The History of the Theory of the Firm from Marshall to Robinson and Chamberlin: The Source of Positivism in Economics

Abstract

A widely believed story in the folklore of the economics profession is that the theories of perfect competition and monopoly were well established from the time of Marshall or perhaps Pigou's Economics of Welfare, and that the role of imperfect or monopolistic competition theory was to fill in the middle ground between these extremes. It will be shown in this paper that the folklore conflicts with the historical evidence. Robinson and Chamberlin created the theory of perfect competition in the course of inventing imperfect and monopolistic competition theory. Robinson and Chamberlin, between them, were concerned with the same issues that concerned Marshall. The difference is that Robinson and Chamberlin derived their analyses from a few clear axioms, while Marshall sought to develop his analysis from a well-informed but necessarily impressionistic description of actual business behaviour and dynamic processes. Along with the introduction of indifference analysis to English-speaking economists by Hicks and Allen, Robinson and Chamberlin gave the theory of value and distribution a complete and logically consistent axiomatic basis. Because their axioms relating to business motivation and behaviour were amenable to empirical verification, the work of Robinson and Chamberlin rendered the theory of value and distribution open to a new empirical criticism. It will be argued that the widespread acceptance of Friedman's (195 3) positive methodological position was a necessary response to these empirical criticisms if the new axiomatic foundations of the theory of value and distribution were to be as secure as those previously provided by Marshall.