's (1933) discussion of consumers' behaviour and its impact on industrial organization follows a similar pattern.

Robinson (1935 [1931]: 13) wrote that ‘industries as such have no identity’ and Florence (1933: 11) that ‘the definition of any one industry is very blurred’ and that in the long period firms continually fall ‘into a new kaleidoscope of industries’ (Florence 1932: 69).

The rather disparaging entry on Florence in New Palgrave presents his position as ‘idiosyncratic’ and his work as amateurish.

Joan Robinson herself later recognized that she had taken the wrong turn in the 1930s (Robinson 1951: vi – vii).

Perhaps Andrews's sympathies for big businesses explain some of the animosity towards his work shown in the reaction of Robinson and Kahn (Lee et al. 1986: 34 n.1). O'Brien (1984) recognizes that Andrews and the Oxford group (unlike Joan Robinson and Chamberlin) followed the approach of Industry and Trade and, unsatisfied with static equilibrium analysis, focused on the relationship between individual firms and the industry.

In his correspondence with Robertson, as well as elsewhere, Andrews shows profound admiration for Marshall: ‘I wish that I had been trained to use the representative firm, by Marshall – I am sure that it was an important tool in his thinking, and that great book Industry and Trade – completely and undeservedly neglected here [Oxford], how it is in Cambridge? – shows how good his thinking was’ (Lee and Earl 1993: 119). On the attitude of Oxford towards Marshall, I think it apt to report an episode which I was told by Becattini. When he asked Steindl how was it possible to discuss business size without introducing the Marshallian concepts of external and internal economies, the author of Small and Big Business replied that in 1945 Oxford Marshall's work was under a taboo. On the Oxford economists' low opinion for Andrews, cf. Lee (1993).

A convincing sketch of this post-Marshallian trend is to be found in Loasby (forthcoming). The subject is also dealt with in Raffaelli (2003b).

Besides the works already mentioned, see Foss (1997), Dow and Earl (1999), Foss and Knudsen (1996), Foss and Loasby (1998), Langlois and Robertson (1995). Cf. also Chandler (1992) for applications to economic history. Nelson and Winter (2002) consider the capability approach as one of the most successful outcomes of the paradigm put forward by Nelson and Winter (1982), based on routines selection.