History of Economic Analysis part 98 pot

simple reproduction. However, independently of him it began to be used in the period under discussion for the purpose of singling out, for preliminary analysis, a set of particularly simple problems: as such it was recognized, for example, by Marshall, 6 who spoke of the ‘famous fiction of the “Stationary state”’—though, as a methodological fiction the stationary state was not at all ‘famous’ in 1890—used it repeatedly, and was, so far as I know, the first to point out that we may increase its usefulness for analysis by defining it differently (more or less strictly) for different purposes. Also he gave the lead, followed by many and especially by Cassel, 7 for an extension of the idea to the case of balanced progress, that is, to the case of a society in which population and wealth grow at about the same rate and in which ‘methods of production and the conditions of trade change but little; and, above all, where the character of man himself is a constant quantity’—a conception which has acquired additional interest in our own day owing to its bearing upon the problem of full employment in the models not only of a stagnating but also of an expanding economy. 8 This extension of the concept of stationarity should have separated out neatly the phenomena of evolution in the narrow sense of the term, and so it did. But with all the leaders of the period this meant setting these phenomena aside rather than constructing a comprehensive theory of them. Neither Walras, who used the phrase point de vue statique, nor Marshall, who used the phrase statical method, failed to distinguish static theory from the theory of the stationary state. But most writers confused them, witness the growing popularity of the phrase ‘static state,’ 9 which is the hallmark of this confusion. Nevertheless, though more clearly visualized than rigorously defined, the system of economic statics did emerge during the period and in fact constitutes its great achievement. But the nature of economic dynamics was not even clearly visualized—some identified it with a historical theory of change or else with a theory that allows for trends; others with a theory of general interdependence as against partial analysis of sectional phenomena; still others with a theory of a modern as against the tradition-bound economy of the Middle Ages; and a few simply with the theory of small variations of 6 See Principles, pp. 439 et seq. The crowning achievement in this line of analysis is, of course, Professor Pigou’s The Economics of Stationary States (1935). The first methodologist to analyze this tool was, I think, J.N.Keynes, Scope and Method of Political Economy. 7 Cf. Theory of Social Economy, ch. 1, 6. Marshall’s pointer is on p. 441 of the Principles. 8 Because of this, it will be useful to point to three modern pieces of work that reflect the distance we have traveled since: E. Lundberg, Studies in the Theory of Economic Expansion (1937); R.F.Harrod, ‘An Essay in Dynamic Theory,’ Economic Journal, March 1939; E.Domar, ‘Capital Expansion, Rate of Growth, and Employment,’ Econometrica, April 1946. 9 With J.B.Clark, statics was simply the model of a stationary society; dynamics was the model of evolutionary change (see especially Essentials of Economic Theory, 1907). Cassel (op. cit.) used static and stationary interchangeably. History of economic analysis 932 economic quantities. 10 Many, among them Böhm-Bawerk, would not hear of statics and dynamics at all—for them there was just one type of theory, which no doubt admitted of varying degrees of abstraction but not of logically distinct ‘methods.’ And there were those in whose hands the whole discussion degenerated into a quarrel about words. All this goes to show the importance, even for purely practical purposes, of logically rigorous definitions: for had the nature of the statics of the day been subjected to rigorous analysis, the problems of dynamics would have emerged almost of themselves. But all was not mere confusion. We also find suggestions that point toward the dynamics of our time. They were not more than suggestions, sometimes not more than obiter dicta. I can only refer to the (relatively) clearest and most important of them, which are all due to Pantaleoni. 11 (2) Precisely because even the most advanced thinkers of that time had no explicit dynamic schema or method to help them, they failed to realize the severe limitations of their static schema or method. For these reveal themselves only in the light of dynamic considerations. In consequence, they incessantly stepped out of their statics without having a right to do so and without being aware of it. The situation was made worse by the prevalent confusion between static theory and the theory of a stationary—or quasi- stationary—state. [This version breaks off at this point, obviously unfinished, with three lines of shorthand notes to indicate how the argument was to be carried on.] (b) Determinateness, Equilibrium, and Stability. From the workshop of Walras the static theory of the economic universe emerged in the form of a large number of quantitative relations (equations) between economic elements or variables (prices and quantities of consumable and productive goods 10 This is, I think, what Walras meant by phase dynamique de trouble continuel de l’équilibre par des changements dans ces données (Éléments, p. 302). Certainly it is what Barone meant in his important paper ‘Sul trattamento di questioni dinamiche,’ Giornale degli Economisti, November 1894. 11 In this connection, two papers of his are of fundamental importance: ‘Caratteri delle posizioni iniziali e influenza che esercitano sulle terminali,’ Giornale degli Econo-misti, October 1901; and ‘Di alcuni fenomeni di dinamica economica,’ an address before the Italian Association for the Advancement of Science, September 1909. Both are republished in Erotemi di economia, vol. II, 1925. The main points are these: (1) Pantaleoni raised the question of the relation of an observed configuration of elements of an economic system to temporally (not only logically) anterior initial conditions; so soon as one raises this question one has raised the fundamental problem of dynamics. (2) Though Pantaleoni’s definition of dynamics is not quite satisfactory (Erotemi, p. 79), he had the decisive idea and in consequence realized that economic statics is nothing but a caso particolare of economic dynamics (ibid. p. 76). (3) He realized that there are two types (generi) of dynamical patterns: one that issues in a position of equilibrium and another that does not but presents fluctuations that may go on indefinitely (ibid. p. 77). H.L.Moore was much impressed by these ideas, the importance of which for general theory he was perhaps the first to realize. Nevertheless, his method was substantially one of comparative statics. Equilibrium analysis 933 or services) that were conceived as simultaneously determining one another. As soon as this great feat had been accomplished—as soon as this Magna Charta of exact economics had been written, which we shall presently study in some detail—a type of research began to impose itself that had been unknown in pre-Walrasian economics. Pure theory there had been from the first, or almost. But its technique had been a simple affair. The Walrasian system of simultaneous equations, however, brought in a host of new problems of a specifically logical or mathematical nature that are much more delicate and go much deeper than Walras or anyone else had ever realized. Mainly they turn upon determinateness, equilibrium, and stability. 12 They are much too difficult and especially too technical for us. But a few fundamental points about them must be noticed if we are to understand the nature of that period’s achievement and the way in which modern work links up with it. For this purpose, let us consider a distinction that was very characteristic of the analytic methods of that period, as it presents itself both in the critical and in the constructive part of Böhm-Bawerk’s work. He was out to ‘explain’ or ‘understand’ the phenomenon of interest This task seemed to him to involve two different things. First, it seemed obviously necessary to unearth the ‘cause’ or ‘source’ or ‘nature’ of interest. Second, after this had been done and the result had been critically safeguarded against other ‘theories,’ there arose the problem of what determines the rate of interest. Mathematical economists, Pareto especially, poured contempt upon this methodology. But it may be salvaged, to some extent, by reformulating it like this: since the economic system cannot be treated as a set of undefined things, we must in fact first define what its elements (including interest) are to mean before we can formulate the exact problem of their determination in terms of certain properties of the functions (relations) which this meaning involves. Then follows logically the proof that the problem can in fact be solved (proof of the existence of a solution) and, finally, the investigation into the ‘laws’ that the solution reveals (the properties of the solution). When we have done all this, we say that we have ‘explained’ or ‘understood’ whatever the element or elements we wished to ‘explain’ or ‘understand.’ More generally, and at the same time more simply, we say that we have determined a set of quantities (variables) if we can indicate relations to which 12 The non-mathematical reader may, however, acquire an idea of this type of problem from Professor Hicks’s Value and Capital; and the mathematical reader from the Mathematical Appendix to Value and Capital, and from the papers by Professor A. Wald, ‘Über einige Gleichungssysteme der mathematischen Ökonomie,’ Zeitschrift für Nationalökonomie, December 1936 (summing up the results of two earlier and more technical papers); Professor P.A.Samuelson, ‘The Stability of Equilibrium: Comparative Statics and Dynamics,’ Econometrica, April 1941, and ‘The Stability of Equilibrium: Linear and Nonlinear Systems,’ ibid. January 1942; and Professor J.von Neumann, ‘A Model of General Economic Equilibrium,’ Review of Economic Studies, 1945– 6 (trans. of an earlier German paper). These complement one another nicely. Also see R.Frisch, ‘On the Notion of Equilibrium and Disequilibrium,’ Review of Economic Studies, February 1936. History of economic analysis 934 they must conform and which will restrict the possible range of their values. If the relations determine just a single value or sequence of values, we speak of unique determination—a case that is, of course, particularly satisfactory. The relations may yield, however, more than one possible value or sequence of values—which is less satisfactory but still better than nothing. In particular, the relations may determine only a range. 13 In the light of what has been said in the preceding paragraph, we realize that ‘determining’ a set of quantities in the sense in which we use this phrase is indeed not all that is involved in the task of ‘explaining’ a phenomenon. But we also realize that it is an indispensable and important part of—or, more precisely, an indispensable step in—this task. And this answers the question, so often asked with a sneer, why theorists should bother so much about ‘mere determinateness.’ If the relations which are derived from our survey of the ‘meaning’ of a phenomenon are such as to determine a set of values of the variables that will display no tendency to vary under the sole influence of the facts included in those relations per se, we speak of equilibrium: we say that those relations define equilibrium conditions or an equilibrium position of the system and that there exists a set of values of the variables that satisfies equilibrium conditions. This need not be the case, of course—there need not be a set of values of variables that will satisfy a given set of relations, and there may exist several such sets or an infinity of them. Multiple equilibria are not necessarily useless but, from the standpoint of any exact science, the existence of a ‘uniquely determined equilibrium (set of values)’ is, of course, of the utmost importance, even if proof has to be purchased at the price of very restrictive assumptions; without any possibility of proving the existence of uniquely determined equilibrium—or at all events, of a small number of possible equilibria—at however high a level of abstraction, a field of phenomena is really a chaos that is not under analytic control. Again, we derive a simple and convincing answer to the layman’s question concerning the good we expect from all our worry about ‘determined equilibrium’—and to the more specific question why this concept played such a role in the thought of Walras and Marshall. 14 13 Illustrative examples: suppose then we have to do with people who, if they experience an access of income of one dollar, invariably borrow another and promptly spend both (in Keynesian terms this means a marginal propensity to consume equal to 2); if this goes on, the monetary values of the system will be inflated to infinity, but the process is perfectly determined. The reader should bear this in mind because of the frequent confusion we find of determinacy and equilibrium. Again, the reader can easily satisfy himself that a monopolist may make the same maximum amount of profits at two or more different prices of his product. Finally, price is in general indeterminate in cases of bilateral monopoly. But it is indeterminate within limits which are perfectly determinate themselves. 14 Its role in the thought of the Austrians, in Wieser’s particularly, was actually just as fundamental. If it does not show explicitly, this was owing exclusively to their technical disabilities. Historians who shared these disabilities spoke of the ‘equilibrists’ (sic) as a sort of school or sect. In fact, however, the writers thus labeled only brought out more clearly what all the theorists of the period—actually also of the preceding period—groped for. Equilibrium analysis 935 The relations from which we start, according to whether they link elements that carry the same time subscript or different ones, may define a static or a dynamic equilibrium. The leaders of that period used only the former concept—at least in their mathematical set-ups—and do not seem to have had any precise ideas about the problems that center in the latter. We shall, therefore, confine ourselves to static equilibrium except so far as description and criticism of their analysis forces dynamical aspects upon us. It should be emphasized, as it has been in the first part of this section with respect to the terms ‘static’ and ‘dynamic’ themselves, that the concept of equilibrium, whether static or dynamic, has nothing to do with any borrowing, legitimate or not, from those physical sciences in which analogous concepts occur. They are logical categories and as such as general as is logic itself. They occur both in the physical and the social sciences because it is the same human mind that works both. Whether static or dynamic, equilibrium may be stable, neutral, or unstable. Before we go into this matter it will be well to comment briefly—and very superficially—on the meaning of a system of simultaneous equations and on the conception of simultaneous determination of a set of variables. We start again from the first two of the four steps into which we have split exact analytic procedure and which are, for the first time in the history of economics, clearly discernible in Walras’ work, namely, the enquiry into the nature of the phenomena we are to study and the discovery of the relations which, guided by our knowledge of their nature, we conceive to subsist between them. When we have succeeded in expressing these relations by equations, we are ready to take the third step: we put them together into a system (a theoretical ‘model’) and ask whether there is a unique set of values of the elements that appear in this system as variables (or ‘unknowns’) that will satisfy all those equations which must all hold simultaneously— hence the phrase simultaneous equations. So far, it is hoped, everything is plain sailing. But the answer to this question—in most cases negative of course—is extremely difficult to provide. Plain common sense can indeed indicate certain conditions that must be fulfilled if such a unique set of values—a ‘solution’—is to exist. Thus, the equations must be genuine equations and not mere identities (such as x is x); 15 they must be independent in the sense that none must be implied in one or more or all of the others; 16 they must be sufficient in number; and, of course, 15 But identities that express the fact that x and y, which occur in the rest of the system, are really identical (x≡y) permit sup pression of either x or y and thus may contribute toward determinateness just as much as does an equation. Confusion between propositions that are identities and propositions that may determine equilibrium values is a frequent source of error and controversy. See J.Marschak, ‘Identity and Sta bility in Economics: A Survey,’ Econometrica, January 1942. 16 Independence must, however, be distinguished from autonomy. In the argument above nothing is required but that no equation should follow from the others mathematically. It does not matter here whether or not, for economic reasons, one or more equations could not hold unless others do, though this matters greatly in other respects. The concept of autonomy—which is due to Frisch—is far beyond our range. History of economic analysis 936 they must not contradict one another. 17 But these conditions are adequate and easily verifiable only in a particularly simple class of cases to which the Walrasian system does not belong. Very advanced argument involving some complicated tools of modern mathematics is needed to cope with the problem of which we shall get but a glimpse in section 7. Walras and Marshall were far from solving it—for one thing because some of the mathematical tools required did not exist in their creative time—and cannot even have had a clear conception of its nature and difficulty. But, as we shall also see, Walras did more than ‘counting equations.’ 18 [This version too is unfinished. A single paragraph from the early version (see Appendix) follows here, because it very briefly defines stable, neutral, and unstable equilibrium. These concepts will be touched upon again in later sections of this chapter.] Thus we may consider stationary and evolutionary processes and we may analyze both of them by either a static or dynamic method. We shall now introduce the concept of equilibrium. The simplest and for most purposes the most important case is that of static equilibrium. Suppose we have settled the question, what elements in an economic universe we wish to determine and what are the data and the relations by which to determine them. Then the question arises whether these relations that are supposed to hold simultaneously (simultaneous equations) are just sufficient to determine sets of values for those elements (variables) that will satisfy the relations. There may be no such set, one such set, or more than one such set, and it does not follow that our system is valueless if there exist several. But the most favorable case and the one every theorist prays for is of course uniqueness of the set. Such a set or such sets we call equilibrium sets and we say that the system is in equilibrium if its variables take on the values thus determined. It goes without saying that these values are very much more useful for us if they are stable than if they are neutral or unstable. A stable equilibrium value is an equilibrium value that, if changed by a small amount, calls into action forces that will tend to reproduce the old value; neutral equilibrium is an equilibrium value that does not know any such forces; an unstable equilibrium is an equilibrium value, change in which calls forth forces which tend to move the system farther and farther away from equilibrium values. A ball that rests at the bottom of a bowl illustrates the first case; a ball that rests on a billiard table, the second; and a ball that is perched on the top of an inverted bowl, the third case. Naturally, the conditions which insure stability and the absence of which produces instability are of particular interest in order to understand the logic of the economic system. In this sense it has been said that it is the stability conditions that yield out theorems. 17 The far-reaching importance of the latter point (which also shows that such purely logical questions may bear directly upon hotly debated practical issues) should be noticed in passing. If a system or model that correctly expresses fundamental features of the capitalist society contains contradictory equations, this would be proof of inherent hitches in the capitalist system—proof of real, instead of imaginary, ‘contradictions of capitalism.’ 18 See Marshall, Principles, Mathematical Appendix, Note XXI in fine. Equilibrium analysis 937 4. THE COMPETITIVE HYPOTHESIS AND THE THEORY OF MONOPOLY * It has been stated above that the economists of the period under survey substantially retained the habit of their ‘classic’ predecessors, which was to consider ‘competition’ as the normal case from which to build up their general analysis; 1 and that like those predecessors they overrated the range of application of such an analysis. In fact, instances abound of writers who considered competition as the normal case either in the sense that it covers most of actual business practice (Walras, the Austrians); or in the sense that deviations from the competitive schema, though frequent, may be taken care of by occasional recognition (Marshall, Wicksell); 2 or in the sense that competition ‘ought’ to be the normal case and ‘should’ and could be enforced by appropriate policies (Clark); or, finally, in the sense that the actual system, however noncompetitive in parts, nevertheless works out, on the whole, as if it were competitive (Cassel). Moreover, while not all of them were uncritical eulogists of competition (see below sec. 5), nearly all of them were apt to yield to the specific bias of the economic theorist that has nothing to do with political preference, the bias for easily manageable patterns. And it stands to reason that the theorist’s generalized description of economic behavior is greatly simplified by the assumption that the prices of all products and ‘factors’ cannot be perceptibly influenced by the individual household and the individual firm, and hence may be treated as given (as parameters) within the theory of their behavior. 3 These prices will then be determined, in general, by the mass effect of the actions of all households and all firms in ‘markets,’ the mechanisms of which are relatively easy to describe so long as the households and firms have no choice but to adapt the quantities of commodities and services they wish to buy or to sell to the prices that rule. We may call this the Principle of Excluded Strategy and accordingly say that the bulk of the period’s pure theory was a pure theory of static equilibrium that excluded * [This section was found in four parts, three in typescript (each with pages numbered independently) and one in manuscript with the pages unnumbered. The parts seemed to follow consecutively except the last, which was very short and apparently written quite early. The part in manuscript was the treatment of oligopoly, obviously not completed. Still another shorter treatment entitled ‘Monopoly, Oligopoly, Bilateral Monopoly,’ probably a preliminary study (not typed), has been deposited with the rest of the manuscript in the Houghton Library at Harvard.] 1 But compare also what has been said on Mill’s qualifications and warnings, which have not always been given due weight. Nor should we forget that Cournot built his analysis from the monopoly case. 2 But Pareto denied emphatically that competition actually ‘rules’ in our society; see Cours, vol. II, p. 130. 3 It is interesting to note that in 1939 Professor Hicks was just as convinced that successful theoretical analysis is substantially confined to the competitive case as J.S. Mill had been in 1848: abandonment of the competitive hypothesis threatens ‘wreckage …of the greater part of economic theory’ (Value and Capital, 1939, p. 84). History of economic analysis 938 strategy. The all-round rise of the level of scientific rigor eventually produced if not the term yet the substance of what we now call pure or perfect competition. 4 (a) The Competitive Hypothesis. This notion had been made explicit by Cournot at the end of Chapter 7 and the beginning of Chapter 8 of his Researches: after having started with the case of straight monopoly (discussed below) he first introduced another seller and then additional ones until, by letting their number increase indefinitely, he finally arrived at the case of ‘illimited’ (unlimited) competition, where the quantity produced by any one producer is too small to affect price perceptibly or to admit of price strategy. 5 Jevons added his Law of Indifference, which defines the concept of the perfect market in which there cannot exist, at any moment, more than one price for each homogeneous commodity. These two features—excluded price strategy and law of indifference—express, so far as I can see, what Walras meant by libre concurrence. Pareto’s definition (Cours I, p. 20) comes to the same thing. This does not however dispose of all the logical difficulties that lurk behind the concept of a competitive market, 6 and some of these must now be noticed briefly. The mechanism of pure competition is supposed to function through everybody’s wish to maximize his net advantage (satisfaction or monetary gain) by means of attempts at optimal adaptation of the quantities to be bought and sold. But exclude ‘strategy’ as much as you please, there still remains the fact that this adaptation will produce results that differ according to the range of knowledge, promptness of decision, and ‘rationality’ of actors, and also according to the expectations they entertain about the future course of prices, not to mention the further fact that their action is subject to additional restrictions that proceed from the situations they have created for themselves by their past decisions. As we shall see below, Walras was very much alive to these difficulties and in places (e.g., in the last paragraph of the 35th leçon of the Éléments) he clearly saw the necessity looming in the future of constructing dynamic schemata to take account of them. For himself, however, he saw 4 The term pure competition, which will be used in this book, was introduced by Professor E.H.Chamberlin in his Theory of Monopolistic Competition (the preface of the first edition is dated 1932, but the substance of the argument, in all essentials, is contained in an unpublished Ph.D. thesis presented in 1927). See below, Part V, ch. 2. 5 The advantage of this approach is that it emphasizes the fact that pure competition results from certain conditions: this is much better than to posit it as an institutional datum. In addition Cournot emphasized (op. cit. p. 90) that the quantity produced by each producer must be ‘inappreciable not only with reference to the total production, D=F(p), but also with reference to the derivative F′(p) so that the partial production [of every single producer] could be subtracted from D without any appreciable variation resulting in the price of the commodity.’ 6 The first author to display logical discomfort at the handling of the concept by others was H.L.Moore (‘Paradoxes of Competition,’ Quarterly Journal of Economics, February 1906, and Synthetic Economics, pp. 11–17) but his own treatment of it is not more satisfactory. Equilibrium analysis 939 not less clearly that, absorbed in the pioneer task of working out the essentials of the mathematical theory of the economic process, he had no choice but to simplify heroically (Éléments, p. 479). Thus, he postulated (at first) that the quantities of productive services that enter into the unit of every product (coefficients of production) are constant technological data; that there is no such thing as fixed cost; that all the firms in an industry produce the same kind of product, by the same method, in equal quantities; that the productive process takes no time; that problems of location may be neglected. Under such circumstances it was but natural that he used or abused the prerogatives of the pioneer still further by narrowing down all the possible types of reaction to a single standard type. 7 For us the question arises: how much of this did he mean to include in his ‘free competition’? It has been held (by Professor Knight among others) that Walras, and the theorists of that epoch generally, intended to make ‘omniscience’ and ideally rational and prompt reaction attributes of pure competition; deviations from this pattern would then find room in the spacious folds of an entity called ‘friction,’ which would thus emerge as a helpmate of pure competition with the assignment to pick up whatever the latter proved incapable of carrying. It is submitted, however, that there is no point in overloading pure competition like this, and that it is quite possible to separate, in interpreting the writers of that epoch, their concept of pure competition as defined in the preceding paragraph from any further assumptions that they may have made, in general or for particular purposes, about knowledge, promptness, and rationality of action and all the other things mentioned above, even in those instances in which they did not carry out this separation themselves. 8 Marshall, however, did not take this line. Just as Walras, more than any other of the leaders, was bent on scraping off everything he did not consider essential to his theoretical schema, so Marshall, following the English tradition, was bent on salvaging every bit of real life he could possibly leave in. As regards the case in hand, we find that he did not attempt to beat out the logic of competition to its thinnest leaf. On the first pages of his Principles he emphasized economic freedom rather than competition and refrained from defining the latter rigorously. Moreover, throughout the Principles, he paid much attention to the problems of individual firms—the manner in which they conquer their Special Markets within which to maneuver, the manner in 7 He did, however, here and there, make some use of a none too precisely defined Law of Great Numbers. In this he followed a suggestion of Cournot’s. 8 An example that will illustrate the importance of this point is afforded by the statement that, according to pre-Keynesian theory, there could not be involuntary unemployment in conditions of perfect competition, except unemployment of the ‘frictional’ type (Keynes, General Theory, p. 16). The implied criticism is entirely disposed of so soon as it is remembered that ‘full employment’ is a property not of pure competition per se but of perfect equilibrium in pure competition. But if pure competition implied ideally prompt adaptation, then both full employment and perfect equilibrium in general would practically always have to be present—‘friction’ permitting—and it could in fact be argued that such a theory does not fit reality. History of economic analysis 940 which they lose them again, and certain consequences that follow therefrom. It is submitted that there is more in this than mere dislike of naked abstractions. There is awareness of that set of problems that later on developed into the theory of monopolistic (Chamberlin) or imperfect (Robinson) competition, whose patron saint Marshall may indeed be said to have been. But there is also a subtle difference in attitude toward these problems between him and the modern exponents of this theory that is not easy to convey. If we are of the opinion, on the one hand, that from all the infinite variety of market patterns pure or perfect monopoly and pure or perfect competition stand out by virtue of certain properties—of which the most important is that both cases lend themselves to treatment by means of relatively simple and (in general) uniquely determined rational schemata—and, on the other hand, that the large majority of cases that occur in practice are nothing but mixtures and hybrids of these two, then it seems natural to accept pure monopoly and pure competition as the two genuine or fundamental patterns and to proceed by investigating how their hybrids work out. This renders the attitude of the theorists of monopolistic or imperfect competition. But instead of considering the hybrid cases as deviations from, or adulterations of, the fundamental ones we may also look upon the hybrids as fundamental and on pure monopoly and pure competition as limiting cases in which the content of actual business behavior has been refined away. This is much more like the line that Marshall took. Should the reader feel that I am laboring to convey a distinction without a difference, he is requested to ask himself whether the definition of pure competition that has been given above really fits what we mean when talking about competitive business. Is it not a fact that what we mean is the scheme of motives, decisions, and actions imposed upon a business firm by the necessity of doing things better or at any rate more successfully than the fellow next door; that it is this situation to which we trace the technological and commercial efficiency of ‘competitive’ business; and that this pattern of behavior would be entirely absent both in the cases of pure monopoly and pure competition, which therefore seem to have more claim to being called degenerate than to being called fundamental cases? 9 This, if I am not mistaken, is beginning to be widely felt today—hence the search for a ‘workable’ concept of competition (J.M.Clark) that might well start with an analysis of Marshall’s argument. The latter was, however, singularly unfortunate in this part of his teaching. Neither theorists nor institutionalist enemies of theory saw the hints that they could have developed. (b) The Theory of Monopoly. We have already surveyed the work and views of that period’s economists concerning the practical problems of monopoly, oligopoly, and monopolistic practice that were thrust upon their attention owing to the developments in the sphere of largest-scale business. Now we must turn to the theoretical tools they provided for use in this field. Several 9 The moral of this story is, of course, that dissecting a phenomenon into logical components and working out the pure logic of each may cause us to lose the phenomenon in the attempt to understand it: the essence of a chemical compound may be in the compound and not in any or all of its elements. Equilibrium analysis 941 . threatens ‘wreckage of the greater part of economic theory’ (Value and Capital, 1939, p. 84). History of economic analysis 938 strategy. The all-round rise of the level of scientific rigor. Notion of Equilibrium and Disequilibrium,’ Review of Economic Studies, February 1936. History of economic analysis 934 they must conform and which will restrict the possible range of their. model of evolutionary change (see especially Essentials of Economic Theory, 1907). Cassel (op. cit.) used static and stationary interchangeably. History of economic analysis 932 economic