The Biological Analogy and the Theory of the Firm: Marshall and Monopolistic Competition

Article excerpt

Although the application of analogies from biological evolutionary thought to economics is an old pastime, it is well known that economists were among the early sources of inspiration for the emerging theory of natural selection. Charles Darwin is said to have been strongly inspired by the work of Thomas Malthus on population as well as by the broadly evolutionary theorizing of the Scottish Enlightment [Schweber 1977; Jones 1980; Jones 1989]. Given this, one would perhaps have expected economists to enthusiastically adopt results from evolutionary biology and to endorse evolutionary modes of thought. However, in the mainstream tradition - on almost any level - one seeks in vain for anything that can properly be said to constitute an evolutionary model.

This does not mean that evolutionary thought is not given argumentative function within the mainstream tradition; but the function is a relatively subordinate one. To be more specific, the relevant function is primarily to provide a justification for disposing of the realism-of-assumptions-issue in an "instrumentalist" manner [Friedman 1953]. The proposition is that in the long run, all firms will profit-maximize, those that failed to do so having been selected out in the process. And since profit maximization adequately summarizes the conditions of survival, economists are justified in following the conventionalist criterion of parsimony by focusing attention on maximizing modes of behavior, rather than on the troublesome and complicated mechanisms of reality.

This evolutionary defense of profit maximization is, of course, in some sense theorizing. But as applied by the formal mainstream economists, it is not theorizing of the ordinary kind. To the extent that evolutionary thought enters formal mainstream economists' explanations, it is in the form of what Nelson and Winter [1982] call "appreciative theory" as distinct from "formal theory" (however, things do seem to be slowly changing in formal mainstream economics; see Schaffer 1989). In mainstream economics, evolutionary thought finds its function in either the unformalized storytelling that accompanies the economist's explanation to the outsider or in the service of a defense of instrumentalism in economics. In both roles, evolutionary thought is little more than a mere - and fundamentally ad hoc - appendix to formal theory.

In his classic article, Thorstein Veblen [1898] castigated contemporary marginalist economics for its supposedly Newtonian slant, calling for an evolutionary economics explicitly inspired by Darwin. What is interesting about the context of Veblen's article is that a work that could, in at least a limited sense, be said to have honored Veblen's call for an evolutionary economics had in fact appeared eight years earlier: Alfred Marshall's "Principles of Economics."(1)

Economic folklore has it, however, that Marshall constructed price-theory - at least of the "intermediate" species - and that Marshall is where neoclassicism begins. The common recognition is that we owe Marshall for the graphic instrumentation of basic price theory, with its temporal distinctions, its cost curves, etc. Furthermore, the concepts of perfect competition and monopoly were purified and given their classic representations by Marshall. In other words, the usual impression is that Marshall is responsible for the fundamentals of contemporary microeconomics and accordingly for its neglect of real time and institutions. The recognition that this interpretation of Marshall is grossly inaccurate and that another - evolutionary - interpretation is much more adequate is gaining wide currency today [Loasby 1989; Metcalfe 1989; Moss 1990].(2)

In this article, I examine the much less debated questions of why, how, and when Marshall's use of the biological analogy was suppressed and eventually eliminated from economics. I only very briefly look at the presence of evolutionary thought in Marshall's work(3) because much of this is well known, and what happened after Marshall had written his Principles is more essential for my purpose. …