Monopoly Power And Competition: The Italian Marginalist Perspective 178100370X, 9781781003701

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© Manuela Mosca 2018 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2018935720 This book is available electronically in the Economics subject collection DOI 10.4337/9781781003718

ISBN 978 1 78100 370 1 (cased) ISBN 978 1 78100 371 8 (eBook)

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Contents Acknowledgements

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Introduction

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1 The sources of monopoly power in the history of economic thought

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2 The universal force of competition

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3 Monopoly power: competition is never perfect

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4 Monopoly power, competition and reality

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5 The concept of the state and economic policy

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Conclusions

186

References Name index

201 237

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Acknowledgements I wish to thank Saiyid Abu Turab Rizvi, Giampaolo Arachi, Corrado Benassi, Elodie Bertrand, Michael Bradley, José Luís Cardoso, Alessandra Chirco, Muriel Dal Pont Legrand, Gilbert Faccarello, Riccardo Faucci, Amedeo Fossati, Yasunori Fukagai, Nicola Giocoli, Vitantonio Gioia, Michele Grillo, Marco Guidi, Jan Horst Keppler, Ephraim Kleiman, Atsushi Komine, Heinz Kurz, Cristina Marcuzzo, Luca Michelini, Kayoko Misaki, Antoine Missemer, Fabio Monsalve, Mary Morgan, Nerio Naldi, Antonella Nocco, Guy Numa, Raimondello Orsini, Cosimo Perrotta, Enzo Pesciarelli, Ana Rosado Cubero, Torsten Schmidt, Fabrizio Simon, David Teira, Gianfranco Tusset, Rob Van Horn, Masazumi Wakatabe, Kiichiro Yagi, and an anonymous referee of the journal Rivista Italiana degli Economisti for their helpful comments. Special thanks for their very useful comments go to Michele Giuranno, Bruna Ingrao, Stephen Martin, Michael McLure, Donatella Porrini, Marcella Scrimitore, Eugenio Somaini, and Richard E. Wagner who read a draft of the manuscript. The usual disclaimers apply.

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Introduction According to modern economics, market power (or monopoly power)1 is ‘the ability of firms to influence the price of the product or products they sell’ (Martin 1989, p. 16). But what’s the history of this idea? How have the economists of the past explained monopoly power? And what role has this concept played in economic interventionism? I first encountered this question many years ago (Mosca 1998) when studying the work of the engineer-economist Jules Dupuit, who had clearly described some of the causes of market power, apart from the institutional ones.2 It made me wonder where I could find a history of ideas on the sources of monopoly power and, as I will explain in Chapter 1, it turned out that this history coincides with the theory of barriers to entry. Histories of thought that focus on entry barriers, however, go no further back than Bain (1956), even though models of monopoly and duopoly date back at least to Cournot (1838). Quite apart from the use of models, the question of the sources of market power has existed in economic theory from the very beginning.3 I myself found a treatise on it in the writings of Dupuit. Anti-monopoly policies, too, go back at least to the end of the nineteenth century:4 wasn’t it the monopoly power of firms that such policies were designed to counteract? There must therefore have been some historical research focusing on this theme in the great amount of literature dealing with these policies. What emerged, instead, was a gap in the historiography. I was puzzled as to why there were no studies about the history of a category that certainly did not appear out of the blue with Bain in 1956, and I decided it was worthwhile starting to 1 Market power and monopoly power are regarded as synonyms (see Krattenmaker, Lande, Salop 1987). As claimed by Elzinga and Mills (2011, p. 560), the ‘provenance of these two terms is obscure’. We consider them synonymous throughout the book, except for Chapters 4 and 5. 2 Dupuit (1854a, p. 340) describes the difficulties of entering the transport network market. 3 For a theory of monopoly before the time of Adam Smith (1723–1790), see De Roover (1951). 4 It is well known that the first antitrust legislation was introduced in Canada in 1889, followed by the Sherman Act in the USA in 1890.

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write one.5 Dealing with the question of monopoly power made it unavoidable to deal also with competition, which is widely studied in the secondary literature. The first aim of this book is therefore to attempt to reconstruct from a historical perspective the theory of market power and the relationship it has with the theory of competition.6 The reason for the choice of four Italian marginalists (Pareto, Pantaleoni, De Viti de Marco and Barone) will be thoroughly explained in the first chapter, while their links and influences will be highlighted in the other chapters. I will argue that these economists should be considered by historiography as a close-knit group constituting Italian marginalism. That is the second aim of this book. I should first clarify why I call these Italian economists ‘marginalist’ and not ‘neoclassical’. In fact, all four belong to the era of the construction of the neoclassical paradigm, being part of the generation following that of the first marginalists.7 Nevertheless, calling them simply neoclassical would be even less effective for placing them in their period with any degree of precision, because the term neoclassical is still used today to classify microeconomists. It would perhaps be more exact to call them founders of the neoclassical paradigm, or early neoclassical economists. But I will call them marginalists, since the word marginalism was coined in order ‘to cover the acceptance by economists of both marginal utility and marginal productivity’,8 and, as we know, the latter concept was incorporated into economic theory not by the first generation of marginalists, but by the one we are studying here.9 In this decision on terminology I also have the

5 During the research, one of the causes of market power, namely economies of scale when they lead to natural monopoly, required separate study due to its complexity and its implications. This issue was therefore the subject of an independent study (Mosca 2008). 6 I started dealing with the relation between competition and market power in a work on the Italian late classical liberal economist A. Marescotti (Mosca 2005b). 7 Barucci (1972, p. 512) sets 1890 as the date marginalism completed its first inroads into Italy; Screpanti and Zamagni (2005, Ch. 6) gave the title ‘The Construction of Neoclassical Orthodoxy’ to the chapter on the period from the end of the 1800s to the early 1920s. 8 Howey (1973, p. 15); according to him, the word was coined by Hobson in his Work and Wealth (1914). 9 In the coming chapters, we will mention the role played by one of our four economists (Barone) in founding the theory of marginal productivity.

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support of those who feel the term neoclassical is not at all appropriate to describe the marginalist theory.10 Deciding the angle to adopt for a research study on the history of thought is always complex; I followed the criterion of placing importance on what was relevant for the economists examined. I started from a sound basis of history of analysis; that is, from their ‘pure economics’:11 the third aim of this book is precisely to expand the existing awareness of how extraordinarily rich and innovative their theoretical contribution was. However, I will not limit my analysis to the reconstruction and interpretation of abstract theories; but will also treat the ideal and political value conveyed by these theories as an integral part of the study, along with the hoped-for effects they were intended to achieve. As we shall see, in the specific case of the four economists at the centre of this research, these external aspects were not only present, but also pervasive and often dominant. The fourth aim of this work is therefore to make an in-depth reconstruction of the historical and political context in which their theories were generated, also focusing on the way they have been applied. This corresponds to my belief that reconstructing exclusively internal history could give the impression that these four economists wrote only for the sake of the advancement of economic analysis: a purely rational reconstruction12 in fact conceals the motives behind the formulation of the theory, although its normative implications may give some pointers. It is only a well-contextualised approach that enables us to know the aims those theories sought to achieve, and that also provides a key to understanding theoretical passages that are difficult to interpret.13 I wrote this book with the impossible desire to be judged by the authors I’ve dealt with, and with the illusion of hearing them say I’ve 10 In Aspromourgos’ words, ‘it would be best if the term were now entirely expunged from the language’ (1986, p. 269). He also cites Schumpeter’s criticism of the term neoclassical (p. 266). See also Colander (2000). 11 This is how they defined the new economic theory, and it is also the title of a book by Pantaleoni (1889), who in the Preface writes: ‘This manual is intended as a succinct statement of the fundamental definitions, theorems and classifications that constitute economic science, properly so called, or Pure Economics. Thus, all questions pertaining to economic art, or Political Economy, are beyond its scope’ (1898, p. vii). 12 We refer here to Blaug’s distinction between rational reconstruction and historical reconstruction, on which see Maas (2013), among others. 13 Think for instance of ‘The Ministry of Production in the Collectivist State’ by Barone (1908b), which could be interpreted as being in favour of socialism, if it were not for its author’s well-known political position. See Bradley and Mosca (2014).

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given a faithful reconstruction of their thought. This book is for historians of economic thought, of economic analysis and of economic policy, for industrial economists, microeconomists, economic historians, and historians in general.

PLAN OF THE BOOK Chapter 1 sets the research field and explains the motivations. Chapter 2 deals with the theory of competition in the work of the four identified Italian marginalists. Chapter 3 is devoted to their ideas on monopoly power. Chapter 4 examines the application of these theories and ideas to various aspects of reality. Chapter 5 analyses their vision of the state and of economic policies. The last chapter then offers some concluding thoughts on the results that have emerged from our enquiry.

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1. The sources of monopoly power in the history of economic thought1 1.1 INTRODUCTION When was the notion of market power defined? And how has it been explained in the history of economic thought? In this chapter, we distinguish four different fields of enquiry in which to seek a history of ideas on the causes of market power. The first concerns the history of the formal models of profit maximisation in imperfectly competitive markets; the second, competition policies in a historical perspective; the third, the theory of competition in economic thought; and the fourth, the development of the notion of entry barriers. This chapter is of a historiographical character and places this book within the existing panorama of the secondary literature. Moreover, it has been written in the conviction that in the study of economic thought one cannot restrict oneself to simply narrating a history, one must also have some very good reasons for doing so.

1.2 FIELDS OF ENQUIRY The four possible fields of enquiry in which to seek the origins of the notion of monopoly power are to be found within the pre-history and history of industrial economics and competition policies. This is true insofar as market power is the characteristic feature of all imperfectly competitive markets, so the natural place to look to follow its historical 1

A previous version of this chapter was presented to the Conference ‘Histoire des théories en économie publique’ (Paris, 10–12 December 2008), in a seminar at the Dipartimento di scienze economiche e matematico-statistiche, University of Salento (Lecce, 14 January 2009), at the 73rd Annual Meeting of JSHET, Keio Gijuku University (Tokyo, 30–31 May 2009) and at the 36th Annual Conference of HES, University of Colorado at Denver (Denver, 26–29 June 2009). It was also published as a working paper (Mosca 2009); some ideas presented here are also included in Mosca (2008) and Mosca (2016a). 5

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development is in these fields. Nevertheless, as we shall see, also the historiography of the theory of competition will provide various ideas for a history of the sources of market power. 1.2.1 The History of Formal Models The first field of enquiry concerns the attempts to calculate equilibrium prices and quantities in imperfectly competitive markets. The history of these attempts has been reconstructed by many scholars,2 who all agree on the fact that it began with the work of Cournot (1838), followed by Dupuit (1844), Bertrand (1883), Launhardt (1885), Auspitz and Lieben (1889), Edgeworth (1897), Bowley (1924), Hotelling (1929), Chamberlin (1933) and J. Robinson (1933).3 These formal models do not consider entry of new firms, and do not pay much attention to the causes of market power, often taking them as given.4 These are the reasons why the historiography that focused on profit maximisation models in imperfectly competitive markets has little to say about the causes of monopoly power in economic thought. 1.2.2 The History of Competition Policies The second field of enquiry concerns the history of the theory behind the two main competition policies, namely antitrust policy and regulation.5

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See, among others, Schumpeter (1954), West (1978), Stigler (1982), Niehans (1990), Ekelund and Hébert (1999), Puu (2002, pp. 1–5). 3 The reason I stop at the 1930s is explained further on in section 1.3. 4 Modigliani for example writes that ‘the impossibility of entry is frequently at least implicitly assumed in the analysis of oligopoly, following the venerable example of Cournot, with his owners of mineral wells’ (1958, p. 216). And according to Ekelund and Hébert, among all the ‘pioneers’ they cite, ‘Dupuit alone examined in detail the sources of monopoly’ (1999, p. 19, my italics); I have already mentioned this in my Introduction. Clearly, in the models of monopolistic and imperfect competition the cause of market power is explicitly indicated in product differentiation (Hicks 1935). See section 1.2.4.2. 5 ‘The main instruments of competition policy are: antitrust policy, the policy for the efficiency of financial markets, regulation, the production of public services, the policy for innovations and patents’ (Grillo and Silva 1989, p. 501); here we restrict ourselves to considering the two main ones. Unless stated otherwise, the translations of quotations are my own.

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1.2.2.1 The history of antitrust Since the specific purpose of the firms at which antitrust legislation is directed is that of obtaining and enhancing their own market power, it would be reasonable to expect to find the history of the discovery of the causes of monopoly power by analysing the theories that have inspired antitrust legislation over the years. The developmental history of antitrust policy has been the subject of a great many studies: some of them affirm that in the first decades of its activities antitrust was moved more by political and social considerations than by economic ones;6 others argue the presence of a strong influence of economic theory right from its very beginnings.7 This latter position8 would involve the possibility of reconstructing the development of the ideas on the causes of market power by means of a comprehensive review of the theories behind the antitrust legislation; however, even if one were to accept the most extreme version of this position, we still wouldn’t find the history we are looking for, for various reasons. The first of these is that antitrust does not consider the existence of market power illegal per se,9 but restricts its interest to those cases in which firms, to obtain it, adopt anticompetitive practices.10 So, we in this historiography cannot find a general interest in the causes of monopoly

6 Peritz (1990) cit. in Giocoli (2009). Stigler (1982) was still sceptical about the influence of the economists on antitrust policy. 7 See, for example, Hovenkamp (1989b), Kovacic (1992) and Meese (2003). 8 In the words of Hovenkamp, ‘Antitrust policy has been forged by economic ideology since its inception’ ([1989b] 1991, p. 136); and ‘The antitrust laws are […] eternally wedded to prevailing economic doctrine’ (p. 157). 9 However, there are practices considered violations per se that it is held necessarily procure market power (and in fact do not require an enquiry into their existence); e.g. antitrust has almost always considered price agreements illegal per se, holding them to be clearly a cause of market power. For EU competition policy, the exercise of market power is, in principle, an abuse of a dominant position, although cases where this rule has been applied are rare. I thank S. Martin for this suggestion. 10 These practices consist of: collusive behaviour, mergers and takeovers, monopolisation (in the United States) or abuse of dominant position (in Europe). Within the latter, practices excluding rivals take on especial significance.

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power,11 because its interest is limited merely to those kinds of behaviour12 that generate market power by restraining competition.13 The second reason is the following: if in the evaluation of illegal behaviour, the rule of reason approach is adopted,14 judgement is based on the principle of reasonableness, according to which it is not enough that an action, to be condemned, restrains competition, it also has to restrain it unreasonably. By adopting this approach, therefore, an anticompetitive practice aiming at the acquisition of market power that, however, restrains competition ‘reasonably’, would not be condemned. In this context, the main causes of monopoly power for antitrust change according to whether such power is judged reasonable, which further explains why the historiography of ideas behind antitrust legislation cannot contain a general analysis of the causes of monopoly power.15 The third reason is that the only economists who are believed to have influenced antitrust at its beginnings are Americans;16 this cuts out all the economic thought which, starting from the latter part of the nineteenth century in the rest of the world, focused on the development of a good deal of thinking on antitrust policies.

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For example, market power that all firms inevitably enjoy through the absence of perfect competition in actual markets is obviously not the object of antitrust enquiry, nor is that achieved due to merit, nor that deriving from natural monopolies. 12 The attention paid by antitrust to market share is explicable in that it is considered as evidence of behaviour that could have illegally generated market power. 13 And in a recent approach this restraint also has to be ‘detrimental’ (Motta 2004, p. xvii). A criticism of this approach is found in Grillo (2006). See also the approach put forward by Etro (2006). 14 In enacting antitrust legislation the rule of reason has been widely adopted. See Kovacic and Shapiro (2000). The various meanings attributed to the rule of reason in the history of antitrust are examined in Grillo (2006). 15 On the relationship between the character of the violations and market power from a different perspective, but one compatible with ours, see Krattenmaker, Lande and Salop (1987, p. 242). 16 See the examination of the literature in Giocoli (2009). The author formulates convincing hypotheses on the history of antitrust in Europe, which is beyond our temporal horizon in that, as is well known, it has much more recent origins (the Treaty of Rome was signed in 1957). For the debates on the issue of monopoly power in the case of predatory pricing in the history of American antitrust see Giocoli (2014).

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1.2.2.2 Industrial regulation Within this second field of enquiry we also need to use historical perspective for the theory of regulation policies. Nevertheless, since policies of this kind aim to intervene in industries characterised by natural monopoly, they are linked to just one of the causes of monopoly power, namely economies of scale, which are included in our reconstruction, but by no means make up the whole of it.17 1.2.3 The Historiography on Competition The third research path turns to the literature specifically devoted to the history of the notion of competition, with the idea of arriving at information indirectly on the non-legal sources of market power.18 This is not an easy thing to do, because the historiography on competition in general does not raise the problem of implications for ideas about monopoly power, and because the two notions are not always antithetical. Only if competition is characterised by perfect elasticity of the firm’s demand curve, is it antithetical to market power: the competition thus defined necessarily implies absence of monopoly power. In this case, the list of the conditions associated with perfect competition provides us with all the information we need on the causes of market power: the latter in fact emerges exclusively if one or more of these conditions do not occur.19 Yet as we shall see, the notion of perfect competition was fully defined only in the 1930s. Before that, competition was treated as an activity,20 and to compete meant to undertake strategies precisely to obtain monopoly power; that is, to set prices so as to make positive profits:21 in this situation, there can clearly be no antithesis between competition and market power. 17

On the origins and history of the concept of natural monopoly see Mosca

(2008). 18

In this work, we do not deal with legal protection from competition, because the recognition of this kind of entry barrier has never been problematic, being simply attributed to the government. 19 See Machovec (1995, pp. 179–181). Berta, Julien and Tricou (2012, pp. 10– 11) note that these conditions are not normalised in the literature. 20 As a result, the term was applied to any kind of market structure. See MacNulty (1967, p. 397), Backhouse (1990, pp. 59–63), Blaug (1997, p. 67; 2001a, p. 153; 2001b, p. 39), Bradley (2010). 21 Which is a very different thing from assuming given prices and zero economic profit as in the model of perfect competition (MacNulty 1967, p. 399; 1968, p. 656).

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On examining this literature to seek the causes of monopoly power we therefore have to be careful to distinguish between the two cases: whereas in the former the causes of market power coincide with the obstacles to perfect competition, in the latter the firm’s behaviour in obtaining market power is in fact an expression of competition. 1.2.3.1 Competition in the classicals We start with an examination of the literature on competition in the classicals with the aim of finding their views on the causes of monopoly power. Beyond the legal restraints, which as we have already said do not come within the scope of our present work, the uncovering of other sources of market power, such as limited knowledge, collusion, imperfect factor mobility and inelastic supply is down to Smith (1776). In addition, it is held that for Smith the number of rivals in a market was important for determining market power.22 It is stated that to Bailey (1825) we owe the interesting analyses of ‘monopolies’ with restricted entry and one or more sellers, as well as that of markets in which the producers have a cost advantage over the new entrants; he also highlighted the role of potential competition.23 Senior (1836) is cited for having worked on the impossibility of transferring capital from one use to another without incurring losses, and of the unavailability of information on profits;24 at the same time, it is thought that for Senior the number of firms was unimportant.25 J.S. Mill (1848) is remembered for having paid attention to consumers’ ‘custom’;26 as far as the number of firms is concerned, the idea that ‘concentration will inevitably lead to some “contrivance to raise prices” or some form of “combination among dealers”’27 is attributed to J.S. Mill, as well as to Smith. Cairnes (1874) is described as interested specifically in cases of monopoly power within his ‘non-competing groups’.28

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Stigler (1957, p. 2 and 1987, pp. 531–532) and Bradley (2010). By contrast, Blaug (1997) states that ‘only once did Smith ever mention the number of rivals involved in competition’ (p. 68). 23 Backhouse (1990, pp. 60–61). 24 Stigler (1957, p. 3 and 1987, p. 532). 25 Machovec (1995, p. 118). 26 Backhouse (1990, p. 66). Schumpeter ([1954] 1976, p. 546), Machovec (1995, p. 132). L.R.P. (1925, p. 378) recalls in general that ‘much […] of his treatise is devoted to showing its [of competition] limitations in practice’. 27 Bradley (2010). 28 Stigler (1957, pp. 3–4), L.R.P. (1925, p. 378), Backhouse (1990, p. 61).

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To sum up, and in the light of the previous distinction, we can state that the classicals had singled out a series of causes from which they believed monopoly power for firms could derive: some of them (agreements, limited knowledge due to the withholding of information) are to be considered strategies to compete,29 others (imperfect factor mobility, inelastic input supply, custom) were seen as real constraints on the competitive process.30 The latter were however seen as temporary, but to this we shall be returning (section 3.1). On the importance of the number of firms for competition, as we have seen, there was no agreement. 1.2.3.2 Marginalist and neolassical competition We will now seek the sources of monopoly power in the literature on competition in marginalist and neoclassical thought.31 As we shall see, in that age the foundations were laid for the conception of competition as the market structure in which prices instantaneously converge to costs, without moreover abandoning the classical idea of competition as an activity, which we have just examined.32 This is the reason why most of the economists dealt with in this section are different from those included in section 1.2.1 (The History of Formal Models). This is not the case for Cournot (1838) who, as we know, paid no attention to the conditions of entry, yet in the literature on competition he is cited for one aspect that also interests us here: his theory establishes that if the firms are few, they have market power.33 Jevons (1871) is remembered for his ‘law of indifference’,34 which characterises perfect markets.35 Edgeworth’s Mathematical Psychics (1881) is considered the first work to list certain conditions without which agents cannot compete or, to use his term, 29

Hart (2001, p. 3) recalls for example that for the classicals ‘technological change was the natural result of economic competition’. 30 We do not share the idea that in the classicals’ thinking the non-legal obstacles to competition were entirely absent. For example, Hovenkamp is being reductive when he sees in the classicals ‘the absence of any notion of barrier to entry’ ([1989b] 1991, p. 148). 31 For the distinction between these two categories see our Introduction. 32 We will come back to this later in this chapter, as well as in Chapter 2. 33 Stigler (1957, pp. 5–6 and 1987, p. 533); Bradley (2010, pp. 242–243); Dos Santos Ferreira (2012, pp. 207–208). We should also remember that Cournot is held not to have really believed that competition existed in most real markets. 34 Backhouse (1990, pp. 66–67); according to this law, in a market there cannot be two different prices for the same good. 35 Stigler (1957, p. 6). A perfect market for Jevons requires perfect information and ‘perfectly free’ competition, not better defined. On Jevons’ view of perfect competition see also Dos Santos Ferreira (2012, p. 212).

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‘recontract’: free communication,36 divisibility of goods,37 a large number of sellers.38 As we know, Bertrand (1883) is known for his theory of price competition,39 which makes the number of firms in the market irrelevant. Marshall (1890a, 1890b) confidently proposes that the ‘race’ of competition can take place, on the condition that there is sufficient knowledge and absence of agreements.40 It has also been argued that Marshall’s conception of competition left no room for long-run concerns.41 Hadley (1896) is cited for the role played by custom,42 as in J.S. Mill, but above all for finding natural monopolies.43 J.B. Clark (1887, 1901, 1904) is remembered for having held that firms operating in the market are capable of preventing entry,44 and even of eliminating potential competition.45 He is also cited (J.B. Clark 1899) for having added two more conditions to those of Edgeworth: the instantaneous mobility of resources and the identification of competition with stationary equilibrium.46 Wicksell (1901) and Moore (1906) are mentioned for

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Backhouse (1990, p. 77). Stigler (1957, p. 7 and 1987, p. 534). 38 Backhouse (1990, p. 78), Dos Santos Ferreira (2012, pp. 209–210). 39 Backhouse (1990, p. 69). 40 Stigler (1957, p. 9). In general, it is held that Marshall was aware that perfect competition requires small firms and given prices, but that he didn’t push his argument as far as that formulation (Peterson 1957, p. 72; Corley 1990, p. 84). In a marvellous passage, Schumpeter gives an explanation for this, writing that Marshall ‘was bent on salvaging every bit of real life he could possibly leave in […] he did not attempt to beat out the logic of competition to its thinnest leaf’ ([1954] 1976, p. 974). 41 According to Chamberlin, for Marshall the phenomenon of the ‘industries in which each firm is likely to be confined more or less to its own particular market’ is exclusively ‘short time’ ([1933] 1956, pp. 69–70). Similarly, Sylos Labini ([1957] 1962, p. 12) notes that for Marshall the big industrial enterprises may not have monopoly power and cites him, ‘the last years of the nineteenth century and the first years of this have shown that even in these cases competition has a much greater force’. Utton (2007, p. 113) recalls that, ‘Marshall continually emphasized the fragile and conditional nature of […] monopolies. They are perpetually under threat from the vigorous new entrant, the alternative source of supply and the substitute product or material’. 42 Morgan (1993, p. 573). 43 Morgan (1993, pp. 593–594). 44 Morgan (1993, pp. 586–587). 45 ‘Successful combinations, by fixing prices and production, could limit both real and potential competition’ (Morgan 1993, p. 587). 46 Stigler (1957, p. 11). 37

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having provided new lists of necessary conditions for competition.47 Wicksell (1901) is also remembered for having traced the causes of monopoly in large overhead costs and joint supply, in price stability, and in location,48 while H.C. Adams (1918) is considered among those who believed firm size to be the cause of market power.49 Finally, the greatest effort to set down the conditions for perfect competition is down to Knight (1921b),50 and it should also be noted that he didn’t believe in it.51 It was precisely Knight who prepared the way for the reaction in the 1930s against the theory of perfectly competitive markets,52 then initiated by Sraffa, and ironically it was Chamberlin53 and Robinson54 who definitively perfected this static notion. The ‘principle of excluded strategy’ having prevailed,55 it is said that after this age every action undertaken to compete was considered proof of monopoly power.56 We shall be returning to this statement (section 1.3.2). 47 For Wicksell, ‘There must be a uniform product, firms must be small in size and there must be constant returns to scale’ (Backhouse 1990, p. 70). Moore lists five conditions, but ‘His first two items state the conditions of price uniformity and profit maximization. Conditions III, IV and V are stated in such a way as to create doubts about the distinction between premise and consequence’ (Dennis 1977, p. 272); see also Stigler (1957, p. 9). 48 Backhouse (1990, pp. 70–71). 49 DiLorenzo and High (1988, p. 429). 50 Stigler (1957, p. 11) and Machovec (1995, pp. 163–164). 51 See Stigler (1957, p. 11), Dennis (1977, pp. 273–275). 52 ‘It was the meticulous discussion in this work that did most to drive home to economists generally the austere nature of the rigorously defined concept and so prepared the way for the widespread reaction against it in the 1930’s’ (Stigler 1957, p. 11); ‘Knight highlighted the severely abstract character of perfect competition in such a way that led other theorists to hunt for more plausibly realistic models of market behaviour’ (Dennis 1977, p. 270). 53 Peterson (1957, p. 76). 54 Dennis (1977, pp. 270–271) writes, ‘Chamberlin [and] Robinson had to specify more precisely what the model of perfect competition itself entailed, so that a proper contrast could be drawn with the newer models’, and Machovec (1995, p. 181) states that ‘the Chamberlin/Robinson model provided the capstone for the triumph of equilibrium theory’. 55 ‘The Principle of Excluded Strategy’ is the colourful and predictive expression Schumpeter uses ([1954] 1976, p. 972) to indicate perfect competition. 56 Machovec (1995, p. 180): ‘as the neoclassical conceptions of competition and monopoly began to take hold, nearly every traditional means of competing came to be interpreted as unlawful’. Blaug (1997, p. 68): ‘every act of competition […] was now taken as evidence of some degree of monopoly power, and hence a departure from perfect competition’. See also Blaug (2001b, p. 39).

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As can be seen, for the age examined here as well as for the classical age, we can divide the causes of market power into two categories: (i) those due to strategic behaviour (agreements, information withholding, product differentiation), and (ii) those owing to external factors (technology, indivisibility, inelastic input supply, custom), while the significance or otherwise of the number of firms remains controversial.57 We also point out that, as the definition of the conditions for perfect competition gradually becomes more rigorous, it is denied that those conditions can be realised.58 In the historiography focused on the notion of competition there is therefore interesting material for a history of the causes of market power. Further on (section 3) we will look much more closely at the consequences these ideas have for our research. For the moment, however, we shall restrict ourselves to noticing, together with most of the relevant secondary literature, that in this period there were several concepts of competition, and they co-existed side by side. 1.2.4 The History of the Notion of Entry Barriers The fourth field of inquiry concerns the literature dealing with the way industrial economists of the past have answered the question, ‘Which factors generate situations in which firms have market power; that is, in which they are able to set their prices?’59 The findings of this literature overlap very little with those of the historiography focused on profitmaximisation models in non-competitive markets, as well as on antitrust

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Dos Santos Ferreira (2012) makes a distinction between Cournot and Edgeworth on the one hand, for whom the size of firms matters, and Jevons, Walras and Bertrand on the other hand, who see price-taking behaviour as independent of size. 58 Peterson (1957, p. 65) for example cites J.B. Clark (1899), ‘a static state […] is imaginary’. Certainly, this is true for the short run; as Morgan (1993) notes: ‘imperfections in the market delay the effects of the working of the static laws’ (p. 589, my italics). 59 For those who argue that monopoly power is generated exclusively by legal protection this question makes no sense. For example, certain exponents of the Chicago School state that ‘firms cannot in general obtain or enhance monopoly power by unilateral action’ (Posner 1979, p. 928). The Neo-Austrian School, basing itself on different methodological foundations, argues that ‘Monopoly power […] is always associated with legal, third-party restraints on either business rivalry or cooperation, not with strictly free-market activity’ (Armentano 1999, p. 18).

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and on competition. We shall examine three periods, beginning with the most recent. 1.2.4.1 From Bain to the present day Starting from the contribution of Joe Bain (1956), who studied at Harvard, industrial economics provided the following answer to our question: ‘The causes of firms’ market power are entry barriers’. In other words, the notion of entry barriers was used to explain the existence of monopoly power. So, we found the category our research was looking for in economic theory: entry barriers explain the presence of market power. We still have to ask ourselves if the history of this category had already been written. In fact, a history focused on the specific subject of the notion of entry barriers already exists,60 and to put it briefly, is the following: Everything starts from Bain, who found entry barriers in economies of scale, product differentiation, and the absolute cost advantages of established firms. It should be noted that for Bain entry barriers allow incumbents to ‘persistently raise their prices above a competitive level without attracting new firms to enter the industry’ (Bain 1956, p. 3). So for Bain, profits above the normal level were a sign of the existence of entry barriers.61 For our own research, it is important to emphasise that independently of Bain, and in the same period, Sylos Labini (1957) studied the relationship between the number of firms and market power, also using the concept of entry barriers.62 Stigler (1968), from Chicago, attacking Bain’s definition, defined entry barriers as a cost advantage of the firm already in the industry compared to those seeking to enter, thus detaching them from above-normal profits. With the two different definitions of Bain and Stigler, a controversy arose63 on the issue of which concrete situations act as entry barriers.64 60 On entry barriers in the history of economic thought starting from Bain there are the works of Keppler (2008) and Rosado Cubero (2008). However, the main information set down here can be drawn from textbooks of industrial economics. 61 In this context, it is worth remembering the title of an article of his, ‘The Profit Rate as Measure of Monopoly Power’ (Bain 1941). 62 Sylos Labini ([1957] 1962, pp. 54–55) also uses the term ‘barriers’, for example: ‘In concentrated oligopoly, technology creates external barriers between each group of firms and its potential competitors’. 63 See for example McAfee et al. (2004), Carlton (2004), Schmalensee (2004). 64 As well as on the usefulness of the concept. Some exponents of the Chicago School wholly rejected the concept of entry barrier, e.g. Bork (1978,

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From Salop (1979) onwards, non-legal entry barriers were classified as ‘innocent’ and ‘strategic’, the former of a structural type, and hence exogenous, the latter activated by the incumbent, and hence endogenous.65 Basing itself on this theoretical categorisation, industrial economics first defined the causes of market power according to the structure-conduct-performance approach,66 and then, starting from the 1980s, according to the ‘new industrial economics’. For the former, monopoly power is a function of the degree of concentration of an industry,67 and depends on the existence of exogenous entry barriers.68 For the latter, it is not a function of the concentration,69 and depends on both exogenous and endogenous entry barriers. Notice that the latter are strategic barriers, so they imply competitive behaviour by the firm, akin to the activities to compete found by the classicals and those marginalists of whom we spoke in the section on competition.70

Ch. 16), Demsetz (1982) and Posner (1979, p. 929); the latter calls entry barriers ‘colourful characterizations’. Even more critical were the representatives of the Neo-Austrian School, for whom ‘most of these alleged barriers have proven to be economies and efficiencies that leading firms have earned in the market-place’ (Armentano 1999, p. 13). 65 See also Shepherd (1995, p. 303): ‘I have assembled […] some 14 sources of entry barriers which the literature has identified. They derive both from “exogenous” causes (that is, basic conditions such as technology) and “endogenous” conditions (that is, voluntary actions taken by the incumbent firms so as to make entry harder)’. 66 Some (for example Shepherd 2007, p. 209) hold that we owe this approach to Edward Mason, and thus to an age prior to the one under consideration in this section; we shall deal with Mason in the next section 1.2.4.2. 67 The degree of concentration provides indications on size (of market share) of firms present in an industry. ‘An industry is concentrated if a small number of firms controls a large part of the economic activity of the entire sector’ (Grillo and Silva 1989, p. 250). 68 The Chicago School opposed this approach, in particular Demsetz, Posner and Friedman, for whom the greater size of firms is a sign of greater efficiency, not market power (Martin 2007, pp. 39–43). The same position was taken by the Neo-Austrian School, for which ‘a firm’s market share is not its market power, but a reflection of its overall efficiency’ (Armentano 1999, p. 18). 69 Hence for this approach the number and size of firms are not necessarily correlated to market power. 70 The similarity of these two conceptions is examined in Mosca (2016a).

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1.2.4.2 From the birth of industrial organisation to the 1950s All this is widely known, but less well known is the way in which monopoly power was explained before the introduction of the category of entry barrier. In this section, we examine the period from the 1930s to Bain (1956). Although there is a large historiography on this period,71 it does not focus on the specific subject of the sources of market power, being devoted to tracing the birthplaces of industrial economics. Among them we cite only the three that seem to us the most significant: one is in the United Kingdom with J. Robinson (1933) and Lerner (1934), the other two are in the United States, the first at Harvard with E. Chamberlin (1933) and E.S. Mason (1939), the second at Chicago with H. Simons (1934). The interrelationships between the protagonists of these three groups over the two decades would deserve an entire study. Here, however, we just try to extrapolate the answers they provided to the questions that interest us; that is, ‘What are the impediments to entry?’ ‘Do incumbents have monopoly power?’. We recall that in this period the latter was usually represented by a downward sloping demand curve for the firm.72 To begin with we can state that the controversies between these three schools do not seem to be about the specific subject of obstacles to entry. It is well known that the models of J. Robinson (1933) and Chamberlin (1933) are characterised by product differentiation; and it is likewise well known that this impediment to entry has both exogenous and endogenous features.73 On the basis of this theory, Chamberlin (1937) adopts a

71 Grillo and Silva (1989, pp. 28–29), Corley (1990), Martin (2007, pp. 27– 29), De Jong and Shepherd (2007) and the literature cited there. Bain (1948), Galbraith (1948), Keppler (1994a) and Marcuzzo (2003) are focused specifically on the decades examined in this section. 72 It seems to us that the representation of market power through a downward sloping demand curve is already contained in the following words of Sraffa (1926, p. 543): ‘This necessity of reducing prices in order to sell a larger quantity of one’s own product is only an aspect of the usual descending demand curve, with the difference that instead of concerning the whole of a commodity, whatever its origin, it relates only to the goods produced by a particular firm’. Chamberlin (1933), Robinson (1933), and Lerner (1934) use downward sloping demand curves for the individual firm. Mason (1939) rejects the analytical tools, including this representation, on the basis of them being empirically inapplicable. 73 Shepherd (1991) includes in the list of the factors that produce exogenous entry barriers ‘Product differentiation (occurring naturally among products)’ (p. 53) and in the one for endogenous entry barriers the ‘Selling expenses, including advertising (to increase the degree of product differentiation)’ (p. 54).

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complex position on free entry,74 while J. Robinson75 provides other examples of limitations to entry, both endogenous76 and exogenous.77 And while it is true that Mason focuses on technological factors,78 it is only because he believes that these and no others can be found empirically.79 On the other hand, Simons states that firm size is determined by exogenous factors, such as economies of scale, as well as by endogenous factors.80 It is not surprising therefore, that Bain in 1956 considered it obvious that before him economies of scale had been recognised by everyone, irrespective of the school they belonged to, as a deterrent to entry.81 As for the relationship between obstacles to entry and monopoly power, J. Robinson and Chamberlin both agree that a firm’s demand curve can be perfectly elastic also in the presence of obstacles to entry,82 74 He states in fact that, ‘With respect to the particular product produced by any individual firm under monopolistic competition, there can be no ‘freedom of entry’ whatever […] [but] there can be freedom of entry only in the sense of a freedom to produce substitutes; and in this sense freedom of entry is universal, since substitutes are entirely a matter of degree’ (Chamberlin 1937, p. 567). 75 In her famous book, she does not go beyond the observation that ‘the problem of the conditions influencing the entry of new firms […] presents an interesting and largely unexplored field of inquiry’ (Robinson [1933] 1969, p. 92, fn. 1), and she does deal with it in Robinson (1934). 76 She writes, ‘the existing firms may be so strong that they are able to fend off fresh competition by the threat of a price war. They may even resort to violence to prevent fresh rivals from appearing on the scene’ (Robinson 1934, p. 107). 77 For Robinson, entry is difficult in those industries ‘which require unusual personal ability or special qualifications, such as power to command a large amount of capital for the initial investment’ (Robinson 1934, p. 107). 78 Which he calls ‘market control’ (Mason 1939, pp. 61–62). See also Martin (2007, p. 37). 79 He writes, ‘The objection is not that monopoly theory is incompatible with an analysis that takes [other] considerations into account but that its constructions are irrelevant to the real problems’ (Mason 1939, p. 64). Bain also confirms this ([1948] 1953, p. 183). 80 Martin (2007, p. 32) argues that if on the one hand at Harvard it was believed that economic forces also influenced market structure, at Chicago up until the 1950s the role of technology was recognised as determining firm size (p. 38). 81 He also points out that, whereas judgement on large firms due to these economies in the UK was positive, the USA (Chicago included) was against concentration (Bain 1956, pp. 59–61). 82 The subject is barely mentioned in J. Robinson ([1933] 1937, p. 566): ‘The case of a small number of firms selling in a perfect market raises some

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whereas they disagree on the importance of the number of firms in determining profit levels.83 Lerner (1934) criticises the idea that the degree of monopoly is based on the number and relative size of sellers; for him, market power exclusively depends on the availability of substitutes (which is reflected in the elasticity of the firm’s demand).84 And, however ironic it may seem, Mason, the founder of the structure-conductperformance approach, shows that ‘Data on numbers […] tell us little regarding price and production policies’ (1939, p. 64), whereas Simons (1936), the father of the Chicago School, attributes fundamental importance to firm size in the generation of market power (Martin 2007, p. 33). These groundbreaking contributions published in the first half of the 1930s gave rise to a number of writings by scholars such as Kalecki (1938), Hall and Hitch (1939), Harrod (1939), J.M. Clark (1940), Schumpeter (1942), Rothschild (1942), Kaldor (1943), Andrews (1949), Papandreu (1949), and many others. To sum up, and reporting at the same time the situation described by Scitovsky in 1950, all of them recognise the existence of both exogenous and endogenous impediments to entry;85 nevertheless, not all believe that they generate monopoly power. Can it be argued that this state of affairs was simply due to the fact that the problem of the relation between free entry and market power had not been fully focused on? This is what the three innovators in the theory of oligopoly think, when they complain about the confusion reigning in the literature on conditions of entry before they appeared on the scene.86 difficulties, which are not here discussed’. By contrast, Robinson (1934, pp. 104– 111) and Chamberlin (1937, p. 566) state that the impediments to entry are entirely compatible with perfect competition, on condition that the demand curve for the firm is perfectly elastic. See Dos Santos Ferreira (2012, p. 209), ‘the indefinitely raising elasticity of the supplied good to rival goods in other markets […] is completely independent of market shares being small: even a monopolist is threatened by the existence of close substitutes to his output’. 83 See J. Robinson (1934, pp. 112–120) and Chamberlin’s reply (1937, pp. 566–568 and p. 569, fn. 1). 84 According to Elzinga and Mills (2011, p. 558) the Lerner index is ‘appropriate for assessing monopoly power of a firm […] in homogeneous – or differentiated – product oligopolies, with or without free entry, and in homogeneous-product markets with a dominant firm’. 85 It is worth remembering that, before Bain, Scitovsky (1950) showed a specific interest in the sources of market power, and in particular on the role of ignorance as entry barrier. 86 We are obviously referring to Bain, Sylos Labini and Modigliani. Bain (1956, p. vi) illustrates how on the subject of ‘condition of entry’ received theory

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Martin’s thesis (2007) nonetheless seems to us more convincing; according to this, the real opposition between schools of industrial economics only began in the 1960s,87 after the attacks of the second Chicago School88 (which, again according to Martin, the game theory approach finally proved wrong). 1.2.4.3 Before the 1930s If from the historiography on industrial economics indirect references to the causes of market power can be drawn, we cannot avail ourselves of most of it for the years prior to the 1930s, which is considered the pre-history of this discipline. But since it is obvious that the ideas of the 1930s did not come from nowhere, we found some interesting references in those few works that go further back.89 Despite the great dissatisfaction often expressed about the state of the ideas formulated up until the 1930s on the subject of the causes of monopoly power,90 we have drawn up a list of those earlier economic theorists who made contributions on was ‘in extremely rudimentary form’. Also, Sylos Labini ([1957] 1962, p. 9) writes that ‘the analysis of the relationship between the process of concentration and market form is in a completely unsatisfactory state’; he also explains that, concerning ‘the market power of very large industrial concerns […] apart from the rather elementary observations of Smith and Marx, we are still in need of a really satisfactory theoretical analysis’ (p. 11). And Modigliani (1958, p. 216) notes that ‘little systematic attention [had] been paid […] to the role of entry, that is, to the behaviour of potential competitors’. However, Modigliani alludes to a previous literature, though without specifying which, writing that the entry barriers that ‘Bain labels “absolute cost advantages” […] have already been extensively analysed and understood in the received body of theory’ and that the barrier ‘resulting from the inability of potential competitors to produce a commodity that is a perfect substitute for the product of existing firms – is again one that has received considerable attention in the past’ (Modigliani 1958, p. 231). It will be remembered that the literature following on from the 1950s has always pointed to this period as the origin for the thinking on the causes of market power. 87 This seems to us convincing despite the undeniable divergences between imperfect competition and monopolistic competition of which White (1936) speaks. 88 We are referring to the above cited diatribe on the definition of entry barriers and to the attack on the structure-conduct-performance approach by Stigler, Friedman, Coase, Posner, and others. 89 These works will be cited in the course of this section, the most important being those included in De Jong and Shepherd (2007). 90 For example, according to Nti and Shubik (1979) the study of entry in oligopoly theory was not dealt with before the brief treatment in Chamberlin (1933).

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precisely this subject. As we shall see, these contributions are seldom cited in the existing literature on the history of industrial organisation more generally, or in the literature on the various histories of certain aspects of economic thought that we have looked at in the preceding sections of this chapter. We begin with the Scholastics of the Middle Ages, for whom the causes of monopoly were: ‘engrossing, forestalling, regrating, illicit agreements, secret pacts, conspiracies, bidders’ rings’.91 Later, in the mid seventeenth century, the Dutchman Graswinkel argued that ‘monopoly is not to be feared when there are many, but few’ (1651, p. 158).92 A century further on, Cantillon (1755), standing in opposition to Graswinkel, stated that the number of competitors was not essential for rivalry to occur.93 Moving on to the classical economists of the eighteenth and nineteenth centuries, Smith (1776) is cited by this historiography, too, as by that on competition, for having identified situations where supply is persistently scarce compared to demand.94 Beyond these natural barriers, Smith advances other causes of market power, related to imperfect information, and to technologies (I. 7. 22) which he considers a temporary cause (I. 7. 21). He is often remembered also for having shown that a small number of entrepreneurs facilitate coalitions,95 and for having highlighted their propensity to come to agreements among themselves.96 Recently there has been discussion on how Smith’s monopolists used strategies to enforce their legal barriers to entry.97 We have already recalled the role attributed by J.S. Mill (1848) to ‘custom’ as a restraint on competition;98 he is also cited for ‘the baneful effect of small numbers on the vigour of competition’99 and for his consideration of the influence 91

De Jong (2007a, p. 11, table 2.1). De Jong (2007a, p. 22). 93 De Jong (2007a, p. 19). 94 ‘Some natural productions require such a singularity of soil and situation, that all the land in a great country […] may not be sufficient to supply the effectual demand’ Smith (1776, I. 7. 24) cit. in Mosca (2008, p. 322). On natural causes see also Smith (1776, I. 7. 20). 95 Smith (1776, I. 8. 12 and II. 5. 7) cit. in Sylos Labini ([1957] 1962, p. 8). On Adam Smith’s views on collusion see also Levy and Peart (2008). 96 Smith (1776, I. 8. 13, but especially I. 10. 82 and I. 10. 85); he nevertheless believes such coalitions to be unstable. Cited in Stigler (1982, p. 1). 97 See Salvadori and Signorino (2014). 98 J.S. Mill (1848, II. 4. 3) cit. in Sylos Labini ([1957] 1962, p. 14). 99 Stigler (1982, p. 2) and Mosca (2008, pp. 333 and 337). 92

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of economies of scale.100 There is also Marx (1867), who is cited for the idea that the conspicuous ‘minimum capital necessary to start up production at sufficiently low costs […] creates a “natural” hindrance to competition’.101 We also recall Marx’s law of concentration of capital. As far as marginalist thinking is concerned, the work of Dupuit (1854a; 1854b) is mentioned for having found some deterrents to entry in the transport sector;102 C. Menger (1871) for having considered monopoly an outcome of the limited size of markets;103 and H.C. Adams (1887) for the effects on market structure of increasing returns to scale.104 Marshall (1890) deserves a place to himself: on the specific subject of monopoly power, on the one hand his anthropomorphic theory of the growth of the firm, and the metaphor of the trees of the forest are regarded as unsuitable to deal with the phenomenon of large-scale industrial concentrations.105 On the other hand, he is also acknowledged for having identified the causes of the slope of a firm’s demand curve,106 and for his insights on the effect of advertising expenditure on economies of scale and on the significance of strategic barriers to entry.107 We continue with Hadley (1896), who is considered in this literature for having focused on the importance of fixed costs108 and on the effects of

100

Stigler (1982, p. 3). Marx (1867, I, XXIII, 2) cit. in Sylos Labini ([1957] 1962, p. 9). 102 In addition to the works cited in the introduction, see Ekelund and Hébert (1999, p. 323). 103 Niehans (1990, p. 279), De Jong (2007b, p. 35). 104 Hovenkamp (1989a, p. 123); Trebing (2007, pp. 173–174). 105 For example, Stigler (1950, p. 23), ‘An anthropomorphic theory of the growth of the firm […] scarcely fits our modern giants’ and Sylos Labini ([1957] 1962, p. 169), ‘According to Marshall […] the trees of the forest must have been saplings once’. 106 Joan Robinson ([1933] 1969, p. 50) writes, citing Marshall, ‘Its elasticity will depend upon many factors, of which the chief is the number of other firms selling the same commodity and the degree to which substitution is possible, from the point of view of buyers, between the output of other firms and the output of the firm in question. If there are few or no other firms producing closely similar commodities, the distribution of wealth among buyers, the conditions of supply of rival commodities, the conditions of supply of jointlydemanded commodities, and all the innumerable factors which affect the demand for any one commodity will influence the demand curve for the individual producer’. Sylos Labini ([1957] 1962, p. 51) comments on this that, according to Marshall, with the passing of time ‘the demand schedule becomes more rigid’. 107 Utton (2007, pp. 113–114). 108 Hovenkamp (1989a, p. 125). 101

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the time necessary for new competitors to enter the market,109 and with Collier (1900), for having understood the strategic role of excess capacity.110 Ely (1900) is remembered for having grasped the monopolistic nature of trade-marks,111 and for stating that the existence of substitutes reduces market power112 and that economies of scale are a deterrent to entry.113 J.B. Clark (1901; 1914) is spoken of for the role he attributes to predatory practices and, with the opposite effect on market power, to potential competition.114 Chamberlin then cites Taussig (1911),115 again for substitutes; and Fisher (1912), for the attention he paid ‘to the idea of a separate market for each seller.’116 In addition, he mentions Knight (1921a; 1921b) for the statement that ‘every business is a partial monopoly’,117 for the analysis of the effects of ‘trade-marks, trade names, advertising slogans […] reputations’,118 differentiated products,119 and for having postulated that in competition, small firms must be more efficient than large ones.120 Chamberlin also deals with J.M. Clark (1923) for his emphasis on the number of firms,121 again on product differentiation;122 and on excess capacity.123 Finally, J. Robinson acknowledges Sraffa (1926) for saying that ‘the entry of new firms into an imperfect market must necessarily be difficult’,124 while Chamberlin recalls the same article for the role of increasing returns;125 – Sraffa compares the firm that spends on advertising to a monopoly, thanks to the ‘protection of its own barrier’ (1926, p. 545). It is also worth noting here Chamberlin’s citation of Hotelling (1929), both for the ‘circles of customers [who] 109

Hovenkamp (1989a, p. 151). Hovenkamp (1989a, p. 147). 111 Ely (1900, p. 43), cit. in Chamberlin ([1933] 1956, pp. 59–60). 112 Ely (1900, p. 35), cit. in Chamberlin ([1933] 1956, p. 66). 113 Hovenkamp (1989a, p. 147). 114 Stigler (1982, p. 4), Hovenkamp (1989a, pp. 147–148), Brown (2007, pp. 175–176). 115 Taussig (1911) cit. in Chamberlin ([1933] 1962, p. 66). 116 Fisher (1912, p. 323) cit. in Chamberlin ([1933] 1956, p. 69). 117 Knight (1921b), cit. in Chamberlin ([1933] 1956, p. 5). 118 Knight (1921b), cit. in Chamberlin ([1933] 1956, p. 60). 119 Knight (1921a, p. 332), cit. in Chamberlin ([1933] 1956, p. 70). 120 Knight (1921b), cit. in Chamberlin ([1933] 1956, p. 245). 121 J.M. Clark (1923, p. 417), cit. in Chamberlin ([1933] 1956, p. 49). 122 J.M. Clark (1923, p. 418), cit. in Chamberlin ([1933] 1956, p. 70). 123 J.M. Clark (1923, pp. 437–439), cit. in Chamberlin ([1933] 1956, p. 109); it is also cited in Hovenkamp (1989a, p. 148). 124 J. Robinson (1934, p. 105). 125 Chamberlin ([1933] 1962, p. 5). Sraffa’s article of 1926 is cited by all the literature. 110

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make every entrepreneur a monopolist within a limited class and region’, and for the statement that at the same time ‘there is no monopoly which is not confined to a limited class or region’.126 As can be seen the list is not a short one and the causes of monopoly power are all there, exogenous and endogenous: strategies, economies of scale, absolute cost advantages, product differentiation, conditions of demand (elasticity and market size). There is also the idea that the number of firms may not affect market power or even that the entry barriers in the long run may not be effective at all. However, the literature examined above says little about the role the authors of the period before the 1930s played in respect to the uncovering of the causes of monopoly power. What is said amounts to no more than vague, random fragments, lacking a background of systematic study or interpretation.

1.3 WHERE TO SEARCH? The historiography relative to the four fields we have analysed so far has never focused specifically on the subject of the causes of market power before the 1930s, thereby leaving a gap that we believe requires filling. In the light of the review we have just carried out of the literature on competition on the one hand and on the pre-history of industrial economics on the other, we may well ask ourselves at this point in which direction we should be concentrating our research in order to start writing a history of ideas on the sources of monopoly power. 1.3.1 Why not Begin with the Classicals? The information we have gathered from the secondary literature tells us that the causes found by the classicals were in part endogenous, due to strategies carried out in order to compete, and in part exogenous, the fruit of constraints independent of the firms’ intentions. These constraints, we have argued, were held to be mainly short run;127 in fact, the literature insistently recalls that in classical thinking restraints on competition had 126

Hotelling (1929, p. 44), cit. in Chamberlin ([1933], 1956, p. 6). The term ‘mainly’ refers to the fact that, for example for Smith, certain factors of production could be scarce ‘forever’ (Smith 1776, I. 7. 24); see also Salvadori and Signorino (2014). J.S. Mill also believed that certain obstacles would last in the long run, for example: custom, the combinations (Schumpeter [1954] 1976, p. 546), and also natural monopolies (Mosca 2008). 127

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no importance in the long run.128 The monopoly power resulting from competitive strategies was hence considered by the classicals to be always present, but continuously threatened by competition, both actual and potential, except of course in the case of temporary exogenous obstacles.129 We also need to add that such a conception was valid for the classicals in theory as well as in reality,130 which means that competition was considered a widespread phenomenon, on condition the market was free from legal restraints.131 This optimism is further confirmed by the fact that in their writings the specific subject of monopoly takes up very little room.132 If the market power that the firms obtained through strategic behaviour did not worry the classicals because it was perpetually threatened, and if that due to exogenous obstacles did not go beyond the horizon of a short run that they judged unimportant, then it is clear that a detailed, coherent examination of the causes of monopoly power cannot be found in their thinking.

128 Hovenkamp (1989a): ‘The analysis of classical political economists generally assumed that entry into markets was easy and could be accomplished very quickly’ (p. 144, my italics). Machovec (1995): ‘From a classical view […] harm ensued only if institutions existed to inhibit the process of competition, independent of the presence of transitory monopoly profits due to P > MC’ (p. 17, my italics). See also Giocoli (2017). 129 Hovenkamp (1989a, p. 149): ‘Classicism’s faith that potential competition would discipline incipient monopolists was based largely on its concepts of market entry barriers. Classical political economy recognized only government restrictions as barriers to competitive market entry’. It would be correct to add: in the long run. 130 Schumpeter ([1954] 1976, p. 545): ‘the “classics” [were] firmly convinced that the competitive case was the obvious thing’. This conviction holds true to the extent it is believed that the impediments were temporary or of small account. 131 Backhouse (1990, p. 60) notes that Smith on many occasions uses the term ‘liberty’ to indicate competition, and defines it precisely ‘in terms of the absence of restraints’. It is interesting to note that Hovenkamp ([1989b] 1991, p. 148) indicates among the restrictions recognised by law also ‘a privately created restriction on entry, either by a contract including the restricted person as a willing participant, or else by a combination directed at other people as target’. 132 Stigler (1987, p. 532): ‘Demsetz has counted only one page in 90 devoted to monopoly in The Wealth of Nations and only one in 500 in Mill’s Principles of Political Economy. Indeed, the world “monopoly” was usually restricted to grants by the sovereign’.

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1.3.2 Why Begin with the Age of the Marginalists? The reasons we have just illustrated direct us towards the age of the marginalists, and this is what the secondary literature does on subjects akin to ours.133 But why this particular age? We can find a general answer in the history of the sciences. In his obituary for Pareto, Pantaleoni (1923, p. 582) writes: ‘The rate at which physical, biological, historical and economic science have been progressing in the last seventy years has precedents only in the times of the Renaissance’. In economic analysis in particular this has involved the attempt to use a truly scientific approach based on principles of marginal utility and productivity. Another answer can certainly be found in economic history. New phenomena such as trusts, cartels, mergers, the vertical integration of firms, public utilities, and the railways,134 raised new problems. Compared to the world of the classicals, the provisional character of the hindrances to competition no longer seemed to apply;135 in fact, the short run in some industries seemed to be very long, and in certain cases to enter a market turned out to be very difficult also in the absence of legal barriers.136 Faced with these new phenomena, economists tried to understand why in certain markets firms continued to be few, if they should be worried about their size, or if this was on the contrary an advantage,137 or whether one could count on their reciprocal rivalry.138 These questions gave rise to a quantity of studies on the subject of market power that was, as the review of the literature already provided has shown, without precedent.139 133 For example, De Jong and Shepherd write about industrial economics: ‘There was major pioneering from the 1870s on’ (2007, p. xxiii). Hovenkamp (1989a, p. 105), on dealing with the debates on the subject of antitrust, focuses on the ‘waning years of the nineteenth century’ and also Morgan (1993), dealing with competition, concentrates on this period. 134 These subjects are dealt with in Hovenkamp (1989a). 135 Hovenkamp (1989a, pp. 144 ff.) writes that in this age doubts began to be voiced about the classical idea that the savings of big firms were transferred on to consumers, and also that potential competition was always at work. 136 Hovenkamp (1989a, pp. 150–151). See also Giocoli (2017). 137 Hovenkamp (1989a, pp. 136–137) reports the various positions on the controversial hypothesis of ‘ruinous competition’. 138 The latter is the idea that DiLorenzo and High (1988) attribute to the economists of the marginalist age. 139 Hart (2001) argues that the various positions of the economists reflected the popular division between supporters and opponents of the trusts due to the effect of these organisations on their business (p. 3).

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From a methodological perspective, how were these problems dealt with? It is well known that the years at the turn of the century were a kind of crossroads for a variety of different positions, in which the already bitter controversies between old classical thought and the new ideas of the historical school also had to face the marginalist paradigm that was making headway. The historiography on the subject of industrial economics shows that for a long time in the thought of this period, classical theory co-existed with historical analyses based on the examination of cases and on statistics, as it did with marginalist ideas that were slowly gaining ground.140 The historians of the theory of competition also point out this co-existence.141 So, we do not find a pure neoclassical theory in this period,142 but rather methodological contaminations that gave rise to a great wealth of ideas, as has already been shown through our account in the previous sections. One significant aspect which helps to explain why it is worthwhile concentrating our analysis on the age of marginalism concerns the history of the analytical tools used by economists. We recall that Cournot, Dupuit, Ellet, Von Thünen and others143 had used mathematical tools, leaving their methods and their results to those who came after them: demand functions, cost curves, and equilibrium conditions were available at the end of the century for use in economic analysis. Some of the theoretical developments on the causes of monopoly power also came about through the logical necessity imposed by the analytical tools employed.144 This turn of the century preoccupation with the problem of monopoly and its causes came about for two different kinds of reason. The first, 140

Hovenkamp (1989a, p. 116): ‘The earliest economic studies of the trust problem were dominated by broad, historically based inquiries’, while Schumpeter notes, concerning the marginalists, that ‘To a surprising extent they continued to look upon the competitive case as [in the preceding period, but] they complemented this vision by an analysis that was far superior to that of the “classics”’ ([1954] 1976, p. 892). 141 ‘For three decades prior to 1920 a bifurcation period existed’ (Machovec 1995, p. 97). The many different positions on the subject of competition present in this period in the US is the subject of Morgan (1993). 142 The construction of the neoclassical paradigm was a slow process, and the ‘purification’ of economic theory in the sense of reductionism occurred still more gradually. On reductionism in economics see Zamagni (2000). 143 On which see Niehans (1990) and Ekelund and Hébert (1999). 144 De Jong and Shepherd write that in this period in industrial economics ‘basic concepts were invented as the new “neo-classical” microeconomic theory rapidly emerged’ (2007, p. xix).

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linked to method, is that with the emergence of the notion of perfect competition, all strategic behaviour of firms became a sign of monopoly power, and as such was a cause for concern. The second, on the other hand, relates to the new economic situation in which market power, whether generated by strategies or obstacles, showed itself to be long lasting, which also created anxiety, although for other reasons. The difference between the two cases, however, should not be lost sight of: in the first case, the identification of monopoly power was due to a change only in the theoretical model,145 while in the second it was to be imputed to new circumstances in the real world. 1.3.3 Why the Italian Marginalists? Schumpeter, referring to the high regard in which the economists of the marginalist age were held, remarks that: ‘The most benevolent observer could not have paid any compliments to Italian economics in the early 1870s; the most malevolent observer could not have denied that it was second to none by 1914’.146 Schumpeter’s glowing tribute is certainly helpful as it reinforces our belief that the economic theory of the Italian marginalists is of great merit. There are, however, other good reasons for studying this Italian thought, and they concern the specific subject of this work. The Italian marginalists wrote a great many studies on the subject of monopoly power,147 a problem that was not confined to the United States despite popular opinion to the contrary.148 Many Italian economists dealt with it, in part as a reflection of American and European realities,149 but also because of the industrial situation in Italy and the microeconomic policies followed (or indeed not followed) by Italian governments in the early decades of the twentieth century. It was the condition of Italian 145 This is Edgeworth’s opinion, according to Machovec (1995, p. 288), ‘Edgeworth’s dissatisfaction with the concept of zero profit […] was rooted in his realization that the new package of semantics and ideas attending the model of perfect competition were affecting how leading economists were reasoning about the market process’. 146 Schumpeter ([1954] 1976, p. 855). 147 They will be mentioned in Chapter 3, section 3.2. 148 Morgan (1993, p. 564, fn. 4) seems to support it, and adds that in both the UK and Germany the problem of competition between big firms was not raised, but De Jong (2007c, pp. 62–63), for example, recalls the German book Die Kartelle by Kleinwächter (1883). In this sense, also Gerber (1998). 149 See for example the case of Riccardo Dalla Volta, examined by Augello and Guidi (2009).

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industry that encouraged thinking on the subject of monopoly power, characterised by ‘participations intersecting and in succession; holdings and groups, trade union agreements, also secret ones, interlocking directories,150 with at least some big linkers; interlocking relations between industry and the big banks; concentration of activities in the industrial triangle; districts’.151 The massive intervention by the government in the life of firms also provoked commentary from economists, thus revealing their idea on market power in the absence of this intervention.152 To these reasons taken from economic history, others can be added concerning the derivation of the ideas. The fact that the father of the theory of imperfect competition was Italian (Sraffa), as were two of the three founders of the new theory of oligopoly based on the notion of entry barriers (Sylos Labini and Modigliani), suggests that their ideas could have an Italian derivation. Also, the wholly Italian history of the working-out of U-shaped average cost curves, an instrument of fundamental importance for our subject,153 encourages us to continue exploring in this direction. Moreover, the role the Italian marginalists played in the definition of the notion of natural monopoly also offers good prospects for research on the subject of monopoly power in general.154 We conclude our line of argument by recalling, together with Modigliani, that the possibility of reading Italians in their own original language ‘is open only to the “happy few”’ (1958, p. 216); we therefore think it a duty and a privilege of Italians to carry out historical work on their primary sources. 1.3.3.1 The economists considered In this book, we deal especially with four Italian marginalists: Vilfredo Pareto, Maffeo Pantaleoni, Antonio de Viti de Marco and Enrico Barone.

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The sharing of administrators that allows big companies to form a network of connections. 151 Ciocca (2008, p. 159). Economic historians in general believe that the ‘phenomenon of industrial concentration in the sectors of higher economies of scale emerges in Italy at the start of the twentieth century’ (Amatori and Colli 1999, p. 117). 152 This issue will be examined in Chapter 5. 153 See Dooley (2001) and Keppler and Lallement (2006). They are important in particular for the structure-conduct-performance approach, since they allow the identification of various market structures. 154 Mosca (2008).

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Three of them were equal in age155 and three, but not the same three, died within a very short time of one another.156 Their biographers tell us of their deep personal ties:157 for example, Pantaleoni converted Pareto and Barone to economics;158 we know about the brotherly friendship between De Viti de Marco and Pantaleoni (Mosca 2016b);159 we have a wealth of correspondence between Pareto and Pantaleoni (De Rosa 1960),160 between the latter and Barone (Magnani and Bellanca 1991), between Pantaleoni and De Viti (Fusco 1983; Finoia 1993), and so on. And again, it is well known that three of them (De Viti de Marco, Pantaleoni and Pareto) gave rise together to a memorable series of the Giornale degli Economisti.161 It is precisely of our four economists that Einaudi (1934a) speaks in his preface to the First Principles of De Viti de Marco as of those who gave ‘contributions to the pure theory of economics so important that they made [that] period […] comparable with the most brilliant epochs in the history of our science’ ([1928] 1936, p. 19). The point to emphasise here is the importance to our study of considering the group composed of these four figures as a single

155

Pantaleoni was born in 1857, De Viti de Marco in 1858 and Barone in 1859. Pareto, ten years before, in 1848. 156 Pareto died in 1923, Barone in May 1924 and Pantaleoni in October of that year; De Viti de Marco lived for another two decades, dying in 1943. 157 We provide here only one of the many testimonies of their interrelationship in this letter from Pareto to Pantaleoni, ‘All the theories I have set out are simply the germs of theories. Economists like Barone who have knowledge, culture and intelligence, should be the ones to develop these theories, and seek new truths’ (Pareto 1960, vol. I, p. 455). 158 Pareto was an engineer, Barone was in the military forces (Magnani 2003, pp. 44–45, p. 72; Gentilucci 2006, p. 21). 159 De Viti de Marco and Pantaleoni had been fellow students since 1877 in the law faculty at the University of Rome, where they had studied the theories of Jevons (De Viti de Marco 1925a, p. 168) and Cairnes by themselves (‘De Viti and I […] challenged each other to solve problems based on Cairnes’ [Letter to Loria of 1 March 1890, in Fiorot 1976, p. 477]). 160 The close ties between Pantaleoni and Pareto has also been written about by Chauvel and Fitoussi (1997). 161 Until 1897 (Magnani 2003, p. 211). Ugo Mazzola was also one of the leading lights of the Giornale degli Economisti. Barone took an active part in the project, as a reviewer (Gentilucci 2006, p. 28). Macchioro (1996, p. 10) speaks of a very violent Methodenstreit against all economic positivism led by the Giornale degli Economisti. For the role of the Giornale degli Economisti on Paretian thought see McLure (2007, Ch. 4).

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entity,162 since it was precisely their frequent intellectual contact and their reciprocal influence that affected the genesis and development of the ideas on market power. It is by no means of secondary importance for the purposes of this study that for most of their lives they were all believers in free market and free trade and that all four were politically very active. They intervened in the political life of Italy, proposing reforms both in their works, as well as through direct participation: two were members of parliament (De Viti de Marco and Pantaleoni), and two tried to get elected (Barone and Pareto). Their period of militancy lasted from the mid-1880s to the arrival of fascism in 1923–24,163 a time when, as we have noted already, issues concerning monopoly power dominated economic thinking; and since all four were free market and free trade economists, issues related to competition policies and market power feature prominently in their writings. It is perhaps helpful to recall the reasons for their reputations, beginning with Pareto’s everlasting fame due mainly to the concepts of Paretian optimum, of ordinal utility, to his law of income distribution, and in general to his contributions to Walras’ theory of general economic equilibrium.164 Pantaleoni is considered the first economist to have applied the marginalist analysis to public finance,165 in 1883. He was the author of a textbook on pure economics, which led him to be called ‘the Italian Marshall’ for the role it played in the Italian culture,166 and he wrote other very innovative works.167 The fame of De Viti de Marco is mainly due to the foundation of Scienza delle Finanze as a purely theoretical discipline, as well as his important contributions to the theory of banking, international economics and the history of economic 162 The subject of the Italian marginalists seen as a distinct intellectual tradition will be discussed in the conclusive chapter of this book. It was briefly dealt with in Mosca (2015b). 163 After that time the only survivor of the four, De Viti de Marco, remained silent for two decades, drafting his textbook on Scienza delle Finanze. These aspects will be dealt with in Chapter 5. 164 Knight ([1921b] 1964, p. 6) considered Pareto ‘the most prominent exponent of the mathematical method’. 165 Pantaleoni (1883) has priority over Emil Sax (1884); see Mosca (2010). 166 The quotation, which comes from the Italian economist Umberto Ricci, is reported in Groenewegen (1998, p. 45). 167 Pantaleoni’s fame in his age is also attested by the following statement by Knight (1921b, 1964, p. 6): ‘Among “literary” pure theorists, Wicksteed, Schumpeter, and Pantaleoni stand out’. The historiography on Pantaleoni is examined in Bini (1995) and in Augello and Michelini (1997).

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thought.168 Finally, Barone is known mainly for his contributions to the theory of marginal productivity and the socialist calculation debate.169 The secondary literature also makes some references to them on subjects relevant to our enquiry. For example, Lombardini deals with Pareto and Pantaleoni’s contributions to the theory of monopoly;170 Schumpeter recalls Pareto’s position on competition (as a precursor of the modern duopoly theory171) and, critically, on monopoly.172 He also mentions Pantaleoni’s study of industrial combinations173 and Barone’s thoughts on the theory of costs and the supply curve.174 Pareto is also mentioned by Chamberlin for having distinguished ‘between acting like a monopolist and acting like a competitor’, and again for his contribution to the theory of duopoly.175 Sylos Labini cites Pantaleoni on the importance of fixed costs,176 while Stigler references Pareto for ‘the possible effects of social controls over purchases and sales’.177 It is again to Pareto that Dennis attributes the abandonment of the idea of competition as activity;178 he also claims that Barone was one of the few economists ‘to show much interest in Walras’s work by the 1890s’.179 Backhouse recalls Pareto’s innovations for Walras’ theory of competition;180 Machovec calls Pareto’s description of the behaviour of the

168 On De Viti de Marco’s bibliography see Cardini (1995); on his contribution to the history of economic thought see Mosca (2005a). 169 An example of Barone’s fame is found in Morgenstern’s review of the German translation of his Principi in 1927; this edition contained an introduction by Schumpeter (1927), who also praised him in Capitalism, Socialism and Democracy, and in his essay on Pareto (Schumpeter 1942 and 1949). On Barone’s contribution to the theory of marginal productivity see Baldin, Legris and Ragni (2012). 170 See Lombardini (1953, pp. 25–28, 53–54 for Pareto, and pp. 54–55 for Pantaleoni). 171 Schumpeter ([1954] 1976, pp. 972–973 and pp. 981–982). 172 Schumpeter (1949, p. 157). 173 Schumpeter ([1954] 1976, p. 857). 174 Schumpeter ([1954] 1976, p. 994). 175 Chamberlin ([1933] 1956, p. 16, pp. 36–37, p. 40, p. 52, pp. 222–223). 176 Sylos Labini ([1957] 1962, p. 89; 1995, pp. 197–199). Meacci (1998a, p. 3) emphasises the link between Pantaleoni and Sraffa. Bini (1995, section 5) deals with ‘Competition, Firms and Entrepreneurs in the Economics of Maffeo Pantaleoni’. 177 Stigler (1957, p. 9). 178 Dennis (1977, p. 265). 179 Dennis (1977, p. 232, fn. 3). 180 Backhouse (1990, pp. 68–69).

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monopolist ‘classical’;181 and Blaug attributed to him the ‘definition of the beneficial effects of competition’.182 To this list of contributions, we can add others found in specific articles by individual economists: De Viti de Marco’s article (1890a) on the telephone industry;183 Barone’s insights on the development of U-shaped cost curves,184 the concept of natural monopoly,185 and the theory of competition;186 Pantaleoni’s adherence to Spencer’s evolutionism187 and his interest in coalitions.188 As can be seen, our economists’ contributions seem very promising; however, no scholar has yet dealt with the specific subject of monopoly power in their thought. 1.3.3.2 The international diffusion of their ideas Another important reason why these four Italian marginalists were chosen is that they were leading figures on the international scene, placing Italy at the centre of contemporary debates on economic theory and practice. For personal reasons, they were cosmopolitan,189 and this certainly helped them find a place in the cultural cross-fertilisation of the period. They engaged in correspondence with economists throughout the world, and their work was reviewed in the best journals, in which they in turn published articles and reviews; their textbooks were translated into various languages.190 The secondary literature confirms that Italian ideas made up a conspicuous proportion of those circulating among the 181

Machovec (1995, p. 183). He also mentions Barone: radically critical towards the perfectly competitive model, he assigns Barone the role of having ‘encouraged the appealing ahistorical notion, directly rooted in Walras, that the basis of ownership was irrelevant to the achievement of static efficiency’ (p. 75). 182 Baug (2001b, p. 43). 183 See Petretto (2014) and Mosca (2007a). 184 Keppler and Lallement (2006). 185 Mosca (2008). 186 Ragni (2012) and Mosca and Bradley (2013). 187 Mosca (2015a), Sunna and Mosca (2017). 188 Dardi (2014). 189 Pareto, born in Paris of a French mother, was nephew to an ambassador to Constantinople, and had one Russian and one French wife; Pantaleoni, whose mother was Irish, gained his qualifications from school in Germany; De Viti de Marco, whose grandmother was English, married an American woman; Barone had very close links with German culture. 190 Pantaleoni’s textbook of 1889 was translated into English in 1898, De Viti de Marco’s of 1928 was translated into German in 1932, into Spanish in 1934, and into English in 1936. Pareto’s 1906 Manuale was translated into French in 1909 (but then translated into English only in 1971); Barone’s Principi (1908) was translated into German in 1927 and into Spanish in 1942.

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economists of the marginalist age;191 there are therefore good reasons for asking ourselves if their thinking gained currency on the specific subject of monopoly power. We shall also be evaluating their influence at the international level on the economic thought of the generations that followed them, and the outlook is promising because there is already some encouraging evidence available. The first regards Knight, mentioned previously for his exposition of the theory of perfect competition, who would appear to owe his ‘rigorous notion of equilibrium’ precisely to Pareto and Barone.192 Further evidence concerns the influence of Pantaleoni’s theory of fixed costs on J.M. Clark193 and, through him, on the following theories of competition. De Viti de Marco inspired entire areas of research,194 and there is evidence of derivations from his ideas on the subjects of monopolistic power and the regulation of public utilities.195 There is also a thread that from Pareto leads to Lerner, via Amoroso, and to Lerner’s famous index to measure market power, even though there is no proof of direct influence.196

1.4 CONCLUSIONS This chapter has shown that there is a gap in the secondary literature regarding economic thinking on the sources of monopoly power before the 1930s. We have looked at the literature on the history of different topics (models of profit maximisation in non-competitive markets, antitrust, competition and industrial organisation) to find out which kind of limitation to entry economists before Bain (1956) took into account, the role these economists attributed to the number of firms present in the market, and their ideas on potential competition. The economists offering 191 On the diffusion of Italian thought see Asso (2001) and Asso and Fiorito (2001a and 2001b). 192 Marchionatti (2003, p. 66). 193 Sylos Labini ([1995] 1997, p. 197) states that Pantaleoni was followed by J.M. Clark (1923) on the question of overhead costs. 194 Buchanan (2003, p. 283) recognised the importance of De Viti de Marco as ‘entry point’ in the research project that led him to the Nobel Prize. 195 Petretto (2014) does not trace the actual paths of the ideas; but offers useful hints on how to look for them. 196 Keppler (1994b, p. 597) attributes to Amoroso, a follower of Pareto, the formulation in 1930 of an index similar to the one developed by Lerner four years later. Amoroso’s priority is dealt with in depth and contextualised by Giocoli (2012).

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a promise under the terms of our enquiry were found to be from the Italian marginalist school of economic thought: Vilfredo Pareto, Maffeo Pantaleoni, Antonio de Viti de Marco and Enrico Barone. Having outlined the achievements and influence of the quartet, the next chapter addresses in more detail their theory and their vision of competition.

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2. The universal force of competition1 2.1 INTRODUCTION In Chapter 1, we came up with some important information on the sources of monopoly power by examining, among other things, the literature on competition: this means that a history of the ideas on the sources of market power for the Italian marginalists cannot disregard the analysis of their concept of competition. Competition, unlike monopoly power, has been dealt with extensively in the literature but there has never been a systematic analysis of what the economists we are studying thought of the question, especially if they are considered as a group.2 We 1 This title is inspired by the conception of competition in Pantaleoni ([1907] 1925, p. 216). It is a view that is found again in more recent literature: Hazlett (1985, p. 5), for instance, highlights the economists who believed ‘in the universality of the competitive assumption’. Previous versions of various parts of this chapter have been presented at the following conferences: at the 2nd STOREP Conference (Siena, 3–4 June 2005) with the title ‘Concorrenza classica nel pensiero marginalista’; at the Workshop ‘The Foundations, Definitions and Usages of Perfect Competition’ (University of Paris Ouest, 13–14 January 2011); at the 12th AISPE Conference (Florence, 21–23 February 2013) under the title ‘Perfect competition according to Enrico Barone’; at the 15th ESHET Conference (Istanbul, 19–21 May 2011) with the title ‘Competition in public finance. From De Viti de Marco’s lecture notes to his Principles (1886–1953)’; at the 9th STOREP Conference (Padova, 1–3 June 2012); at the 16th ESHET Conference (Saint Petersburg, 17–19 May 2012) with the title ‘The Italian Marginalist Maffeo Pantaleoni and the Universal Force of Competition’; and at the 55th SIE Conference (Trento, 23–25 October 2014), with the title ‘Io che sono un darwinista. La visione di Maffeo Pantaleoni’. 2 As we have seen in Chapter 1, section 1.3.3.1, Chamberlin (1933), Lombardini (1953), Schumpeter (1954), Stigler (1957), Dennis (1977), Backhouse (1990), Machovec (1995), and Blaug (2001b) deal briefly with some of Pareto’s ideas on competition, while Pantaleoni’s position on these issues is mentioned by Lombardini (1953), Schumpeter (1954), Sylos Labini (1957; 1995) and Mosca (2015a). Barone’s ideas on competition are just cited in Schumpeter (1954), Dennis (1977), Machovec (1995), Keppler and Lallement (2006), and Mosca (2008); they are dealt with in Ragni (2012), Mosca and Bradley (2013), and Dardi (2014). De Viti de Marco’s thought on market power is analysed in

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shall start by checking whether the hypothesis put forward in Chapter 1, that marginalist ideas co-existed with classical theory in the thought of the economists of this period, can also be applied to the Italians. We will start from the thought of the classical period. We will then examine opinions on method that are important in our economists’ conception of competition. In the central section, we will give a critical re-reading of the Italian marginalists’ writings, interpreting the way they dealt with competition. As we have already said, competition and monopoly power are antithetical only if competition is perfect.3 It is therefore necessary to clarify how the question will be divided up between this chapter and the next. In the first part of this chapter we will examine the elaboration of the theory of perfect competition. In this vision, the absence of monopoly power is clear from the very conditions hypothesised in order to ensure the instantaneous convergence to the perfectly competitive equilibrium.4 In the second part, we will deal with the ‘dynamic’ theory of competition in which monopoly power is temporary, that is: the transition of the economy once equilibrium is disturbed; the path of dynamic adjustment toward equilibrium after the introduction of an innovation; the case of competition without equilibrium, where the process of competition does not terminate in an equilibrium state, and where market power is not incompatible with competition. Under the expression ‘dynamic competition’ we also include stability analysis, innovation-imitation, disequilibrium, strategic behaviour, and selection.5 The latter was debated heavily in those years, for instance in the form of social Darwinism, as we shall see in the rest of the book. After an analysis of static and dynamic efficiency we will draw our conclusions.

Mosca (2007a) and Petretto (2014). There are of course some other studies on each of the four single economists which also consider their vision of competition, mainly in Italian, which will be mentioned when necessary. The comparison between this literature and our analysis will be the topic of the last section of this chapter. 3 Competition in the sense of the absence of monopoly is only one in a list of meanings of the word ‘competition’, which are reviewed and clarified by Martin (2004). 4 An original classification of the various contributions of past economists to the theory of perfect competition can be found in Dos Santos Ferreira (2012). 5 Naturally we are aware of the profound methodological differences between these different theoretical perspectives. For a taxonomy of dynamic competition theories see Ellig and Lin (2001).

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2.2 CLASSICAL COMPETITION In this section we will clarify the approach and the terminology we will use in relation to the classical concept of competition, before going on to examine the specifically Italian legacy passed down on this question by the marginalists. In the historiography on this subject, there are various interpretations of the classical concept of competition. The first comes from those who see Adam Smith as a forerunner of the modern perfectly competitive model. Adopting an incrementalist approach, they reconstruct the long process undertaken by the economists of the past with the aim of rigorously proving Smith’s intuition, finally achieved by Arrow and Debreu.6 The second line of research argues that in the theories of the classical thinkers there are no equilibrium prices, but only centres of gravity given by the conditions that guarantee the reproduction of the system.7 The continual movements of prices around their centres of gravity can take place thanks to the competitive behaviour of the economic agents.8 On this approach, in the classical thought ‘fluctuations of market prices around [the centres of gravity] are considered to be the normal state of an economy’ (Semmler 1984).9 This approach, too, therefore highlights what we have already said (Chapter 1, section 1.3.1); that is, in the classical perspective there is no inconsistency between competition and monopoly power.10 According to the third interpretation,11 espoused by most historians of economic thought, classical competition consists of active behaviour by firms in essentially free entry conditions in the long run. Various 6 See, among others, Arrow and Hahn (1971) and Hahn (2005). A harsh critique of this interpretation is to be found in Hutchison (1999). 7 For different interpretations on this front, see Roncaglia (1975), Garegnani (1981), and Eatwell (1982), among others. On the distinction between gravitation, convergence and stability, see D’Orlando (2007). 8 A similar conception is attributed to the classicals by Lombardini (1971). In the words of D’Orlando (2007, p. 18): ‘The classical economists (and scholars of the classical economists) believed that the economic foundations for longperiod positions to be attractors […] for actual magnitudes were to be found in the competitive process’. For an assessment of the classical notion of competition in this perspective see Salvadori and Signorino (2013; 2016). 9 Clifton (1977) also attributes the same vision of competition to Sraffa. 10 See also Dutt (1987) and Clifton (1977). 11 There are however other interpretations of competition in the classicals, including that in Arena (1979).

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expressions have been used to define this conception of competition: Schumpeter for instance referred to firms’ ‘strategies’;12 Stigler to their ‘rivalry’;13 Backhouse (1990) described such competition as a ‘dynamic process’ (in contrast to the ‘static’ concept of competition);14 and Blaug (1997) refers to ‘competition as a process’ (rather than ‘as an end-state’) and the ‘dynamic process-conception of competition’ when talking about the classicals (Blaug 2001b, p. 40). For our purposes, the terminology of Backhouse and Blaug is best suited to our enquiry into what was important for the Italian marginalists, since the distinction between static competition and dynamic competition is central to their economic thinking. Within this simple binary conceptual system (static/dynamic) we will include a plurality of different notions of competition. One final terminological clarification on the classical conception of competition is suggested by John Elliott Cairnes: I use the phrase ‘industrial competition’ as expressing the competition which takes place between the producers of different commodities – competition which tends to bring wages and profits into correspondence with the sacrifices undergone, in contradistinction to that which takes place between dealers in the same commodity and which operates toward equality of price. The latter might be called ‘commercial competition’. (Cairnes 1874, p. 303, fn.)

We will see that this distinction plays an important role in the period we are investigating.15 Now, however, we will focus on the legacy that the Italian classical thinkers left to our marginalists on the issue of competition.

12 In Chapter 1 we mentioned Schumpeter’s expression used to indicate the classical conception of competition, as opposed to the neoclassical view seen as ‘a pure theory of static equilibrium that excluded strategy’ (Schumpeter [1954] 1976, pp. 972–973). 13 Stigler (1957, p. 1) writes that for a long time, competition ‘connoted only the independent rivalry of two or more persons’. 14 Also Giocoli (2017) distinguishes the two notions of competition: for him, one is characterised by freedom of trade, the other by freedom of contract; and his view is that they both co-existed in the classical system. 15 Stigler (1957, p. 4) points out that a similar distinction (interindustry competition and intraindustry competition) was proposed by Marx, while Edgeworth (1925, p. 378) specifies that this distinction comes from Sidgwick’s Political Economy.

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2.2.1 Classical Thought in Italy16 For Italian classical thought,17 competition corresponded to the freedom to seek out new opportunities for profit, and to fight for a more advantageous position. Italian economists, considering it to be equivalent to a natural law, believed it was futile to violate ‘the principle of competition with restrictions of economic freedom’.18 Competition was seen as the source of all progress: the main instrument available to firms to compete, for them, was the adoption of more efficient production techniques. And even if this were to cause an increase in the firm size, Italian classical economists did not see this as a threat to competition: indeed, they were in favour of large firms, for they could introduce new machinery, which would allow a reduction in the costs of production. The introduction of machinery in turn required the transformation of firms from small domestic workshops into bigger modern factories.19 The monopoly power of the firm that first innovated did not arouse their concern, because such power would only be temporary. In fact, they expected that in a short time a series of imitators would adopt the new production technologies, and that as a result a rapid spread of innovations to other firms in the same industry would take place.20 Since freedom of entry in the long run determines a price equal to the cost of production, it was the belief of the classical economists that the benefits of efficiency were passed on to the consumers in the form of lower prices. Their writings nowhere betray any fear that a firm with a large market share may acquire market power and blockade entry; on the contrary, they were in favour of the freedom to set up associations, not only of firms, but also of employers and workers. The school of the distinguished scholar Francesco Ferrara also shared this vision of competition. However, having a powerful conceptual tool available (the cost of reproduction21), they defined competition more 16

This section is a re-working of Mosca (2007b, section 1). The economists we have considered are: Scialoja, Boccardo, Ferrara, Virgilio, Ciccone, Fornari, Fontanelli, Lampertico, Cossa, Marescotti, Martello, Todde. 18 Ciccone (1866–70, vol. II, p. 53). 19 I dealt with this aspect in Mosca (2005b). 20 This notion of competition as a process of innovation will, as is well known, be developed by Schumpeter. 21 The cost of reproduction theory of value considers that value depends on the cost of reproducing the unit in question, or a substitute of it. Developed by Ferrara, and preceded by Carey’s similar theory, it was regarded by the Italian marginalists as an antecedent of their own value theory (see Guccione 1993). 17

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incisively: for Ferrara (1864) ‘economic reproduction [tends to] remove anything that smacks of monopoly’ (1890, vol. II, part I, p. 110), and for his student Todde (1885, p. 691) competition exists if there is the possibility of ‘direct reproduction’. Comparing these ideas with the remarks made at Chapter 1 (section 1.3.1) on the theories of the classical economists, it can be seen that they do not differ from those prevailing outside of Italy. In particular, we wish to underline the fact that for the Italian classical economists the market power obtained through innovations was considered not just compatible with the competitive process, but indeed necessary to it. These ideas, as we will see, were significant as the roots of the Italian marginalists’ thought.

2.3 ECONOMIC DYNAMICS In Chapter 1 (section 1.3.2) we showed the importance of methodology in the development of ideas in the age of marginalism. An investigation into this point is needed to get a better understanding of the meaning of the contribution made by our economists to the specific theme of competition. Specifically, it is important to remember the deep thought they gave to the distinction between what they called statics and dynamics, and that is precisely why we have decided to adopt the terminology of Backhouse and Blaug. This distinction, borrowed from mechanics, was already present in Turgot, Canard, and Cournot,22 and then in Jevons and Walras, but it was only in this period that three of the economists considered in this book (Barone, Pareto and Pantaleoni) laid the foundations of modern economic dynamics.23 One of the first fields in which the concepts of statics and dynamics were used in the history of economic thought was that of monetary phenomena.24 We will therefore start from De Viti de Marco (1885), because in his first book, among the arguments he uses to defend the quantity theory of money from its critics,25 there is the accusation 22 See Ingrao and Ranchetti (1996, p. 757). On the mechanical analogy in Pareto see Ingrao (1991), McLure and Samuels (2001). Donzelli (1997) criticises the alleged similarities between rational mechanics and theoretical economics in the early neoclassical economists, and especially in Pareto. 23 On the birth of modern economic dynamics, see Tusset (2009). 24 Pantaleoni ([1909a] 1955, p. 31) was to recall the dynamic approach of Ricardo and Cairnes when he dealt with the effects of an increase in the supply of gold on prices. 25 On De Viti de Marco’s monetary economics, see Cesarano (1991).

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he levels against them of confusing monetary dynamics and statics (pp. 9–10, p. 29). In this context, for De Viti, dynamics is the study of the transitory period when money penetrates ‘a country’s entire circulation’. In fact, he writes: ‘before [equilibrium] is reached’, there is a period of dynamics to go through’ (p. 86), while the final result is ‘examined by statics’ (p. 92). Dynamics for De Viti therefore studies the path of adjustment that occurs following a ‘temporary disturbance of the equilibrium’ (p. 121).26 Another instance in which De Viti deals with this issue is related to crises, especially to the ‘period of dynamics’ preceding an economic crisis (De Viti 1885, p. 210). The latter may emerge from the fact that a price rise is erroneously attributed to an increase in the demand,27 or from the overestimation of the size of such an increase; in both cases, the reaction of firms generates excess supply.28 The crisis therefore breaks out if ‘due to faulty forecasting’ the ‘static outcome’, namely ‘the adaptation of the new supply to the new demand for goods’ is not achieved (p. 210).29 The distinction between static and dynamic problems soon also became part of the terminology used by Pantaleoni (1887, p. 186),30 to account for the distinction between final and transitory outcomes of a shock (Pantaleoni’s concern is with a fiscal shock). So far, we have only sketched out the concept of dynamics, but in 1894 Barone published a work entirely addressed to this specific issue.31 He explains that dynamics is the study of the period needed for equilibrium to be re-established after a change in the data, the movement towards the 26 This process of adjustment seems to us very similar to the so-called Cantillon effect, an expression that De Viti however never uses. 27 This reasoning by De Viti reminds us of the Lucas islands model with imperfect information. 28 In his words, ‘every producer, prompted by the liveliness of competition today, counts on being the only one, or on arriving ahead of the others to fulfil the higher demand manifested on the market during the initial price rise. He therefore increases his production, without considering that others are doing the same thing’ (De Viti de Marco 1885, pp. 216–217). 29 In this case the excess supply of goods firstly generates a rise in input prices, then such a reduction of the output price that it is no longer possible to repay ‘the price of the capital consumed during the production period’ (De Viti de Marco 1885, p. 202). De Viti defines the crisis as a permanent loss of wealth (1885, p. 197). He also returns to this theory in his essay on public debt (De Viti de Marco 1893). The issue reappears in relation to protectionist policies ([1902] 2008, p. 147). 30 Pantaleoni ([1887] 1904, p. 116) writes: ‘besides the dynamic problem of tax pressure, there is also a static problem’. 31 On the dynamics in Barone’s thought, see Tusset (2009, pp. 271–272), Mosca and Bradley (2013, section 6).

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final equilibrium; in other words, the behaviour out of a stable equilibrium.32 In his opinion, the Walrasian method is of no use for studying the adjustment path, since it jumps to the new equilibrium ‘without having to work out the intricate series of intermediary steps that the individual takes during the period that extends from one equilibrium to another’ (Barone [1894b] 1992, p. 25). During this transitory period, Barone finds the Marshallian analysis more appropriate.33 He writes: ‘Marshall’s method […] provides us with a first approximation of dynamic phenomena, which is not only theoretically correct but also extremely useful in practice’ (Barone [1894b] 1992, p. 17).34 All these ‘dynamic phenomena’ for him are therefore ‘phenomena of adaptation’, the slowness of which is proportional to the size of the ‘frictions’ (Barone [1908a] 1936, p. XVII).35 Because of the latter, on the way towards final equilibrium he

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Barone’s example is the introduction of a tax ([1894b] 1992, p. 24), which is taken up again in his textbook on financial economics ([1911–12] 1937, p. 271) and mentioned by Pantaleoni in a footnote written in 1904 (Pantaleoni [1887] 1904, p. 150). But elsewhere Barone also considers changes in tastes, in the amount of available capital, in population, technology and duties. 33 The fact that Barone turns (warily) to Marshall’s partial analysis is due precisely to the presence of frictions that make a shock spread more slowly. The Marshallian analysis interpreted in this way seems therefore to logically presuppose the presence of dynamic phenomena in Barone’s sense, namely of slowness in the propagation of a shock. According to Stigler (1957, p. 11): ‘technological limitations to the rate at which resources can move from one place or industry to another […] were in fact the basis of Marshall’s concept of the short-run normal period’. On partial equilibrium as the most essential element of Marshall’s dynamics, see Dardi (2003). 34 A similar result in the comparison of Marshall and Walras is reached by Donzelli (2008) by examining their formal analysis of a pure-exchange, twocommodity economy. 35 Barone attributes the slowness of the adjustment to different reasons: in this essay he finds that, after an exogenous shock, ‘[e]ven if an individual is gifted with an excellent hedonistic sensitivity, the task of adjustment must proceed through trial and error’ ([1894] 1992, p. 25). Later he would also talk about the fact that ‘The difficulty of adapting production to consumption is more serious for direct goods; it gets worse and worse, as long as they are instrumental goods of an even higher order’ ([1908a] 1936, p. 606). Other examples of ‘slowness […] in adapting from one equilibrium to the other’ ([1908a] 1936, p. 119) are: delay in wage variation after a price variation (p. 120); slow price reaction after an increase in the amount of money in the theory of comparative costs (p. 164), and – like De Viti (1885) – in the quantitative theory of money (pp. 198–200).

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thinks there emerge some ‘approximate’,36 or ‘provisional’37 equilibria, the study of which constitutes dynamics. Notice also that for Barone ‘the point of equilibrium in dynamic changes is always gone beyond’ (Barone [1908a] 1936, p. 635). Therefore, even if the oscillation is convergent in theory, in practice it does not converge;38 in fact, during this oscillation new shocks make their appearance, thereby preventing the achievement of final equilibrium.39 This is the essence of Barone’s specific contribution to economic dynamics, which can be placed in the category of sequential equilibrium (Tusset 2009). In spite of this, in some of his other works he uses the notion of continuous equilibrium resulting from uninterrupted variations in the data.40 Regarding dynamics in this second sense, Barone uses the analogy of a machine with tanks, pipes, pistons and weights, through which some liquid flows: by changing the weights, pipes, and tanks, the flow of liquid constantly shifts the equilibrium and gives ‘an idea of dynamic changes’ (Barone [1911–12] 1937, p. 274).41 36

An equilibrium is ‘approximate’ when ‘individuals adjust to the real economic environment with its oscillating prices’ (Barone [1984b] 1922, p. 26). 37 Barone for instance was to write, ‘we distinguish: a) provisional equilibrium, in which the price is determined by the demand and by the amount available; b) the distant equilibrium […] as far as the quantity produced is great or contracted, so as to equal the price at the production cost of the marginal firm (Barone [1908a, ed. 1923] 1936, p. 11). And also: ‘this provisional equilibrium cannot be final’ ([1912a] 1936, p. 303). It would seem that Barone’s provisional equilibrium corresponds to that of Marshall’s very short, or ‘market’, period, in which supply is fixed (perfectly inelastic). 38 Barone (1894b) proposed a mathematical method of investigation for a case where during the adjustment there are new exogenous shocks. In D’Orlando’s terminology it would be a case of gravitation, not convergence: the oscillation would be converging unless there were random disturbances in the meanwhile (D’Orlando 2007). In the next chapter, we will examine the forces that, also in theory, impede the achievement of the new equilibrium. 39 Our interpretation is different from that of Tusset (2009, p. 271), who thinks that for Barone ‘there is converging oscillation […] leading towards single market equilibrium’. 40 The data for Barone are: utility functions, production functions and initial endowments. He writes: ‘It will depend on us, to make a short enough time [when the data remain unchanged] to bring the hypothetical phenomenon of a succession of states of equilibrium ever closer to the real, essentially dynamic, phenomenon’ (Barone [1896] 1936, pp. 158–159). As we will see, this distinction was to be taken up by Pareto. 41 Barone was clearly inspired by Fisher’s hydraulic machine of 1891, which the Italian economist greatly admired. Like the Principi di Economia Politica, also the Principi di Economia Finanziaria (published in 1937) consist of a mixture of articles and lecture notes, most of which were written in the years

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At other times, Barone employs the adjective ‘dynamic’ to indicate exogenous shocks: an event ‘of a dynamic kind’ is for instance population growth ([1912b] 1936, pp. 334–335), and also the ‘raising of the demand’ ([1911–12] 1937, p. 299); for him, crises have ‘the nature of great disturbances of the equilibrium’, of ‘major dynamic facts’ ([1908a] 1936, p. 599), while phenomena related to war ‘constitute a gigantic dynamic change’ ([1908a ed. 1919–20] 1936, p. 649). As we will see, dynamics is used by Barone to make his analysis more realistic.42 For Pareto, too, changes in the external conditions that occur during market adjustments make it impossible to achieve equilibrium: ‘The real state is […] that of continuous oscillations around a central point of equilibrium, which also moves’ (Pareto [1896–97] 1971, p. 177).43 Following Barone,44 the focus of Paretian dynamic theory is the movement over time of the economic system.45 With the help of the metaphor of the man coming down a slope, Pareto states that political economy already has the tools to study the successive equilibria that occur at discrete intervals (the man’s steps as he descends the slope); if on the other hand the man uses a sled, explains Pareto, it is a question of dynamics, which involves the system adapting to the perturbations typical of continuous equilibrium. He says however that economists are not capable of dealing with it (Pareto [1896–97] 1971, pp. 642–643). In his Manual (1906), Pareto explains this difference more clearly: ‘The study of pure economics is composed of three parts: a static part, a dynamic part that considers successive equilibria, and a dynamic part that studies the 1911–12. Unlike the former, however, we shall not distinguish between the various editions, because the citations and quotations from the latter mainly play the role here of confirming and strengthening statements Barone made elsewhere. 42 Maurandi (2001) says the same about J.B. Clark. We will return to the relation between realism and dynamics in Chapter 4, section 4.1. 43 Remember that Pareto gave an ‘instantaneous interpretation of the notion of economic equilibrium’, in which ‘the equilibration process must necessarily be interpreted as a pure virtual process’ (Donzelli 2006, pp. 513–514). 44 In the Cours, Pareto does not cite Barone’s article on dynamics, but refers in general terms to his articles published in Giornale degli Economisti in 1894 (Pareto 1896–97, p. 210). 45 Luigi Amoroso (1935, p. 327), Pareto’s famous student, clearly explains that his master was not satisfied with the theory of economic equilibrium, and that he saw as essential ‘the influence of forces […] that tie the present to the past, the future to the present’; but Amoroso then adds that due to the impossibility of translating these forces into mathematical terms, according to Pareto, ‘economic dynamics ends up in […] sociology’. On dynamics in Pareto, see Demaria (1952), Donzelli (1991) and Tusset (2009).

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movement of an economic phenomenon’ (Pareto [1906] 2014, p. 73).46 The first kind of dynamics therefore returns to the method of sequential equilibrium, while the second is supposed to study the continuous movement of the system over time, but Pareto regrets that the analytic system available to the economists does not allow them to carry out such an analysis.47 After the contribution by J.B. Clark (1907) on the distinction between statics and dynamics,48 Pantaleoni took up Pareto’s challenge49 and steered the issue we are dealing with here in a new direction.50 In a famous essay of 190951 he commented on the ‘well-established’ terminology,52 which saw equilibrium as ‘a static position’, while dynamic phenomena were the movements which take place ‘once the equilibrium has been disturbed’ (Pantaleoni [1909a] 1955, p. 28). Pantaleoni’s theoretical innovation was not to confine dynamics only to cases where the system moves towards the initial equilibrium or towards a new 46

And later adds: ‘Static theory is the most advanced; there are very few and scanty accounts about the theory of successive equilibria; […] nothing is known about dynamic theory’ ([1906] 2014, p. 73). Montesano et al. (2014, pp. 522 and 556) recall Pareto’s attempts, including that of pursuit curves, which we will come back to. 47 In Pareto’s words: ‘It is vain attempting to build mathematical economic dynamics […] I have made dozens of attempts’ (quoted in Tusset 2009, p. 275). Also, according to Schumpeter (1949, p. 159), dynamics in Pareto remained ‘quite rudimentary’. On the reasons that made Pareto abandon the attempt to formalise continuous dynamic movement, see also Donzelli (1991, pp. 62–65). On the Italian legacy of Pareto’s dynamics, see Pomini and Tusset (2009). In the next chapters, we will see that Pareto also deals with the dynamic of evolution, institutional dynamic, and political dynamic, in a conception that goes well beyond pure economics. 48 On the mutual influence between Italian economists and their foreign colleagues, see Chapter 5. 49 Pantaleoni ([1909a] 1955, p. 26) writes: ‘Pareto succeeded in constructing a general system of static economics, but as regards dynamics, his work is no more than a beginning’. 50 On Pantaleoni’s dynamics, see Michelini (1993 and 1998), Giocoli (2003), Tusset (2009). Pantaleoni’s dynamics is also admired by Schumpeter ([1954] 1976, p. 967). 51 An abstract of this paper was published in English in 1910, while it was entirely translated in 1955. 52 He writes: ‘Economists have always used the concepts of statics and dynamics in this manner’ (Pantaleoni [1909a] 1955, p. 30); as well as Ricardo and Cairnes, who we have already mentioned in fn. 24, Pantaleoni cites Barone (1894b), Pareto (1896–97) and J.B. Clark (1907). Giocoli too calls this dynamic theory ‘orthodox’ (Giocoli 2003, p. 220).

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equilibrium (cases that he includes in dynamics ‘of the first type’), but to extend it to the case where it does not converge towards equilibrium at all (dynamics ‘of the second type’). According to Pantaleoni, such a case occurs whenever the variation causing the out-of-equilibrium movement changes the actual structure of the system,53 and in his essay, he examines four examples of dynamism of the second type, some of which we will return to later.54 Finally, returning to De Viti de Marco, remember that he too, though not directly contributing to the foundation of economic dynamics, made frequent use of these concepts of statics and dynamics, as well as others that he took from classical mechanics: for instance, the action of the ‘frictional forces’ at work in the adjustment phase.55 This was customary among economists of that generation. We shall conclude by mentioning his interesting application of the concepts of statics and dynamics to the succession of forms of the state (De Viti de Marco 1923, p. 13; [1928] 1936, p. 42; [1939] 1953, p. 40), which we will examine in Chapter 5. Our economists were therefore certainly interested in the conditions for static equilibrium, but they soon became involved in the study of what happens when it is disturbed. In most cases they concentrated on sequential equilibrium,56 in others they attempted to analyse continuous equilibrium, in yet others they considered the effects of structural changes. All of this will prove useful in the following section, in which we examine their economic, sociological, historical and political writings for the purpose of gaining a better understanding of their conception of competition.

53 In Dardi’s words, Pantaleoni’s dynamics of the second type ‘involved some kind of discontinuity in the premises on which a state of equilibrium is based’ (Dardi 2016, p. 371). See also Dardi (2014, p. 507). 54 The four cases are: (1) Changes in the extent of the economic area (public entrerprises, political prices); (2) Transformation of direct costs into overhead cost; (3) Modifications in population structure; (4) Decreasing cost curves in firms that attract inputs (people and capital). Because of its character, dynamism of the second type will be dealt with in Chapter 3. 55 Among very many examples, see De Viti de Marco ([1928] 1936, p. 155) on the shifting of taxes. 56 Montesano et al. (2014, p. 522) calls this kind of dynamics ‘multi-period comparative statics’, because it concerns an orderly succession of mono-periods.

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2.4 COMPETITION We saw in section 2.1 that the Italian classical economists viewed competition as a process of innovation in the presence of free entry. We also clarified the fact that our marginalists were in general interested in out-of-equilibrium behaviour, to the study of which they applied the term ‘dynamics’ (section 2.3). In this section, we will examine their writings, distinguishing the dynamic from the static notion of competition, which at the time was a recent insight. It would seem appropriate to start with dynamic competition, directly inherited from classical theory, before going on to consider the static notion of competitive equilibrium, which is the specific contribution of the marginalist era. However, as we will see in the conclusions of this chapter (section 2.6), for our economists the opposite is true: on their interpretation, the first stage of continuity with the classical economists is found in the theory of long-run market equilibrium.57 We will therefore start with the analysis of the static notion of competition, in which the system is in equilibrium, there is no active rivalry among individuals and among firms, and monopoly power is absent by definition (Machovec 1995 and Martin 2004). 2.4.1 The Static Notion For the four economists, as we have seen, statics includes the study of the ‘conditions necessary and sufficient for an equilibrium position’ (Pantaleoni [1909a] 1955, p. 28). In our case, it is therefore a matter of identifying in their writings the requisites for perfectly competitive equilibrium, and also the outcomes. In this section, we will therefore examine the development of this analysis over time, in chronological order. We will adopt an incrementalist approach, which seems best suited to this case. 2.4.1.1 Competitive equilibrium in the 1880s Confirming the fact that the analysis of equilibrium chronologically precedes that of situations outside it, we see that right from his degree thesis (Pantaleoni 1882) the twenty-five-year-old Pantaleoni started with the static idea of competition, which he would only later make dynamic, 57

In 1913 Pantaleoni equated the notion of equilibrium in competition both to that of the normal value (to which we will return) of classical economists, and to that of Marshall and Pareto’s long run (Pantaleoni 1913a, pp. 2–4).

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to then expand it out of all proportion until it became universal. He started from the theory of value in Book III of J.S. Mill’s Principles,58 and reinterpreted it distinguishing two cases, that of monopoly and that of competition.59 His purpose was to clarify once and for all that, under some hypotheses, the classical cost of production theory of value was ‘perfectly true’ ([1882] 1958, p. 87).60 By linking himself with the classicals,61 and attacking the historicists (the ‘gentlemen of the Verein für Sozialpolitik’ ([1882] 1958, p. 102)62), Pantaleoni illustrates the hypotheses under which this theory is valid: 1) that the products can be indefinitely increased with the same cost; 2) that the competition can be felt instantly, both between industries, which presupposes knowledge of the profits made in the various industries and the possibility of transferring capital from one to another, as well as within each among the many firms engaged in the same activity; 3) that the law of cost of production is always considered subordinate to that of supply and demand. ([1882] 1958, p. 85)

The first of the three hypotheses is ‘taken from Ricardo and J. Stuart Mill, of goods that can be produced ad libitum at the same unit cost of 58

Pantaleoni’s ([1882] 1958, p. 53) exact reference is to book III, chap. II. As we know, J.S. Mill (1848, III.2) considers the Law of Value with respect to three classes of commodities, while Pantaleoni considers only two, which do not correspond to Mill’s three, since both refer to reproducible goods, the first in monopoly conditions, the second in free competition. 60 In a letter to the Italian economist Achille Loria in 1890 he wrote: ‘It never came into my head to abolish the cost theory’ (in Fiorot 1976, p. 478). 61 This book by Pantaleoni (1882) is often regarded as part of the classical tradition, for example by Loria (in Fiorot 1976, p. 455). However, to us it seems already marginalist both because it contains the monopolist equilibrium condition, worked out originally by Pantaleoni ([1882] 1958, p. 72, fn. 1) before he knew of Cournot and Dupuit, and because it makes very frequent use of Jevons’ concept of final degrees of utility (for example, pp. 54, 61, 80, 84 fn. 1). The only sense in which this book could be classified as a classical work is if there is implicit acceptance of Pantaleoni’s idea that from Ricardo to Jevons, passing above all through J.S. Mill, Ferrara and Cairnes (p. 78), there has been a continual perfecting of the discipline and not a scientific revolution. He would always believe this, and we will find many examples of it. In agreement with us on this continuity in Pantaleoni is Michelini (1998, p. 17). 62 Specifically, here he gives an interpretation of the classical theory of value in contrast to that of the Italian historicist Fedele Lampertico (Pantaleoni [1882] 1958, p. 79, fn. 2), about which see Sensales (2011). From his correspondence with Loria we know that this was the very period when Pantaleoni’s rejection of socialism of the chair was formed (Fiorot 1976, p. 452). 59

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production’ (Pantaleoni [1882] 1958, p. 78), and therefore concerns the case of average constant costs.63 The second hypothesis reflects the definitions by Cairnes64 of industrial and commercial competition. Notice that it includes all the conditions required in a perfectly competitive market: free entry and exit, perfect information, large number of sellers, product substitutability. Moreover, as Pantaleoni states, since competitive market adjustment is instantaneous,65 these conditions generate an equilibrium state. He points out that the two kinds of competition identified by Cairnes generate single price (from commercial competition) and normal profits and wages (from industrial competition);66 that is, the two essential results of perfect competition. Lastly, notice that here Pantaleoni talks about ‘perfect freedom of competition’ ([1882] 1958, p. 88), using an adjective that would only later become the widely accepted way of describing this form of market.67 From the time of his first book on monetary questions, De Viti de Marco, for purposes related to his aims as a theoretician of public finance and free trade militant,68 also occasionally refers in his writings to the conditions of perfectly competitive equilibrium and states its outcomes. Using the modern expression, ‘goods produced in a regime of competition’ (De Viti de Marco 1885, p. 48) as well as the more quaint, ‘in 63 This is one of the passages that would disprove the interpretations of Fiorot (1976, p. 455) and of Augello and Michelini (1997, p. 125, fn. 20), which hold that Ricardo was harshly criticised by Pantaleoni. 64 See above section 2.2. Pantaleoni does not cite Cairnes at this exact point, but elsewhere he very often does. Of interest is this passage from a letter to Loria of 1890, about Cairnes: ‘I have read him so many times that I know him by heart and torment the students with Cairnes till they bleed’ (Fiorot 1976, p. 477). Moreover, he includes Cairnes among the ‘Epigones that are able to take Thebes’ (Pantaleoni [1882] 1958, p. 102). And yet in 1898 he admitted that Jevons and Walras were more original than Cairnes (Pantaleoni [1898c] 1925, p. 256). As we saw in the first chapter, these two conditions (perfect mobility of capital and labour, full information) can be traced back also to Senior (1836). 65 He also repeats elsewhere that the time needed to adjust the supply to the demand must be ‘extremely brief, that is, an almost instantaneous effect of competition, otherwise there is extra-income’ ([1882] 1958, p. 89). But he takes up Cairnes’ argument that it is ‘enough to have a small diversion of labour and capital – small compared to the mass invested in any major industry’ (p. 90) for the price to quickly fall into line with the production cost thanks to competition. 66 Pantaleoni ([1909a] 1955, p. 39). 67 We think the term ‘perfect’, referring to competition, may derive from Jevons’ perfect market. Moore (1906, p. 212) allows us to glimpse an already consolidated use of the expression ‘a régime of perfect competition’. 68 We will return to these aspects in greater depth in Chapters 4 and 5.

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conditions of normal and continuous competition’ (1885, p. 28), he means a market mainly featuring an ‘immediate’ (p. 80) – or even simply ‘quick’ (p. 104), or ‘lively’ (p. 216) – mobility of inputs. Remember that the expression ‘free competition’ is often used by him as the exact synonym of free entry.69 In his lecture notes for Scienza delle Finanze,70 which were written during his year of teaching at Pavia (De Viti de Marco 1886–87), before moving permanently to Rome, and which would later become part of his book founding the pure theory of public finance (De Viti de Marco 1888), he pronounces the single price as the typical result of this regime: ‘it is not true that for the same commodity there is always the same price; it is true only when there is free competition’ (De Viti de Marco 1886–87, p. 34).71 Pantaleoni in the meantime had officially joined marginalism with the famous essay of 1883,72 then liberalism with a series of articles in 1884,73 and had begun his incessant counterpoint criticising of the decisions of successive Italian governments.74 During a period of reflection at the School of Commerce at Venice (Scuola superiore di commercio di Venezia),75 in 1887 he studied the effects of fiscal pressure using the very notion of equilibrium,76 and analysed international trade using

69 Think of the meaning Jevons gives to ‘free competition’ amongst the conditions defining his ‘perfect market’. On this see also Dennis (1977, p. 190). 70 De Viti de Marco’s (1928) handbook was widely used for many years, starting from 1886–87, in the form of lithographed handouts, certainly authentic (see Mosca 2017); then in 1923 it was printed in a limited edition with the old title, lastly published in 1928, and then reprinted in various revised versions, until 1939. 71 De Viti uses this statement to confute the principle underlying proportional taxation; that is, ‘that for the same service the state must charge the same price’; since the state is a monopolist, it can set different prices for the same service (1886–87, p. 34). 72 Pantaleoni (1883) contains the first application of the marginalist calculus to public finance, and in particular to the decisions of parliament; on the priority of Pantaleoni over Sax, see Mosca (2010). We will come back to this essay in Chapter 5 where we consider the concept of the state. 73 We will return to the relation between marginalism and free market in Chapter 5. 74 We are referring to Pantaleoni’s reviews of public finances in the Giornale degli Economisti starting from 1886; on this too see Chapter 5. 75 In a letter of 1886 he confesses he has been ‘in a state of absolute mental sterility for the past year’ (Fiorot 1976, p. 463). 76 Pantaleoni writes, ‘the effect of the tax will be to determine a new position of equilibrium’ ([1887] 1904, p. 150).

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the concepts of industrial and commercial competition.77 However, in his groundbreaking handbook Pure Economics (Pantaleoni 1889), the notion of competition is dealt with carelessly. Pantaleoni includes the ‘existence of perfect industrial or commercial competition’ among the ‘hypotheses that frequently occur in economics’ ([1889] 1957, p. 4).78 Besides Cairnes, he refers to Jevons’ law of indifference79 to explain the single price in this market structure (pp. 159 ff.), and cites Cournot and Menger in a footnote. He mainly emphasises the demand side; that is, the consumer’s equilibrium. It was only later, in the wake of Ricardo and Cairnes, that Pantaleoni ([1889] 1957, p. 189) recognised the problem of the influence of the cost of production on the price ‘under conditions of perfectly free competition [and of] commodities susceptible of reproduction’ ([1888] 1957, p. 190). He then deals with it ‘following the elegant theorems of Professor Marshall’ (p. 190),80 with demand and supply curves,81 thus identifying the equilibrium price (p. 195).82 Pantaleoni concludes that he has ‘shown […] how the cost of production in markets between which industrial and commercial competition83 is fully operative, creates a normal value, to which current values tend to approximate’ (p. 197). Lastly, we should recall Pantaleoni’s statement that ‘the price for which a given mass of commodity is sold does not depend […] on the number of vendors, but exclusively on the quantity of commodity 77

In fact, in actual trade between countries he finds: free industrial competition of circulating capital, a ‘highly imperfect freedom of competition of the workers’, and various degrees of commercial competition ([1887] 1904, pp. 188–189). This time Cairnes is explicitly cited, as we have already mentioned (p. 177). 78 And also the hypothesis ‘of non-competing groups’ (on which see Chapters 3 and 4). 79 On Jevons’ law of indifference, Pantaleoni writes: ‘This law is a deduction from the hedonic postulate and from the premise of the existence of competition’ ([1889] 1957, p. 151). We will return to hedonism later in this section. 80 Here he cites The Pure Theory of Domestic Values (Marshall 1879). Ricci (1924a, p. 40) points out that Marshall’s supply and demand curves diagram was first made public in Pantaleoni’s book, as part of his system. 81 This time Pantaleoni considers not only the constant returns to scale, but also different slopes within the same supply curve ([1889] 1957, p. 193). 82 This is one of the examples that explain the following statement by De Viti de Marco (1925a, p. 167) in the obituary for Pantaleoni: ‘He annihilated the schools; but he used the components, which they believed were antithetical, and recombined them to construct a new theory of value’. 83 Here in a footnote Pantaleoni looks more deeply into the difference between commercial competition and industrial competition in Cairnes (1874).

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offered for sale’ (p. 60). For him, the normal value – that is, the equilibrium price – is a result of economic theory that belongs to the ‘hypothetical truths’ (p. 9) that science produces from certain premises; one of which is hedonism, which Pantaleoni considers the universal basis of pure economics. Although his exposition is at times very uncertain,84 it can undoubtedly be said that in this work Pantaleoni deals with competition exclusively in terms of static equilibrium. Pantaleoni’s theoretical findings remain milestones in Italian marginalist thought. Additionally, De Viti, in the 1892–93 edition of his lecture notes, presents Jevons’ law of indifference85 as deriving from a hedonistic postulate, as well as from competition itself (1892–93, p. 116),86 still in the sense of the possibility of capital passing ‘freely from one industry to another’ (1892–93, pp. 165–166). The most meaningful result of competition for De Viti is that the price ‘corresponds’87 to the cost of production, with the addition only of the ‘ordinary profits found on the market’ (1892–93, pp. 158 ff.). 2.4.1.2 The first formalisations The first big step out of the vagueness of the 1880s was taken by Barone (1894b),88 through his reflection on the difference between statics and dynamics that we have already talked about (section 2.3). For him, Walras’ method89 is undoubtedly suited to determining equilibrium prices. In one of the six major articles he wrote in the two-year period 1894–95, while serving in the military profession but wanting to teach at university (Gentilucci 2006, p. 30), Barone clarified numerous important outcomes of perfectly competitive equilibrium, referring to Walras’ system of equations. First of all, in a critique of Wicksell, he identifies 84

This part of Pantaleoni’s book ([1889] 1957, pp. 220–221) is so confused and inaccurate that in the English translation the text was different from the Italian, certainly changed by Pantaleoni himself who, having an Irish mother, knew English well. 85 As was said in a previous footnote, Jevons’ Theory was read by both Pantaleoni and De Viti de Marco when they were at university. 86 See above, fn. 79. 87 But more often ‘tends’, as we will see in the following sections. 88 An in-depth analysis of Barone’s contribution to the theory of perfect competition is found in Mosca and Bradley (2013), several passages of which are included in this book. 89 Which, as we have said, ‘offers us this new equilibrium without having to work out the […] intermediate steps […] during the period that extends from one equilibrium to another’ (Barone [1894b] 1922, p. 25).

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(also in mathematical terms90) the perfectly competitive regime with the situation in which the agents are price takers.91 Then, in a famous review he wrote of a book by Wicksteed, he shows that to have equality between the price of inputs and the value of their marginal product, it is precisely free competition that is required (Barone [1895b] 1983, p. 185).92 He then states that in this form of market ‘Walras’s ideal entrepreneur […] makes neither profit nor loss after having paid for all the services that he hires’ ([1895b] 1983, p. 186). Notice that in this article Barone makes a clear contrast between the conditions of perfect competition and those of other market structures: for him, it is only under free competition that ‘all the output […] will be distributed among the factors of production’.93 He also speaks of the single price that is determined under perfect competition (Barone [1895a] 1936, p. 123). Then he arrives at the following important result: ‘given the prices of the factors of production and the quantity produced, the average cost of production must be a minimum, the value to which the price of output is made equal by the effect of free competition’ ([1895b] 1983, p. 186). For Barone, these outcomes require the following condition: In the new market equilibrium, which arises as a result of the action of [a] disturbance, […] there is an implicit assumption that the individual has already made adjustments to his production and consumption (supply of services, demand for goods) in accordance with the new prices. ([1894] 1992, pp. 24–25)

Another condition for Barone is that there is a large number of economic agents; in competition ‘all the capital is not concentrated in the hands of one capitalist alone, but it is divided up among several of them’ ([1895a] 1936, p. 122). In 1896 Barone still believed that, since firms are price takers, one needs to follow Walras’ hypothesis that they are numerous and call this form of competition, not only ‘perfect’ but also ‘indefinite’ 90

Barone writes that the wage ‘must be considered constant when differentiating in order to set the maximum rate of interest’ ([1895a] 1936, pp. 122–123). 91 He is actually referring to input prices, so he states that every capitalist ‘makes his calculations as if the wage remains what it is, as if he had no means to modify it’ ([1895a] 1936, p. 123). 92 We wish to point out that it was precisely thanks to Barone’s theory of marginal productivity (Barone 1895b) that Walras, starting from the third edition of the Elements (Walras 1874, ed. 1896), considered the zero profit in perfect competition no longer a hypothesis but a result (Jaffé 1964). 93 He argues that Wicksteed ‘completely neglects certain conditions that are characteristic of free competition’ ([1895b] 1983, p. 185).

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([1896] 1936, p. 195), as Cournot and Walras had done.94 At the same time, he too sees himself in continuity with the classical economists, especially with Ferrara’s theory of the cost of reproduction,95 which he regarded as an anticipation of the theory of marginal utility. Then, like the others, he even salvages the theory of value based on costs: ‘between the theory of reproduction cost-pain (or utility theory) and the theories of production cost-numeraire, there is no opposition in a regime of competition’ ([1896] 1936, pp. 210–211). After a clarification like that of Barone on the properties of perfect competition, Pareto added precision to the question in mathematical terms: in the Cours he defines competition as a situation where ‘to establish the conditions for maximisation one has to differentiate keeping prices constant’ (Pareto [1896–97] 1971, p. 145). As we know, the hypothesis that in perfect competition the firm is price taker96 involves a horizontal demand curve, with the firm having no market power. However, as we will see in the next section, none of these implications is clearly expressed by Pareto.97 2.4.1.3 Other roads, for good reasons Barone and Pareto’s advances in mathematical terms do not seem to have been taken into account by De Viti in the 1896–97 edition of his lecture notes (and in later editions), when he describes in detail the process that in competition leads to the single price. His description can be summarised in five steps: (1) the single price does not depend on a ‘constant utilitarian appreciation’ on the part of consumers; (2) but on two forces: ‘the impersonality of the exchange’ and the ‘free competition of the 94

In Barone’s words: ‘From Walras, and also here, we deal with the case of an indefinite competition among entrepreneurs’ ([1896] 1936, p. 195). But before Walras, the adjective obviously comes from Cournot. On the different meaning of ‘indefinite’ in Cournot and in Walras, see Dos Santos Ferreira and Ege (2013, p. 638). Regarding the various terms used in defining competition, Moore (1906, p. 211) asked the following question: ‘In what respect is the idea of competition changed when the modifiers “perfect”, “unlimited”, “indefinite”, “free”, “pure”, are added?’ It does seem to us, however, that in his article Moore doesn’t give an answer to his own question. 95 See above, fn. 21. 96 The American Walrasian Moore (1906, p. 214) credits Pareto with identifying this condition to describe perfect competition, but as we have seen, Barone had already identified it. 97 Schumpeter ([1954] 1976, p. 973) writes that Pareto’s definition of competition derived from that of Walras: ‘excluding price strategy and law of indifference’.

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purchasers among themselves, and of the sellers among themselves’;98 these two forces together determine Jevons’ law of indifference; (3) in the market there are many producers competing with one another; (4) the purchaser, through ‘the law of personal advantage’, chooses the product offered at the minimum price, which becomes the single price (De Viti de Marco 1896–97, pp. 193–196). Pantaleoni too did not appear to follow Barone and Pareto, but seemed to be taking a different road. In the 1890s he was very well-known internationally; in an important article in the Economic Journal (Pantaleoni 1898a) he criticised the limited nature of the research field in economics99 and extended his own perspective.100 In this article, he took up a conception of economic relations typical of socialist literature, identifying three political settlements resulting from the division of the world into the weak and the strong: the predatory settlement where the strong eliminates the weak, the parasitic one where the strong exploits the weak, and the mutualistic one in which there are no opportunities for conflict (and which he considers merely utopistic).101 Pantaleoni states that at first sight competition could be considered an example of the predatory situation, but he points out that both the number of firms present in this market structure, and their size, are not at all the result of acts of strength, but derive from the structure of costs in relation to the demand. He thus sheds light on another important outcome of perfect competition to which we will return (in Chapter 4, section 4.4.2.1). In the next section of this chapter, devoted to dynamic competition, we will see that at this point in his economic works, Pantaleoni has already started to examine out-of-equilibrium situations; here, however, he is still 98

The specification that competition is ‘of buyers amongst themselves and sellers amongst themselves’ only appeared in the 1902–03 edition and remained until 1909–10 when it was eliminated. 99 For Pantaleoni, the only statements studied by economists are those related to contracts, which are voluntary and peaceful: they therefore exclude the possibility of identifying the strengths and weaknesses of the parties to the contract. The questions posed by Pantaleoni and his arguments in this essay are of great interest but are outside the scope of this work. 100 Pantaleoni ([1897] 1925, p. 185) had already mentioned this restriction, saying that the economics alone cannot explain historical phenomena and real events because it is confined to studying contractual relationships (egalitarian), overlooking political relations (violent) and protective relations (altruistic); then in 1898 in a letter to Loria he wrote that he was working on the forces making up political equilibrium, while Pareto was working on his Mind and Society (Fiorot 1976, p. 557). 101 We will come back to this in Chapter 4.

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tied to a completely static analysis of competition, which in fact concludes with the words: ‘Thus alone is equilibrium reached’ (Pantaleoni 1898a, p. 186). Meanwhile, De Viti, a member of the radical parliamentary group since 1901, continued to express in his numerous political writings the idea that capital ‘inevitably’ moves towards the most promising uses (De Viti de Marco [1903a] 1929, p. 21), indifferent to which industries it chooses to create ([1903b] 1929, p. 55). In De Viti’s view, this immediacy in capital mobility is made possible by the device of credit, which allows ‘new investments […] even before the old ones have been liquidated, and the new ones would be used to liquidate the old ones without interrupting the employment of the workforce’ (1904, p. 119). 2.4.1.4 Perfect competition The actual formalisation of the concept of perfect competition is found in Pareto’s Manual (1906), in which the issue is posed explicitly. At this point in his life Pareto ‘was already head over heels in Sociology’,102 but was concluding his work as a pure economist with conviction. Here we find an exact definition of perfectly competitive equilibrium because, as Pareto writes, ‘we must now define it more precisely’ ([1906] 2014, p. 89).103 He recommends using mathematics because otherwise, he maintains, one cannot ‘give a clear idea of the conditions necessary for the theorems to be true’ ([1906] 2014, p. 183), and he uses (or rather, inaugurate) the Edgeworth box for this purpose ([1906] 2014, pp. 95– 96).104 Pareto distinguishes two types of phenomena, type (I) and type (II).105 In the first, ‘the individual accepts the prices he finds on the market and […] tries to satisfy his tastes at these prices’ ([1906] 2014, p. 105). In type (II), the individual can modify the prices.106 He specifies, ‘type (I) is encountered where there is competition’ (p. 81), and it ‘is observed in a much purer form where competition is more extensive and more perfect’, while ‘type (II) is observed where there is no competition’ ([1906] 2014, p. 82). In the first market structure, therefore, the agents 102

Pantaleoni (1923, p. 585). See among others the chapter on Pareto in Ingrao (2013, Ch. VII). 103 Dennis (1977, p. 265) disagrees. 104 On the history of Pareto’s use of the Edgeworth box, see Montesano et al. (2014, pp. 541–545). 105 Montesano et al. (2014, pp. 524–525) explain where this strange terminology derives from. 106 We will return to this issue in Chapter 3.

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are price takers. It is interesting to see what Pareto wrote on this point to his student Pierre Boven: on peut supprimer le terme concurrence. Partout où vous trouverez ce terme […] lisez: ‘on suppose que chaque échangeur […] accepte un certain prix crié au hazard (ou autrement déterminé), et ne tâche pas de le modifier’.107

Therefore, in Pareto’s Manual we find not only the identification of perfect competition with price taking behaviour (which as we have seen was already in the Cours), but also the clear distinction between competition and monopoly deriving from that identification.108 Pareto often states that agents in competition must be numerous109 and demonstrates that ‘when there is competition among firms, they […] make neither profit nor loss’ ([1906] 2014, p. 162). Moreover, in his view resources shift according to the logic of profit and loss until their returns are equalised.110 His conclusion in the mathematical appendix to the Manual is that in competition: ‘The problem of equilibrium is therefore solved and determinate’ ([1906] 2014, p. 360). 107 ‘The term competition can be eliminated. Wherever you find this term […] read “it is presumed that every trader […] accepts a certain price called out at random (or determined otherwise), and does not try to alter it”’. Letter dated 11 December 1911 (Pareto 1973, p. 748). Pareto also sent an enclosure with these same words to de Pietri Tonelli (20 December 1912, p. 802). Another significant letter (14 September 1907) on this is addressed to Pantaleoni, in which Pareto writes that in the case of free competition ‘it is necessary to differentiate presuming constant prices’ (Pareto 1960, vol. III, p. 57). 108 Chamberlin ([1933] 1956, p. 16) says that in the Manual Pareto is wrong in the distinction ‘between acting like a monopolist and acting like a competitor’, but Backhouse (1990, p. 72) points out, ‘Despite his criticisms […] Chamberlin would appear to be adopting the same distinction as him’. 109 In his words: ‘The abstract case […] of two individuals acting according to type (I) does not correspond to the real world […] we need to assume that [they] are not isolated, but form one element of a whole’ ([1906] 2014, p. 94). Also: ‘a large number of persons come together in a market and act independently of one another and in competition’ ([1906] 2014, p. 107). Finally, for the case of phenomena of type (I), he specifies: ‘In general, there are several producers’ ([1906] 2014, p. 169). Chamberlin ([1933] 1956, p. 36) however states that for Pareto ‘the results of competition where there were two sellers would be exactly the same as if there were many’. 110 ‘Free competition tends to equalize the net yields of the capital goods that can be produced with savings; for savings are, of course, transformed into the capital goods that yield the highest returns, until the abundance of these capital goods causes their net yields to fall to the general level’ ([1906] 2014, p. 183).

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The seeds sown by Pareto about the static concept of competition are as usual further developed by Barone, who clarifies their implications. Barone gave up his military career in 1906 to teach economics, and in 1910 became a professor at the university of Rome.111 The year 1908 was very productive for him as he published both his Principi di Economia Politica (1908a),112 and his famous article ‘The Ministry of Production in the Collectivist State’ (1908b),113 in which we find Barone’s model of free competition ([1908a] 1936, pp. 37–40; [1908b] 1935, section II). It is very important to notice here that in his writings in these years he identifies perfect competition with the achievement of two outcomes, which he repeatedly and insistently spells out as typical of this market structure: ‘the cost of production equals the prices and the costs of production are at a minimum’ ([1908b] 1935, p. 254). He also demonstrates that the long-run equilibrium price is also equal to marginal cost, a statement that he illustrates through his very innovative graph with the movements plotted along the total cost curve ([1908a] 1936, p. 21, Fig. 12a).114 At this stage too, he re-reads the classicals from a marginalist perspective, stating that the theory ‘of cost of production, that of marginal utility and that of supply and demand […] far from being contradictory […] express three conditions that simultaneously appear in a market in equilibrium, operating under free competition’ ([1908a] 1936, pp. 41–42).

111

See Gentilucci (2006, p. 33 and pp. 40–41). The Principi di Economia Politica was published for the first time in 1908, and then in many other editions up until the end of the 1920s. The edition of 1936 contains the original version plus all the various additions and changes; moreover, it includes university lecture notes and articles that Barone wrote over the years. Through the dates of the bibliographical references we shall be giving an account of these later layers so as not to lose sight of the evolution of Barone’s thought over the years. On the various editions of Barone’s Principi di Economia Politica, see Michelini (2007). It was translated into German in 1927 with an introduction by Schumpeter (1927). 113 The article was translated into English and published in Hayek’s classic edited volume Collectivist Economic Planning. Hayek ([1976] 1978, p. 303) used Pareto’s and Barone’s arguments against ‘the socialist theoreticians’. Bradley and Mosca (2014) have examined the content and the context of Barone’s ‘Ministry’ (1908b). Several ideas from that work are included here. 114 In a different perspective – that is, referring to the elaboration of the U-shaped cost curve – also Keppler and Lallement (2006, p. 748) write that Barone ‘provides a clear statement of profit maximization: price equals marginal cost’. See also Dooley (2001). 112

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As we know, first for Pareto115 and then for Barone, the outcomes of perfect competition can be theoretically obtained also in a planned economy.116 On this point, other authors117 argue that the analogy between a private property market economy and a planned economy presupposes a static vision of competition, namely the theoretical possibility of calculating equilibrium prices as the solution to a system of simultaneous equations.118 Actually, when talking about the Ministry of Production, Barone often disregards dynamics, describing it as an ‘omniscient’ superior being, which thanks to its perfect information is able to instantly achieve perfectly competitive equilibrium (Barone [1908b] 1936, p. 63). But as we shall see this does not always happen. 2.4.1.5 Toward dynamics In his 1909 essay, which we have already encountered (section 2.3), Pantaleoni still considers equilibrium so central to economic theory that he calls it the ‘Science of the Laws of Economic Equilibrium’ ([1909a] 1955, p. 26). We will see that for him the only static equilibrium possible is that of competition, and it is due to the latter if the economic system can achieve it.119 After stating: ‘Not a few writers find a remarkable difficulty in defining competition’, Pantaleoni tries to solve the problem by recalling various theories and linking them together: Pareto’s idea of transformation, Jevons’ law of indifference, the theory of substitutes by Minghetti,120 and Ferrara’s theory of reproduction cost. More specifically he points out the complete parallel between the definition of competition 115 Pareto (1897, p. 499): ‘we have been able vigorously to prove that the coefficients of production are determined by entrepreneurs in a régime of free competition precisely in the same way as a socialist government would have to fix them if it wanted to realize a maximum of ophelimity for its subject’. See Mornati (2001). 116 Also called ‘collectivist regime’ Barone ([1908b] 1936, p. 294); on this see Bradley and Mosca (2014). 117 Especially Machovec (1995, Ch. 3), but we will return to this analogy later. 118 We will come back to this in Chapter 4. 119 Pantaleoni ([1909a] 1955, p. 38) writes: ‘equilibrium is only obtained as a result of competition between one and another use of a good; between one or another way of investing capital; between one or another way of employing personal services; between the time available to make one thing and that to make another; and the equilibrium position reached is that defined by the law of marginal utilities’. This issue is also dealt with in Giocoli (2003, p. 218). 120 Marco Minghetti, Italian politician and economist, had elaborated a theory of value similar to that of Ferrara, based on the substitutability of goods.

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deriving from Ferrara’s theory of reproduction cost and the one based on Pareto’s theory, and compares these ideas with Cairnes’ previously mentioned definition ([1909a] 1955, pp. 38–39).121 Despite these statements, which again underscore the static aspect of competitive equilibrium, Pantaleoni had already taken other roads leading towards the analysis of dynamic processes that are not necessarily convergent. 2.4.2 Dynamic Competition In section 2.3 we discussed how the Italian marginalists laid the foundations of the modern theory of economic dynamics; here we examine how they applied it to the specific issue of competition. Following the path we outlined in the introduction to this chapter (section 2.1), we will therefore deal with the economy’s transition period on the way towards competitive equilibrium, during which economic agents exert some market power; then we will examine the process of innovation that creates monopoly power, and the subsequent imitation that eliminates it. Afterwards, we will introduce competition without equilibrium, when monopoly power is always threatened and is an essential part of the competition process; in the latter case, it is meaningless to distinguish between competition and monopoly.122 2.4.2.1 The dynamics of adjustment In this section, we will discuss situations where the adjustment is not instantaneous; monopoly power is present, but only lasts until there is convergence on competitive equilibrium. As we have seen, Barone mainly uses the word ‘dynamics’ to indicate the analysis of the movement toward equilibrium, and we know that in dealing with this case, he abandons the general equilibrium approach in favour of Marshall’s partial equilibrium analysis.123 In his 1894 article he identifies the factor delaying the convergence to a new equilibrium as imperfect information: 121

Notice once again Pantaleoni’s incrementalist perspective. In the words of Park (1998, p. 351), who analysed cases similar to ours, ‘the distinction between competition and monopoly becomes blurred at best’. 123 So much so that Pareto wrote to Pantaleoni in 1908: ‘I don’t know whether [Barone] wants to take into account the interdependence of the phenomena’ (Pareto 1960, p. 85). In Schumpeter’s words, Barone ‘was the man who […] formulated the limits of the validity of Marshall’s partial analysis’ ([1954] 1976, p. 858). Actually, he wrote to Wicksell that he did his best to reconcile Walras, Marshall, and Edgeworth (letter dated 23 November 1895 in Jaffé [1964] 1983, p. 189). 122

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he asserts that after an exogenous shock ‘[e]ven if an individual is gifted with an excellent hedonistic sensitivity, the task of adjustment must proceed through trial and error’ (Barone [1894b] 1992, p. 25); obviously there would be no such attempts if agents were fully informed.124 The hypothesis that in competition the firm is price taker commonly implies that the entrepreneur has exhausted his specific function. However, this implication is not present in Pareto’s Cours: two years after Barone clarified the difference between statics and dynamics, also Pareto talks at length about the adjustment process towards competitive equilibrium. To illustrate the difficulty of this process, which he attributes to firms’ forecast and adaptation errors, he makes use of pursuit curves (Pareto 1896–97, p. 143).125 Remember that Pareto did not share Walras’ faith in tâtonnement either,126 as is shown by the following passage and in general by all his research on economic dynamics: If, by an extraordinary chance, […] the cost of production […] were exactly equal to the sales price of the commodities, equilibrium would be achieved at the first step. Generally, however, things don’t work that way. Certain prices […] will be higher than the corresponding costs of production and the entrepreneurs, encouraged by the profits made, will develop that line of production. Other prices […] will be lower than the costs […] and the entrepreneurs will limit those lines. The amounts offered on the market will therefore be altered and, for this very reason, the whole equilibrium will change. A new equilibrium will emerge […] etc. until finally […] equilibrium has been […] achieved. In actual fact, equilibrium is never achieved since, when one tries to approach it […] it changes continually […] The real state is therefore that of constant oscillations around a central point of equilibrium, which itself is moving. (Pareto 1896–97, p. 177)

Shortly afterwards, Pantaleoni (1898a), while transferring the idea of equilbrium to other fields of the social sciences,127 delved further into the 124 Using the words of Scitovsky (1950), we may say that ignorance restrains competition. 125 The pursuit curve describes the curved path of the person pursuing a goal that is moving along a straight line. In mathematics, it is also called the ‘dog curve’. 126 Backhouse (1990, p. 69) writes: ‘Pareto has moved away from Walras’s auctioneer’. Also, Dennis (1977, p. 265) says Pareto ‘does not attempt to construct anything remotely like Walras’s dynamics of tâtonnement’. For a comparison between Walras’ and Pareto’s dynamics see Donzelli (1991 and 2006). 127 We have already examined in section 2.4.1.3 his ‘An attempt to analyze the concepts of “strong” and “weak” in their economic connexion’ (Pantaleoni

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dynamics of adjustment during a critical discussion with the French economist Charles Gide128 on the subject of cooperatives. Much more will be said about this work in the next chapter, which is devoted to monopoly power. Our interest here is merely to recall that it contains a detailed description of the process of convergence towards equilibrium (a process that he and others called a period of ‘crisis’129). The disturbance Pantaleoni considers here is the outcome of the cooperatives setting wages higher than equilibrium wages (pp. 172–173). Notice that in his description he considers the underlying hypotheses of stability of equilibrium, mobility of goods and factors of production, perfect information, and so on, to be implicit. Pantaleoni’s purpose is to show that in an economy exclusively made up of cooperatives, there would be the same prices and the same income distribution as in the ‘bourgeois market’ (p. 168). This purpose reminds us strongly of what made Barone (1908b) claim that the economic categories of the capitalist economy would reappear in the collectivist state. Furthermore, Pantaleoni’s argument on the impossibility of changing income distribution also recalls another famous work by Barone, written in 1895 and at that time still unpublished;130 these ideas would then also be expressed in Pareto’s constant income curve (Pareto 1896–97).131 As we know, at that point Pantaleoni was about to abandon his attachment to the concept of equilibrium completely. As to Pareto (1906), it is certain that with type (I) and with the expression ‘free competition’ he meant not only final equilibrium, but also the behaviour of entrepreneurs during adjustment. In general Pareto feels that firms respond slowly; and takes into account their actions in the intermediate stages that follow consecutively until equilibrium is

1898a). His student Umberto Ricci (1924a, p. 74) states that: ‘Although Pantaleoni did not declare himself to be too fervent an admirer of sociology, none of our economists has more right to the title of sociologist’. 128 Pantaleoni (1898b) was written in response to a discussion with the economist Charles Gide; his polemic is also against those who inspired the latter: J.S. Mill, Cairnes and even Marshall. See also Gide’s (1898) reply. 129 For example, regarding a shock that affects a system in equilibrium, Pantaleoni writes, ‘there will follow a crisis that produces extra-income for some […] and losses for others’ (1898b, pp. 172–173). 130 It was Barone (1895b), in which he demonstrates the equality between the price of inputs and the value of their marginal product. 131 Pantaleoni however cites Barone (1896) and Pareto (1896–97, sections 703–706) on the distinction between entrepreneur and capitalist.

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reached.132 It is interesting to notice that he still often uses the term ‘competition’ as a synonym for free entry, and not only to denote price taking behaviour.133 The year before Pantaleoni’s provocative essay on the dynamics of the second type (1909a), Barone insisted that the market, by trial and error, automatically goes in the direction of the equilibrium set of prices.134 Also for Barone, convergence is never instantaneous or guaranteed, since it requires a transitional period of adjustment, which he presents as the passage through a number of provisional equilibria, before reaching the definitive one, provided there are no other intervening shocks. Barone describes the forces that drive the economy in the direction of the competitive equilibrium, such as the auction mechanism and speculation ([1908a ed. 1919–20] 1936, p. 398 and pp. 438–439), as well as the ‘frictions’ that slow down its attainment on both sides of the markets. Among them, besides imperfect information,135 the most important concerns imperfect input mobility. On the latter, Barone provides a general rule for the speed of adjustment of supply to shocks in demand: for savings [the adjustment] proceeds with a certain speed; for property capital there is greater or lesser speed; for land […] there is no [adjustment] […] because lands cannot be reproduced;136 for labour [it] is slow. ([1908a] 1936, p. 49)

132 Montesano et al. (2014, p. 524) write: ‘he uses the expression free competition to encompass the entire competitive process, predicted on the free entry condition, which he conceives in terms of temporary static equilibria […] and assuming ceteris paribus’. See also Zanni (1993, p. 255), who says Pareto talks about ‘prices […] that vary in the negotiating process that leads to equilibrium’. Zanni (1995, p. 460) also explains that ‘in Pareto the delay in price reaction by competing firms implies limited knowledge’. See also Bridel (1991, p. 46). 133 See for example Pareto ([1906] 2014, p. 176). There is further detail on the fact that ‘Pareto is not univocal when he verbally defines competition in words’ (Montesano et al. 2014, p. 643). 134 In his words: ‘Equilibrium is reached […] by a series of attempts, raising one [price] and lowering the other (which is what automatically happens on the market)’ (Barone [1908a] 1936, p. 40). 135 His definition is: ‘ability to discern and to put into action a plan which combines the technical coefficients to the greatest economic advantage’ (Barone [1908b] 1935, p. 252). 136 We will return to this in Chapter 3.

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Pantaleoni too acknowledges that ‘there is no rapid universal migration of labour from place to place and from occupation to occupation; there is no swift general transferability of capital from one market to another or from one use to another’ (1913a, p. 17), while ‘the industrial and commercial free competition regime’ would require ‘freedom of labour, inviolability of contracts, security of capital and property and all the other conditions of the division of labour’ (1913a, p. 43). Let us conclude with De Viti de Marco. Unlike his political writings, his lecture notes and his public finance handbook very rarely see the author closely examining the dynamics of adjustment in a regime of competition. One of these few cases concerns the description of the convergence that follows the introduction of a tax,137 during which supply adjustments take time, and involve exit and subsequent entry of firms into new sectors, with the necessary mobility of inputs (savings and labour) ([1928] 1936, p. 155).138 However, the adjustment is slowed down by: frictional forces the examination of which would require very detailed analysis; much depends, for example, upon whether in the enterprise […] there is more fixed capital, which is difficult to disinvest, or circulating capital, which may be disinvested rapidly; whether the enterprise operates under increasing or decreasing costs; whether the goods involved are subject to an elastic or inelastic demand. ([1928] 1936, p. 155)

2.4.2.2 Innovators and imitators Separate consideration must be given to the issue of the introduction of innovations, which follows the classical Italian vision examined in the introductory section of this chapter (section 2.1).139 The first source of market power considered by De Viti is related to the introduction of innovations. The economic profit obtained, at least initially, is an incentive for new firms to enter the market: if there is free entry, monopoly power is only temporary and the price tends to gravitate toward the marginal cost of production. In his first book, he writes: 137

De Viti is examining the phenomenon of tax shifting here. The general economic equilibrium approach to the issue of the effects of taxation was praised by Benham (1934). 139 And that, as we have said, is an obvious forerunner of Schumpeter’s model. This is also recognised by J.M. Clark (1955, pp. 450–451): ‘In the theory of a generation ago, competition played a twofold role: as an agency to eliminate excessive and exploitive profits and as a stimulus to technical progress […] Later, Schumpeter’s theory made its mark’. 138

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In every nation, the industrial and commercial classes have to be considered non-competing groups140 […] when one of them [finds] a new outlet for his commodities, he makes extra-profit at first, until the other producers are ready to compete with him, and to bring the prices to a level that remunerates everyone equally. (De Viti de Marco 1885, p. 157)

For Pareto too, the profit deriving from innovations is only temporary because of imitators. In his own words, ‘entrepreneurs […] explore every way of making the unit cost less than the selling price […] But, when one of them has attained his objective, the others through competition bring the unit cost back to the selling price’ (Pareto [1894] 2008, p. 388). And also: Entrepreneurs that suffer losses can be represented as people laying seige to a hill occupied by entrepreneurs that make profits. The latter try to repel the attackers: to do so they are constantly forced to think up new ways of improving their products. ([1896–97] 1971, p. 725)141

At a talk in 1900 the message of the new member of parliament Pantaleoni was clear and simple: if the twentieth century did not pose any danger of socialist success it was due precisely to competition seen as a process of innovation. In Chapter 4 (section 4.3) we will see how the spread of competition, ‘a force as powerful as the law of gravity’ ([1900] 2001, pp. 360–361), can ward off such a danger; here, we will simply look at his description of the competition process. According to Pantaleoni, the competition process is triggered, as in the Italian classicals, by the ‘volcanic eruption’ (p. 360) of an invention (which may be economic, political, cultural or artistic); then, thanks to the imitation that follows, its benefits slowly extend to the whole world. While this process is going on in one industry, a new eruption takes place in another, and the world is like ‘a sea in ferment’ (p. 360). 140

In English in the original text. We will come back to this concept in the next chapter. 141 On this, we can cite the comment by Montesano et al. (2014, p. 562): for Pareto ‘competition is the realm of non-logical actions. Entrepreneurs […] imagine they can take away some share of demand satisfied by other firms in the same industry, or they dream about appropriating the increase in income that will be generated by other industries’. We might specify: competition in this particular meaning, as perfect competition is certainly included by Pareto within pure economics, which for him is the realm of logical actions. Remember Amoroso’s words referred to Pareto: ‘economic dynamics ends up in […] sociology’ (Amoroso 1935, p. 327).

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On a great many occasions, De Viti describes the process of firms entering the markets where there are positive economic profits. In his writings, one continually meets phrases such as: ‘capital will continue to rush preferably to where the operation in itself is more profitable’ ([1903a] 1929, p. 12). For example, for him the reduction of costs derives, all other conditions being equal, from the introduction of cheaper methods: new machinery, better means of communication and above all, as we shall see in Chapter 5, free trade ([1904] 1929, p. 118). In these circumstances, ‘the vital industries […] will run for cover, firstly perfecting their organization [while] some anaemic factories […] will hasten to their final closure’ ([1904] 1929, pp. 118–119). The final effect will be an ‘immediate cut’ in price, following the reduction in the cost of production, and it will be due to the ‘regime of free competition’ (1885, p. 48), in the sense of the entry of new firms into the industry. In some editions of his lecture notes we find a description of the behaviour of entrepreneurs who abandon firms that are no longer profitable ‘to launch into new enterprises and new industrial organisations’.142 Pareto goes so far as to say that it is only when there are imitators that ‘competition is effective’ ([1906] 2014, p. 102).143 As in the case of Barone, for him too there is a delay in the firms’ reaction to the innovator’s price cut.144 We will conclude with Barone, for whom transitory profit is ‘a differential gain [which] appears as soon as the competing entrepreneurs are not manufacturing under the same conditions’ ([1908b] 1935, pp. 251–252). He very often states that competition consists above all of the ‘substitution of entrepreneurs with lower cost for those that produce with higher cost’ ([1908a ed. 1909] 1936, p. 287),145 and repeats that this substitution derives from the ‘continuous dynamism of the market’ ([1911–12] 1937, p. 312). 142 De Viti writes: ‘profit […] vanishes in firms that no longer need the specific work of the entrepreneur to organise them since they are already established, nor do they need to run risks’. They are clearly well-established firms who have given imitators the time to enter the market. This phrase is found only in the lecture notes from 1907–08 to 1914 (exclusive). 143 Montesano et al. (2014, p. 547) suggest a parallel with ‘Cournot’s inventeur monopolist, Marshall’s conditional monopoly’. 144 For Montesano et al. (2014, p. 547), ‘The delay with which the competitors […] react to the reduction in price strategically adopted by an entrepreneur implies that Pareto relaxes […] the unlimited knowledge (perfect transparency) postulate’. 145 For example, in the construction of the supply curve Barone ([1908a] 1936, pp. 8–9) puts firms in increasing order of cost and shows that if a new firm

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It is surprising that for Barone this situation doesn’t change even in a collectivist regime, unless the Ministry, being ‘omniscient’ ([1908a ed. 1919–20] 1936, p. 408), is able to skip the path to equilibrium. Moreover, if the Ministry were capable of introducing more efficient technologies, the ‘firms with higher cost, succeeding the least’ would have to leave the market, generating the same outcome as free exit in market economies (Barone [1908a ed. 1909] 1936, p. 645). He therefore demonstrates that even ‘in a system of collective production […] all the cyclical effects that constitute […] the phenomenon of crises’ (p. 641) would be reproduced, thus depriving the collectivists of an argument condemning the market economy compared to the planned economy.146 2.4.2.3 Disequilibrium We shall now introduce the concept of competition without equilibrium as it emerges from the writings of these economists. Here monopoly power is always threatened and is not antithetical to competition, being an essential part of the competitive process. In this category, we also include a vision of the competitive process that was very characteristic and particularly relevant in the intellectual context of the era under consideration: the idea of competition as a selective process.147 In Pantaleoni’s works this evolutionary perspective is always present.148 He affirms that free competition is merely a special aspect of the struggle for survival ([1892] 1925, p. 16). One of his best-known examples is the horse race (Pantaleoni 1901), an allegory of all races, which he attempts to define in terms of the starting positions and the finishing line. Pantaleoni looks for the natural and artificial factors that affect the initial positions of individuals and nations, both on an economic plane,149 and on a social level.150 While the race is underway, enters the market producing at the same cost as the first one, the last one sustaining the highest cost of production is forced to exit the market. 146 In contrast to what Machovec (1995, pp. 75–76) maintains, here the analogy between a free-market economy and a planned economy is also established in a dynamic context. The issue of innovation in a socialist state is dealt with in depth in Michelini (2005). 147 Competitive selection is today included in industrial organisation (Cabral 2000, pp. 89–91). 148 On Pantaleoni’s Darwinism see Mosca (2015a), Sunna and Mosca (2017). 149 They are original inequalities, or choices with irreversibile effects (such as protectionism). 150 On the social plane, upsets in the starting positions derive from compulsory education, charity, emigration laws, cooperative societies, tax reforms, social legislation, socialism – or also its opposite; that is, a system designed to

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the destination is also continually changed, further redefining the initial positions compared to the finishing line. Competition here is an unstoppable adjustment to conditions that are constantly changing. All reference to equilibrium has been abandoned: what prevails is the feverish dynamism of the biological metaphor. In a work from 1907, Pantaleoni also identifies competition as the primary source of social selection, which is a subject we will examine more closely when addressing the welfare implications of competition (section 2.5). De Viti de Marco ([1890a] 2001, p. 513) in turn often equates competition with selection – the triumph of the ‘most powerful and best organized’ firm, which knocks out the small-sized competitors (p. 513),151 or as a hard-fought war, usually waged by the newcomer against well-established rival firms ([1914a] 1929, p. 184).152 In the various editions of his lecture notes one frequently finds expressions alluding to competition as a struggle between opposing forces. Something important in our view, and to which we will return in Chapter 4, is that the dynamic notion of competition is clearly dominant in the political writings of De Viti de Marco while the static notion is found almost exclusively in his theoretical works. Barone too sometimes calls competition ‘a selection’ ([1908a ed. 1909] 1936, p. 303), ‘a war’ (p. 327) that ‘is declared’ between individuals and between nations ([1911–12] 1937, p. 378), which ‘liberates’ forces ([1908a] 1936, p. 255). In these scenarios, competition seen as selection and as struggle is interwoven with the idea of strategic behaviour,153 which as we have said was also present in Pareto. As the firms considered here compete in order to create and maintain monopoly power, we will examine this topic in Chapter 3. create ‘initial positions that are unequal, but believed to be more advantageous to the collectivity than positions of equality’ (Pantaleoni [1901] 1925, p. 69). 151 On other occasions, too, De Viti (1892–93, pp. 165–166) talks about ‘a struggle, an economic movement among the various industrialists, capitalists and workers’. 152 De Viti ([1914a] 1929, p. 184) augurs that from the beginning firms have a ‘reserve capital’ at their disposal to cope with the ‘costs of war’ of the firms amongst themselves, so that they are not ‘offloaded onto the balance sheets of peaceful consumers’. 153 Dardi (2012) explains the differences between the present use of dynamic models on the one hand, and of game-theoretic methods on the other. Vromen (2013) indicated the merit of evolutionary game-theoretic analyses, in which the two aspects co-exist. Lambertini (2018) gives an organic shape to the literature on dynamic games (in continuous time) in industrial economics.

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2.5 WELFARE IMPLICATIONS What are the implications of competition for welfare according to our economists? This question requires both a definition of welfare and an idea of how to maximise it. 2.5.1 Static Efficiency In July 1894 Pareto published ‘The maximum of utility given by free competition’, in which he credits Walras with having demonstrated that ‘free competition produces maximum utility’ ([1894] 2008, p. 387). Then he proves that ‘The coefficients of production are determined by free competition in such a way as to ensure maximum ophelimity’ ([1906] 2014, p. 183).154 This was followed by other writings on the subject,155 and then by Barone’s demonstration that perfectly competitive equilibrium ([1908a] 1936, p. 24) is characterised by optimality,156 and that collectivist equilibrium is also efficient ([1908b] 1935, p. 274).157 This result was already present in Pareto’s Cours (1896–97, section 721), as well as in his Manual: besides type (I) corresponding to competition and type (II) corresponding to monopoly, Pareto also considers type (III), which ‘corresponds to the collectivist organization of society’ ([1906] 2014, p. 82). Pareto finds it similar to type (II),158 but we are looking at it here because he states that, if it is supported by a planner who wants to ‘procure the maximum welfare of all those who participate in the economic activity’ ([1906] 2014, p. 147), in theory the result will be as efficient as that of perfect competition ([1906] 2014, p. 134). 154

For a reconstruction of Pareto’s elaboration of the criterion of optimality see Mornati (2013, p. 78), who points out that ‘In view of the impossibility of comparing the ophelimities of individuals, in economics there can only be a maximum ophelimity for the society (that […] takes into account the only variations of the individuals’ ophelimities) and not the maximum ophelimity of the society (which should precisely consider the ophelimity of society taken as a whole)’. For Pareto, however, the latter can exist in sociology. 155 Pareto’s analysis of allocative efficiency throughout his writings is examined by Montesano (1991b and 1997). 156 See Bradley and Mosca (2014); see also Petretto (1982a and 1982b). 157 Barone’s originality in the development of the theory of the efficient allocation of resources is stated in Petretto (1982a and 1982b). 158 Pareto ([1906] 2014, p. 106) writes: ‘Type (III) also corresponds to monopoly’.

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Then, moving away from the theoretical side, Pareto specifies that in some real contexts the collectivist state would work better than free competition, in others worse;159 and concluded that ‘pure economics provides us with no truly decisive criterion with which to choose between a system of organization based on private ownership (or competition) and a socialist system’ (Pareto [1906] 2014, p. 184). The effects of competition in terms of welfare are also examined by De Viti, though less rigorously, based on his liberal free-trade beliefs: for him, ‘the universal law of progress is the growing depreciation of all the goods we produce’ ([1903a] 1929, pp. 36–37), and this benefit is obtained with the free market and free trade. In stating that ‘trade cannot be reasonably conceived without reciprocal gain’ (1912–13, pp. 33–34), he too sees the best of all possible results in competitive equilibrium;160 in other words, that which today is called allocative efficiency in a static sense. 2.5.2 Dynamic Efficiency Today dynamic efficiency concerns innovation, while static efficiency refers to a given set of technologies.161 Here however the former concerns the effects of competition on welfare according to the dynamic conception of our four economists; that is, as the outcome of the competitive process.162 It therefore refers to costs and benefits during the adjustment period, as well as to the advantages of competitive selection. What are the implications of Pantaleoni’s Darwinism163 for his ideas on the allocative efficiency of competition? Embroiled in heated political battles,164 Pantaleoni (1892) asks himself how to achieve the greatest 159

It would function better in reaching equilbrium ([1906] 2014, p. 184), worse in the productivity of state employees ([1906] 2014, p. 185 and p. 268). 160 Not however, as we have seen, in the case of the labour market. And yet De Viti ([1904] 1929, p. 117) writes that economic freedom ‘assures the maximum wage level and the minimum cost of living’. We will come back to this in Chapter 4. 161 According to Cabral’s definition: ‘Dynamic efficiency refers to the improvement over time of products and production techniques’ (2000, p. 28). 162 See Blaug (2001b, section IV); in the Austrian tradition, see also, among others, MacNulty (1987) and Kirzner (2000). 163 On Pantaleoni’s Darwinism, see Mosca (2015a). 164 Remember the central role played by Pantaleoni in denouncing the scandal of the Banca Romana in 1892. We will return to these issues in Chapter 5.

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wellbeing of a body composed of several independent parts.165 In one of the cases he examines,166 the collective hedonistic maximum is achieved simply by means of the egoistic actions of single individuals: his classic example is competition, the epitome of individual activity. It destroys firms and creates unemployment, but it is appealed to because, by maximising collective utility, it makes up for these losses. Pantaleoni does not make a great effort to define this maximum rigorously, he simply bows to the authority of Sidgwick to state that ‘those who defend laissez-faire as an excellent universal system, will show that it achieves the collective hedonistic maximum’ (Pantaleoni [1892] 1925, p. 17).167 Later, in his essay of 1907,168 competition is seen as: the most universal and polymorphous form of inventiveness […] the most energetic source of social dynamism […] the greatest demolisher of any kind of acquired position […] a permanent threat for all those who have made it. ([1907] 1925, p. 216)

For Pantaleoni, this dynamism is a source of progress, and is triggered by the precious minority of people who within a society ‘act as yeast’ ([1907] 1925, p. 220), although he admits that in the short run social dynamism can be ‘more harmful than a static situation’ (p. 216). At this point he complains about the absence of theoretical tools to calculate the collective hedonistic maximum,169 while later his reasoning would lead him to conclude that only history can reveal a country’s true interests

165 For a current economic analysis of the conflict between the interests of the individual and groups in Darwinian terms, see Frank (2011). 166 The cases are: the collective hedonistic maximum achieved by (1) the individual, (2) the collectivity; the individual hedonisitc maximum achieved by (3) the individual, (4) the collectivity (Pantaleoni [1892] 1925, p. 12). 167 Bellanca and Giocoli (1998, p. 51, fn. 61) compare Pantaleoni and Sidgwick on this issue. 168 Pantaleoni (1907) contains an evocative time-lapse description of the transformations over time in the size of cities, fields, firms, property, prices and, as we shall see, of costs. To define competition here he states that ‘like an invention, it takes the form of offering a good at a lower price’ (Pantaleoni [1907] 1925, p. 216). This work is also analysed in Tusset (2009, pp. 277–278) who links Pantaleoni’s dynamic with his view on competition. 169 Pantaleoni ([1907] 1925, pp. 219–220). Notice the difference from his 1892 work, where as we said he referred to Sidgwick’s hedonistic notion of the collective maximum; notice also that Pareto had already published his 1894 article.

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([1916c] 1917, p. 197).170 Clearly Pantaleoni is no longer looking for a measurement of the collective hedonistic maximum related to equilibrium, but for a concept that suits his dynamic perspective; this seems to be why he ends up stating that the only judge can be none other than history.171 Pareto too is interested in dynamic efficiency.172 In his Manual, we find a description of the way the savings on costs by firms that have made innovations tend to be transferred to consumers, which clearly shows the active behaviour of firms: it is actually the consumers who ultimately derive the larger part of the benefit resulting from all this effort on the part of the firms. In this way, the competing firms end up at a point where they did not have the least intention of going […] as a result of all of the successive adjustments and readjustments imposed by competition, all this striving on the part of the firms turns out to be to the benefit of the consumers. ([1906] 1971, p. 242)

Barone highlights the costs and benefits encountered during the process of adjustment. He recognises that competition involves a social cost, which is the ‘destruction of fixed capital of the firms it devours’ ([1908a ed. 1909] 1936, p. 327). Don’t forget that in practice the Ministry also proceeds by trial and error.173 However, for Barone the bankruptcy of the firms producing with higher costs is only a healthy ‘elimination of the less fit organisms’ ([1908a ed. 1909] 1936, p. 619).174 In sum, according

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Incidentally, it is worthwhile remembering Pantaleoni’s interest in history: he wrote some essays not only on the history of economic thought, but also on economic history (see Demarco 1976; Bellanca and Giocoli 1998, Ch. 2, appendix). 171 By contrast, Dardi (2014, p. 502) argues that Pantaleoni continued all his life to refer to the collective optimum of his 1892 essay (Pantaleoni 1892). 172 Pareto’s contribution is usually circumscribed to static efficiency, for obvious reasons. See for instance the critique by Blaug (2001b, p. 44). 173 Cabral (2000, p. 91) confirms that ‘The only way to detemine a firm’s efficiency is to actually enter the industry. A central planner who attempted to maximize total surplus would not be able to do better than the market’. 174 Yet he does not think that for this reason society as a whole should passively suffer the damage. In fact, for Barone those that lose their jobs ‘are the inevitable victims of competition, of crisis, and it is useful if society, which benefits overall every time there is economic progress, does not abandon them’ (Barone [1911–12] 1937, p. 95).

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to Barone, competition is advantageous for the ‘social organism, for which consumers’ rent increases continuously’ (1908a, p. 35).175

2.6 CONCLUSIONS From the analysis carried out so far, we have identified some sources of market power present in the works of our marginalists. They are: the absence of the conditions for the long-run competitive equilibrium laid down by Pantaleoni, all the causes that slow down adjustment, and the introduction of innovations. We will pick up the thread of this discourse in the next chapter, which is devoted to monopoly power. However, since as we know this is the first time that a systematic analysis has been made of the thought of these economists on competition, we will conclude the present chapter by concentrating on what is emerging from our analysis of this topic. The overall picture is far richer than that previously outlined in historiography, but there are valid reasons for this; the most obvious is that none of the four economists’ writings was dedicated exclusively to the subject of competition. In Chapter 1 (section 1.3.3.1) we mentioned their presence in the literature on competition in the historical perspective. Of the four, Pareto is the one most frequently cited: his best-known contributions concern the formalisation of perfectly competitive equilibrium, of its optimality, and his clear distinction between the competitive regime and the monopolistic one. Many scholars176 have taken it for granted that Pareto, like Walras, always adopted the hypothesis of ‘indefinite’ competition; and in fact, Moore (1906, p. 214) had already attributed to him the price taking behaviour.177 Others criticised him for this: for example, Dennis (1977, pp. 265–266) finds that he gives an ‘aridly technical […] account […] of the role of competition’, and adds that ‘Pareto was interested only in the properties of equilibrium itself, and not in how it arises’. A thorough historian such as Blaug (2001a, p. 153; 2001b, p. 44) accused him of confining his interest to static efficiency, overlooking the dynamic form. Also, Backhouse (1990, p. 69), whose interpretation of Pareto’s thought is far more detailed, concludes by arguing that Pareto’s analysis of 175

This idea was common to the classicals and the marginalists, though in different terms. 176 Lombardini (1953, p. 53), Schumpeter (1954, pp. 972–973) and Stigler (1959, p. 9). 177 But Moore (1926) himself proposed a theory of economic oscillations, claiming Pareto attempted to pass from statics to dynamics.

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competition is no different from that of Walras. Machovec (1995, p. 75) even blames him for eliminating from economic theory ‘the process insights of the classical economists, particularly the role of entrepreneurial alertness’. This judgement is surprising since in the same book Machovec cites a passage by Amoroso178 which shows that Pareto was not satisfied with the static concept of equilibrium (Machovec 1995, p. 321). While the dynamic dimension of Pareto’s theory of competition is almost ignored by the historiography on competition, it is present in other literature. Besides the works on the origins of modern economic dynamics that we have already cited (section 2.3), in a book on the various notions of knowledge employed by economists, Ragni (2012, pp. 31–32) rightly argues that ‘Pareto sees competition as a real mechanism wherein a series of adjustments takes place, partially beyond the agent’s grasp, but within a historical time frame’. It is however the editors of the excellent recent critical and variorum edition of Pareto’s Manual179 who clarify once and for all the two fundamental aspects of his research on this theme: firstly, Pareto had made considerable effort to extend the formalisation also to the competitive process;180 secondly, he adopted a decidedly multifaceted notion of competition.181 Here we have cast light on his discussion of the adjustment process, the innovation and imitation process, the agents’ delays in reacting, and, more generally, the active behaviour of firms. Apart from Pareto, the other three economists appear rather seldom in the secondary literature on the history of competition theory. For instance, Pantaleoni’s contributions to the theory of perfect competition are overshadowed by those in which he sees competition as a ‘universal force’ (Pantaleoni [1907] 1925, p. 216), which are quite famous.182 178 As we have already said (see above, fn. 45), the mathematical economist Luigi Amoroso was an ‘early faithful follower’ of Pareto’s economic dynamics (Tusset 2009, p. 280). 179 Montesano et al. (2014), in particular editor note 9 (pp. 534–535), editor note 21 (p. 547), en. 123 (p. 643). 180 Pareto’s attempts had already been discussed by Zanni (1995). 181 This explains the misunderstandings by some of Pareto’s interpreters, including Chamberlin ([1933] 1956, p. 16, fn. 106). 182 See for example Bellanca (1995, p. 121): ‘He adopts the concept of competition that belonged to the English classical economists, based on freedom of entry and exit for firms in an industrial sector, regardless of the size and number of these businesses. For him it is perfectly normal for coalitions of capitalists and workers to be created, temporarily or permanently’. In this sense

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However, in our analysis we have found that in his early contributions Pantaleoni (1882) identified all the conditions for the achievement of a competitive equilibrium: free and instantaneous entry and exit, perfect information, large number of sellers, product homogeneity. We know that he later lost interest in the static approach; however, none of the four economists would afterwards express these conditions so clearly, not even Barone (1895a): when the latter explains that in competition it is necessary to differentiate while keeping the price constant, the justification he gives for the price taking behaviour will not be as exhaustive as that given by Pantaleoni. However, it is Barone himself that produces the weightiest and most unexpected contribution to the theory of competition. The number of outcomes he derives from perfect competition is quite remarkable: the equality between the price of inputs and the value of their marginal product, the product exhaustion theorem, and the equality of price with minimum average cost as well as with marginal cost are good examples. And yet Schumpeter ([1954] 1976, p. 858), though warmly praising Barone,183 remembers him for various writings, but not for his ideas on competition. Petretto (1982a and 1982b), a scholar of Barone’s economic analysis, shows that he also had a pivotal role in the development of the theory of the efficient allocation of resources. Barone’s theory of competition is briefly mentioned in Del Vecchio (1925, p. 126),184 and also in Keppler and Lallement (2006, p. 748), according to whom ‘he shows that competition will drive down prices […] and profits will be zero’. Michelini (2007, p. 388), with a deep knowledge of Barone’s ideas in the context of his age, reveals the great clarity of the definition Barone gives in Principi. But it is only Ragni (2012) that studies Barone’s various conceptions of competition, while Mosca and Bradley (2013) make a close study of his notion of perfect competition. As far as De Viti de Marco is concerned, since his main subject of study is public finance, it is not surprising that his works have no deep theoretical reflections on the question of competition, but merely use the concept for other purposes. We will see, on the other hand, his plentiful applications of this concept to reality, to politics and to economic policy. see also Michelini (1998), Giocoli (2003), Tusset (2009), Dardi (2014, 2016), and Mosca (2015a). 183 Schumpeter (1927) is the author of ‘a short and illuminating introduction’ to the German translation of his Principi; this expression is found in a highly favourable review written by Morgenstern (1928, p. 500). 184 In particular his theory of potential competition and oligopoly (we will deal with this in the next chapter).

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In short, in all four economists we have found confirmation of the idea expressed by most of the relevant secondary literature, that in this period there were several concepts of competition, which co-existed side by side. Before concluding this chapter, it seems appropriate to look more closely at the wider problem of their relationship with the essentially dynamic perspective adopted by the classical economists.185 We have repeatedly encountered the desire of the Italian marginalists to be seen in continuity with classical thought.186 This was mainly for two reasons: on the one hand, to claim their place as heirs of the grandfathers of economic theorising in their polemical exchanges with the historical school, at that time very influential in Italy, which denied the existence of universal economic laws;187 on the other hand, due to their incrementalist vision of the history of economic thought.188 Their stated theoretical aim was therefore to translate the classical theories into more rigorous terms, in order to strengthen their foundations. This is explicitly shown in the following passage by Pareto, related to the calculation of the coefficients of production in a regime of free competition: 185 Though it was obviously not rigorous: ‘The use of assumptions which were often dubious in detail and which involved marked but sometimes inspired oversimplifications characterized classical dynamics’ (Baumol [1951] 1970, p. 13). 186 On Pantaleoni’s continual comparison of classical economists and marginalists notice, among others, the following statement: ‘the new doctrines of the final degrees of utility are a no less unexpected than crushing demonstration of the precision, elegance, and truth of all the theorems of the orthodox and classic economists’ (Pantaleoni [1889] 1957, p. 173). 187 In a series of reviews published in the Giornale degli Economisti Pantaleoni finds a continuity between the classical economists and the marginalists in the anti-historicist cause (see for example Pantaleoni 1890, p. 99). 188 Of particular interest is the passage where Pantaleoni (1886, in Fiorot, 1976, p. 461) talks about the main exponent of the Italian classical school, Francesco Ferrara: ‘I am considered by him to be a great heretic! And to think that I’ve always bent over backwards for orthodoxy’. This is a singular passage, because in affiliations it is very rare to know the opinion of the forefather too; as can be seen, Ferrara rejects the attribution of paternity (and who knows how many other precursors would have done the same if they had lived long enough to meet their descendants). In fact, Macchioro (1996) talks about ‘Ferrara halved’ after re-reading his theory with the theoretical tools of marginalism. De Viti (1885, p. 10, fn. 1) also underlined that he descended from the classicals. This attitude to the classical legacy does not only concern the Italians of that generation; take, as one example for all, Marshall. See also Mosca (2005a) on De Viti as historian of economic thought.

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This proposition is one of the main points of the so-called classical political economy; but it was necessary to give this proposition precision, in order to see clearly the limits within which it holds true and what conditions it assumes as given. (1897, p. 499)

To give rigour to the classical theories, however, the economists of this generation turned to mathematics. This forced them, in a first approximation, to concentrate on static equilibrium, and this was a real break with the classical method.189 Nevertheless, in their plan, static analysis was only to be the first stage, which necessitated consciously and temporarily sacrificing realism on the altar of formal rigour.190 This phase was to be followed by the mathematisation of dynamics, a plan that had already been announced by Walras191 and that, as we have seen, was the specific issue on which Barone and Pareto focused. It had such an influence on their elaboration, as well as on the question dealt with here, that in their writings one can distinguish, as we have done, the static conception of competition from the dynamic one. Once static equilibrium was completely translated into mathematical terms,192 the Italian marginalists felt they were ready to get to grips with dynamics, of which they greatly felt the need.193 It was because of these considerations that we decided to put off the examination of dynamic competition until after dealing with the formalisation of the static notion of competitive equilibrium. As this chapter has revealed, this attempt was made both by Pareto, who included in his type (I) also the intermediate

189 Pantaleoni (1923, p. 584) writes that Pareto ‘collaborated at shelling the classics’, but in the Italian version of this obituary ([1924] 1938, p. 329) he specifies: ‘It is perhaps exaggerated to talk about a scientific revolution’ carried out by the marginalists. 190 Pantaleoni talks about the theory of equilibrium as ‘a first approximation towards the truth’ (Pantaleoni [1907] 1925, p. 189). 191 The dynamics of Walras consisted of the method of variable or moving equilibrium; that is, the study of ‘a series of equilibria that follow consecutively over time’ (Donzelli 1991, p. 58). 192 Backhouse (1985, p. 131) writes that the development of the system of static equilibrium ‘was the greatest achievement of the period leading up to 1914’. 193 They were certainly not alone, judging from the words of the German economist Robert Liefmann (1915, p. 316): ‘the problem of monopoly and competition […] is not static, but typically dynamic, a fact which current theory for the most part still fails to perceive’. A comparison with their contemporaries will be the focus of the final chapter.

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stages when firms make economic profits ([1906] 2014, pp. 100–102),194 and by Barone, who dealt with the adjustment mechanism toward perfectly competitive equilibrium using a method inspired by Marshall. However, when they moved from sequential equilibrium to the attempt to formalise other truly dynamic aspects of competition, such as continuous equilibrium, or disequilibrium, they ended up turning their research towards other disciplines, either because of the mathematical difficulties they encountered,195 or because they had in the interim become sceptical due to the narrowness of the new pure economics.196 As a result, Pareto’s hills, and Pantaleoni’s volcanoes and horses never found an adequate formalisation.197 However, these conceptions were the great legacy of the classical theory, which they were certainly not going to give up. That is why we feel that on the question of competition there was not a revolution in content but only in method: it is true that the mathematisation made them concentrate on competitive equilibrium, but as we said this was supposed to be merely the initial phase.198 Viewing this generation of marginalists only as constructors of the theory of static equilibrium would be doing them a serious wrong.199 They never decided to definitively abandon the classical dynamic idea of competition in favour of perfectly competitive 194 Montesano et al. (2014, p. 547). Demaria (1952) also recalls Pareto’s attempts to develop dynamic economics. 195 Remember that Pantaleoni and De Viti were Law graduates, and that they had never had any training in mathematics, unlike Pareto and Barone. 196 The shift towards other fields such as sociology, history, psychology and anthropology, with the aim of dealing with dynamic economic systems occurred not only in Italy; see for example Schütz and Rainer (2016) on Veblen and Schumpeter. 197 This failure was after all inevitable, because between static equilibrium and economic dynamics there can be no continuity, since the conditions required in the two cases are mutually incompatible. My thanks to Bruna Ingrao for pointing out this insoluble internal contradiction in the marginalists’ programme. 198 High (2001, p. xxiii) argues that ‘between 1870 and 1920 there was no […] revolution in the theory or conception of competition’, while Backhouse (2003, p. 560) thinks that ‘There was a revolution in economics, and a changing conception of competition is part of it’. 199 Nor does the international literature date the break between the classical dynamic conception and the static neoclassical one to the marginalist period, but later; for example, remember that for Machovec (1995, p. 111; my italics): ‘The late classical and early neoclassical economists […] simply did not think about competition in static terms’. That is also in general what Vickers (1995, p. 7) thinks, when he states: ‘the notion of perfect competition had its roots in the broad concept of competition as rivalry’. This is also true for Giocoli (2017).

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equilibrium.200 Instead, some of them abandoned economics, though without ever giving up the conviction that it was possible, and for them a must, to elaborate sound and rigorous theories of human social behaviour, even if they were no longer mathematical. The reason, as we will see in Chapter 4, is that the sole function they attributed to theory was to explain reality, nothing else.

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That is why the Italian situation is not covered in the picture outlined by Backhouse (1990, p. 81) who, with reference to the period analysed here, writes: ‘Dynamic issues […] were pushed into the background’.

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3. Monopoly power: competition is never perfect 3.1 INTRODUCTION At this point in our reconstruction it is easy to grasp the sense of what Barone writes, specifically addressing the case of competition: ‘in the real world we are dealing with provisional equilibria, not with definitive equilibria – we would say dynamic, not static, – competition is never perfect’.1 It is therefore time to ask ourselves how these four economists dealt with this world of ‘never perfect’ competition. As we have already explained in Chapter 1, this book does not deal with formal models of imperfectly competitive markets.2 Rather, it analyses the sources of market power examined by the Italian marginalists through an investigation of the kind of non-institutional entry barriers they took into account.3 After showing how important the issue of monopoly power was felt to be in Italy, and how significant it was also for our economists, we will look at their awareness of the different market structures. We will then examine the structural and strategic barriers to entry discoverable in their works; lastly, we will make some concluding comments.

1 Barone ([1921] 1936, pp. 437–438). A previous version of the part of this chapter on De Viti de Marco and Pantaleoni was published in Asso and Fiorito (2007). A previous version of the part on Pareto and Barone was presented at the 32nd HES Conference (Tacoma, 24–27 June 2005) and then published as a working paper (Mosca 2005c). 2 For instance, we will not dwell on the fact that in the Manual Pareto ([1906] 2014, pp. 95–96) uses an Edgeworth box also for imperfectly competitive markets. 3 The reason for the focus on barriers to entry was thoroughly explained in Chapter 1.

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3.2 A CRUCIAL ISSUE ALSO IN ITALY Returning to a remark made in Chapter 1 (sections 1.3.2 and 1.3.3), we wish to repeat that in the economic history of Italy in that period there were many circumstances that made economists think about the issue of monopoly power; these circumstances, initially out of the ordinary, with time became permanent.4 From various studies,5 especially an investigation conducted on the basis of the four tomes of Augello’s dictionary on the Italian economists of this period,6 it is possible to show to what extent these issues were dealt with in the Italian literature. Looking at entries such as Market Structures, Public Utilities, Industries, Transport Systems, Railways, Communication Networks, and Syndicates, we have found the following indications about the literature on these questions. Before Italian unification in 1861, publications on economic affairs were few and far between; those that were available were mainly on topics such as patents, the postal service and trade associations. Over the next three decades, however, they became much more common, and concerned themes such as competition, franchises, trade unions, state monopolies, the setting up of networks, public utilities (such as the telegraph), the development of the different communication routes and their public or private management, as well as the calculation of the various tariffs. They also concerned trusts, combinations, cartels, syndicates, coalitions; analysis of critical new sectors such as telephones, the shipping industry, aviation and insurance also appeared. Clearly, the thinking on market power advanced hand in hand with the growth of Italian industry and technological transformation.7 The scale of these contributions was enormous, disproving the widespread idea that the subject of monopoly power was specific to the United States.8 It is true that in Italy the size of big companies was not seen as a problem; 4

This is the opinion of Vinci (1948, pp. 689–690). See the historical studies of Mazzocchi (1965), Vito (1968), Avagliano (1974), Parisi (1993), Bientinesi (2003), Augello and Guidi (2009), Bini and Parisi (2010). There are also works on the history of industrial economics in Italy: Bianchi (2007), Marchionatti and Silva (1992), Grillo and Silva (1989, pp. 35–37) who, however, are referring to more recent periods than the ones dealt with here. 6 See Augello (2015); the study was published in Mosca (2015b). 7 Gigliobianco and Giorgiantonio (2017) examine the recurrence of the words ‘competition’ and ‘monopoly’ in books and daily papers; their data confirm our results. 8 We have already pointed out that Morgan (1993, p. 564, fn. 4) seems to support it. 5

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however, this did not mean that Italian economists ignored the issues related to monopoly power. On the contrary, their interest in these issues had been aroused by, and was a reaction to, developments in Europe and the United States, while the rapidly changing nature of Italian industry and the government policies introduced to deal with these changes had also sparked their interest. For the four economists dealt with here the topic of market power was also very important. In the previous Chapters, we have seen that Pantaleoni’s scientific production didn’t follow a straight path: when he published his first book (1882), he was still a follower of the classical tradition; then, as we mentioned, in 1883 he applied the concept of the final degree of utility to public finance. After that, with his Manual (1889) he became one of the most prominent theoreticians of pure economics; then he found marginalism too narrow, and turned to dynamic analysis;9 finally, he found economics too narrow and turned to other social sciences.10 But Pantaleoni deals with market power in most of his works, and we will follow him in his intellectual evolution. Pareto was exasperated by the legal and institutional causes of monopoly power all his life,11 perhaps more than the others, who nevertheless spent their lives exposing them: here we will look closely at which non-legal entry barriers he identified and how he described them. Remember that for Pareto the real state of the economy consists of continual oscillations around a central point of equilibrium, which also moves: this vision therefore leaves space for an analysis of the market power of firms out of equilibrium, since the oscillations are determined by imperfections, errors, ‘frictions’, delays, and so on, which we are interested in identifying.12 This opinion was also shared by Barone ([1908a ed. 1909] 1936, p. 603), who illustrated the oscillation around equilibrium, without equilibrium ever being reached. He looks at an increase in demand, while production has not yet been able to increase. This generates high profits, so that new firms enter the market. As long as the increase in production 9 Groenewegen writes: ‘he moved out of the straitjacket of marginalism […] when he realized its actual potential was considerably less than its initial promise’ (1998, p. 45). 10 As already noticed in Chapter 2, Pantaleoni freely and productively used categories from sociology, politology, psychology, anthropology and history. 11 The exasperation is also well expressed by Pareto in the Manual ([1906] 2014, pp. 254–255, fn. 47), as well as endless other times. 12 In Arrow’s (1959, p. 49) words: ‘Long-run competitiveness is not incompatible […] with considerable short-run monopoly powers in transitory situations’.

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goes more slowly than the increase in demand, there will be profits. When the demand stops increasing, production overtakes consumption, but then falls behind, and this continues in an oscillatory movement. In Barone’s words: ‘the point of equilibrium in dynamic changes is always gone beyond’ (p. 635).13 The ‘series of successive provisional equilibria’ in this case occur ‘between a demand that has changed and a pre-existing quantity, which then expands or contracts through the reaction of prices on to it’ ([1908a] 1936, p. 48). Like Pareto, Barone’s conclusion that the final equilibrium is never reached is strengthened by his conviction that during this oscillation new shocks make their appearance.14 Obviously, outside the final equilibrium firms are not price takers, and they may have some degree of monopoly power, which, as we shall see in this chapter, may be long-lasting. As for De Viti de Marco, he is the author of the famous distinction between monopolistic state and cooperative state,15 hence, the concept of monopoly is fundamental to his theoretical construction. Indeed, for him ‘the financial policy of the State […] is monopolistic’ in any case (De Viti de Marco [1928] 1936, pp. 171–172), because public services are always produced by the state in a monopolistic regime. What particularly interests us here is his consideration, as an expert in public finance, of the problem of market failures, which he examined in order to identify the situations in which government intervention was needed.16 Among these failures, we will focus on those deriving from market power, while the policies he recommended will be dealt with in Chapter 5. In the following sections, after searching through our economists’ writings for descriptions of non-competitive situations, we will try to pinpoint the structural and strategic causes that in their view enable firms to influence the price of their product. We have already encountered some of these in Chapter 2, in the section on dynamic competition 13 Barone describes the mechanism not only in a graph but also in words: ‘As long as the increase in production proceeds more slowly than the rising demand, profits remain. But a time comes when the triggering of demand stops; that time does not coincide […] with the interruption of production right at the point [of equilibrium] […]. When the fall in price indicates that the equilibrium point has been passed and that production must be reduced, the higher cost firms do not willingly accept their own disappearance […] and nor do those with lower costs reduce their production’ ([1908a] 1936, pp. 603–605). 14 In his words: ‘Before an equilibrium is reached, other causes intervene to change the data […] and to determine a new one’ (Barone [1908a] 1936, p. 45, see also p. XVII). 15 We will talk about his model of the state in Chapter 5. 16 This will also be dealt with in Chapter 5.

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(section 2.4.2). Here we will deal with the constraints of greatest impact and duration, which can generate different market structures in the long run.

3.3 DIFFERENT MARKET STRUCTURES Let us focus now on the Italian marginalists’ awareness of market structures apart from perfect competition. We begin with Pantaleoni, who in his graduation thesis (1882) compares the various forms of market ‘to the colours of the spectrum [that] blend into each other with extremely fine differences in shade’ ([1882] 1958, p. 89).17 However, in this work, in addition to ‘perfect’ competition, he only deals with price determination under monopoly; he did so with his own original method, because at that time he did not know Dupuit ‘apart from a very short citation made by Loria’ (Pantaleoni [1882] 1958, p. 72),18 and had not yet been able to read Cournot’s Researches (p. 72).19 Then, in his manual Pure Economics (1889)20 he lists ‘the existence of a close market, of noncompeting groups, and other such conditions’ ([1889] 1957, p. 4).21 Having now read Cournot (Pantaleoni [1889] 1957, pp. 147 ff.), Pantaleoni goes on to observe: ‘the difference (if any) between monopoly and free competition can only consist’ of the fact that the price will be different in the two cases, because the quantity offered to maximise the profit will be different ([1889] 1957, p. 161). In 1903, he devoted to the issue of market power an entire essay entitled ‘Some Observations on Syndicates and Associations’, where he adopts a wider perspective, as we will see in the coming sections. Later he identifies monopoly with the situation where ‘one can limit the quantity supplied, or one can regulate 17

His most detailed explanation is the following: ‘The truth seems to me to consist […] of considering that the different products form a gradation with imperceptible steps from conditions of free competition where profits are equal, to conditions of temporary monopoly where ordinary profits have the addition of extra-income and to conditions of absolute perpetual monopoly where there is rent as well as ordinary profits and extra-profit’ (Pantaleoni [1882] 1958, p. 89). 18 Loria (1880, p. 358) briefly cites Dupuit’s theory of price discrimination. 19 A brief comparison between Pantaleoni’s and Cournot’s analyses of the determination of price in a monopolistic regime is made by Magnani ([1995] 1997, p. 52). 20 As already said, Pantaleoni’s Manual was translated into English in 1898. 21 J.E. Cairnes was the first to use the expression ‘non-competing groups’ for the labour market, following the pointers and suggestions of J.S. Mill, who had applied it to international trade.

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the price’ (Pantaleoni [1907] 1925, p. 200) and subdivides the study of economics into three parts, the second of which includes the analysis of ‘syndicates, cartels and trusts’ ([1918b] 1919, p. 138).22 The attention Pareto devoted to this kind of market is one of the main aspects distinguishing his Cours d’économie politique (1896–97) from the Walrasian theory.23 For several years Pareto ([1894] 2008, p. 387) had been saying that Walras’ theory could be extended to ‘non-competing groups’: the first mention of this issue is found in his letter to Walras in 1893.24 In the Cours he solved the profit maximisation analytical problem in a monopolistic regime (following Cournot), and took up the treatment of duopoly.25 Then in 1897, talking about his Cours, Pareto wrote: ‘If our equations are constructed each for a homogeneous group, and several of these groups are considered, we get the theory of non-competing groups of Cairns (sic!)’ (1897, p. 492). Moving on to the Manual (1906), in his view every economic system is made up of ‘free competition with monopolies, constraints, privileges, and restrictions’.26 This is stated even more clearly in a 1908 letter to Cabiati where Pareto specifies that: The theory of free competition is only one part of the theory of pure economics (Manual, III, 30). It is wise from the start to expound the general

22

The first concerns the economic behaviour of the single individual, the third that of the state. 23 This is pointed out by many scholars, such as Ricci ([1924b] 1939, p. 136), Schumpeter (1949, p. 157, fn. 4), Busino ([1979] 1980, p. 347), Kirman (1998), Montesano (1991a, p. 58), and Ingrao (2013, p. 430). Remember also that Pareto inspired the attempt by Triffin (1941, p. 126) to integrate ‘the analysis of monopoly […] into the general system of equations which describes the equilibrium of the whole economic collectivity’. 24 ‘Prof. Edgeworth deals with the question […] of the imperfection of competition. I perfectly admit that it could exist. You have dealt with the limit case of perfect competition; it is the most important. But nothing prevents the obstacles to competition from being taken into consideration’ (Letter dated 12 August 1893, in Pareto 1973, p. 228). 25 Pareto engaged in a controversy with Edgeworth on duopoly; neither this nor the comments by Amoroso and Stackelberg, are considered with here (Montesano et al. 2014, editor note 20, pp. 545–546). In Pareto’s correspondence, there are also some letters to Amoroso that deal with this issue. 26 And added: ‘What varies are the proportions in which these various elements combine’ (Pareto [1906] 2014, p. 254).

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theory of economic equilibrium, of which the theory of free competition is merely a particular case.27

In the part of the Manual cited in the letter (Ch. III, section 30) he outlines the history of the analysis of non-perfectly competitive regimes, contextualising his own contribution. For Pareto, the case of monopoly: had already been studied […] by Cournot. Marshall, Edgeworth and Irving Fisher have continued tackling the economic phenomenon in a more comprehensive and more general way, until in my Cours, it has become the general theory of economic equilibrium, and I shall go still farther along this path in the present book. (Pareto [1906] 2014, pp. 77–78)

Following up the distinction in the Manual between type (I) and type (II) phenomena (see Chapter 2), Pareto explains that in ‘type (II) […] the individual’s principal aim is to alter prices’ (Pareto [1906] 2014, p. 106), and that ‘equilibrium takes place at the point that is most advantageous’ to him (p. 95). Then he adds: ‘Where there is monopoly, in any form, someone is privileged. He takes advantage of his privilege to fix the price’ (p. 106).28 Lastly, remember that for Pareto monopoly is a rare case: ‘In general, there are several producers’ ([1906] 2014, p. 169). Barone ([1894a] 1959, pp. 442–443) too pays tribute to the previous works by the great mathematical economists (Cournot, Gossen, Jevons, Walras, Edgeworth, Launhardt, Auspitz, Marshall and Fisher), whom he acknowledges made monopoly theory take a real step forward.29 He shows that also for the latter market structure, as for perfect competition, the equilbrium quantities and prices can be determined: after dealing with a single price monopoly, Barone deals with ‘multiple prices’, and presents price discrimination applied through an artificial product differentiation ([1908a] 1936, pp. 297–299). However, for him the most 27 Letter dated 13 February 1908 (Pareto 1973, p. 624). Other letters in the correspondence also reveal Pareto’s interest in this issue, especially those addressed to Amoroso. 28 Machovec (1995, p. 183) calls his description of the monopolist’s behaviour ‘classical’, while according to Schumpeter (1949, p. 157) ‘His theory of monopoly cannot […] be salvaged by even the most generous interpretation’. The motivations of both statements are unknown. According to Kirman (1998, p. 25), Pareto discussed ‘what has come to be called “monopolistic competition” and its introduction into equilibrium analysis’. 29 Barone’s article (1894a) was translated into English in 1959 and included in Readings in the Economics of Taxation, by R.A. Musgrave and C.S. Shoup. We made an in-depth analysis of Barone’s view of price setting in the case of monopoly in Bradley and Mosca (2014, pp. 679–681).

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frequent situation is the one where ‘the number of entrepreneurs is very limited’, which ‘represents something intermediate between monopoly and indefinite competition’ ([1896] 1936, p. 195). Notice that Barone uses the term ‘regime’ to identify the different market structures: ‘monopoly regime’, ‘coalition regime’, and so on ([1908a] 1936, pp. 39 and 303; [1908b] 1935, p. 246). He goes on to state that ‘monopolies and cartels are characterized precisely by the fact that by increasing or decreasing supplies they can noticeably influence the prices’ ([1908b] 1935, p. 260). In his manual (1908a) there is a chapter entitled ‘Monopolies and Syndicates’, written in 1909, devoted to the competition among a few firms, in which we may say that he is actually dealing with oligopoly. Then, in his Principi di Economia Finanziaria (1911–12),30 to study the effects of taxes and duties, Barone proposes a broad range of the market structures that he considers: a single firm that produces in the period when average costs are diminishing ([1911–12] 1937, p. 315, p. 377); several firms that due to ‘lazy’ competition also work with diminishing average costs; a combination of firms that form a monopoly (p. 316); a very active competition regime (p. 317); a regime of pure monopoly; a situation of competition between the owners of a good of limited quality that do not come to agreements (p. 328). We will examine these cases in the coming sections. For De Viti de Marco monopolies are only ‘natural or legal’, he includes all the rest in the notion of competition (1885, p. 25). We must however keep in mind that for him real competition does not work as it does in theory: ‘the limits of competition are historically altered according to the moral setting and the judicial environment prevailing in each state of civilisation’ (1888, p. 57). Furthermore, he explains that the monopolist can choose either the quantity or the price; and can price discriminate:31 he describes the monopolist’s position in the various editions of his lecture notes as marked by a price above average costs and by the presence of a positive extra-profit.32 He also likens the latter income to rent: in fact, De Viti generalises the theory, extending it to all the monopolised industries.33 We will also return to this later. We can therefore conclude this section by pointing out that the four Italian marginalists had a clear awareness of the market structures between monopoly and ‘free’ competition. They all obviously knew 30 In Italy, public finance was called Scienza delle Finanze; then De Viti de Marco changed the name to Economia Finanziaria. 31 De Viti de Marco (1892–93, pp. 61, 117, 461), then in the later editions. 32 De Viti de Marco (1892–93, p. 13), then in the later editions. 33 De Viti de Marco (1886–87, p. 51), then in the later editions.

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Cournot’s monopoly model, Dupuit’s price discrimination, product differentiation,34 and the debate on models of duopoly. As we said, we shall not be dealing with these issues here, because these cases, as already pointed out in Chapter 1, do not include explanations of the reason why market power is present. The core of our analysis is the extent to which our economists identified the causes of monopoly power; that is why we will now go on to a detailed examination of their works in search of barriers to entry, distinguishing structural ones from strategic ones. Monopoly power is present in imperfectly competitive markets: they identified several kinds, including the interaction among a few large firms. Let us therefore concentrate on what we are looking for in this book, namely the identification of the conditions that enable a producer ‘to modify the conditions of the market, which is certainly not the case with everybody’ (Pareto [1906] 2014, p. 81).

3.4 STRUCTURAL BARRIER We will first focus on the structural barriers, consisting of all the causes blocking entry into a free market due to structural conditions of the industry. In the writings of the four economists they are: inelastic input supply, cost structures, and conditions of demand. 3.4.1 Input Problems In his first book on the theory of the shifting of taxes, Pantaleoni examines the effects of taxation in different market structures. The section of Pantaleoni’s book which is relevant here is the one dedicated to ‘goods producible ad libitum under perfect competition’ ([1882] 1958, p. 77). In fact, it is in this section that he examines all the circumstances in which perfect competition cannot be realised. To sum up Pantaleoni’s analysis, we can say that in his view there are two structural causes of market power: the possession of unique resources (like talents, extraordinary abilities of the entrepreneur, special machines, natural resources), and impediments to a rapid adjustment of market supply to increases in demand ([1882] 1958, pp. 85–90). He also analyses some aspects of location theory, although only superficially: considering transportation costs as a part of the costs of production, he claims that the 34

Triffin (1941, p. 124) cites Pareto regarding goods that are to be considered ‘economically different if the buyers do not consider them as perfectly interchangeable’.

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firms that are closer to the market have a monopoly power due to their location. Moreover, briefly referring to Senior’s Political Economy and J.B. Say’s Traité, he states: ‘competition can be excluded in many other ways’ (p. 87).35 He concludes his analysis with the consideration that, whatever its source, extra-profit is the most significant signal of the existence of monopoly power. Then, in dealing with international trade, Pantaleoni ([1887] 1904, pp. 188–189) finds a ‘highly imperfect freedom of industrial competition among workers’: this is a case of Cairnes’ non-competing groups, which we have already encountered. While this theory was originally applied to international trade, and later to the labour market, Pantaleoni in his Pure Economics (1889) generalises it to all the input markets in which entry is completely ‘closed’ ([1889] 1957, p. 179 fn. 2),36 to analyse it using reciprocal demand curves ([1889] 1957, pp. 197 ff.). He also extends Ricardo’s theory of rent to the ‘instrumental commodities that are natural agents existing in extremely limited quantity’ ([1889] 1957, p. 278). These include natural resources and other factors, among which entrepreneurial talent stands out, being in his view of crucial importance for social progress.37 However, Pantaleoni does not believe that the factors which are in fixed supply necessarily generate market power; in fact, he mentions the American economist F.A. Walker’s theory of profit as rent,38 with its hypothesis of a market without free entry in which: if […] the entrepreneurs are so numerous as to be unable to create a monopoly of their services, and rather compete against one another, then it is clear that the price of their services will fall to a point at which they find it more advantageous to make some other use of their capacities for work. ([1889] 1957, p. 280)

35 Elsewhere in the work, Pantaleoni ([1882] 1958, pp. 129 ff.) lists the causes of rent according to Senior, Held and Loria. 36 We will deal with the case of the labour market in Chapter 4 (section 4.2.2). Remember that J.B. Clark had also extended the meaning of this expression to the output market in 1887 (see Morgan 1993, p. 586). 37 Regarding the credit companies, for instance, Pantaleoni ([1895] 1936, p. 309) writes that they are enterprises ‘that last only as long as the man who knows how to make them work lasts, and who knows how to steer them through all kinds of battles, merciless competition, economic crises, industrial and political upheavals’. 38 Of Walker’s works, Pantaleoni cites Political Economy (1883) and The Source of Business Profits (1887). According to Roll (1938), the analogy between profit and rent is one of Walker’s main ideas in pure economics.

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Later, making an in-depth critique of the cooperative societies mentioned in the previous chapter, Pantaleoni lists a series of conditions necessary for a business of this kind to be successful: providing that […] it doesn’t take a subtle analysis to discover the most economic combination of factors, that there is little or no change in market conditions so that once this problem is solved, it remains solved for a long time, that intelligence is not required and that the moral qualities needed are not elevated and therefore rare. ([1898b] 1925, p. 165)

Through the contrast here it is very clear which qualities in Pantaleoni’s view characterise a successful enterprise that can enjoy temporary extra-profits, but what is equally clear is his low opinion of the cooperative system of production. Lastly, the economist also examines the presence of entry barriers due to what today are called sunk costs.39 According to De Viti de Marco land rent depends on fertility, on the ‘diminishing profitability of capital invested’,40 and also on localisation.41 Like Pantaleoni, De Viti too likens Ricardian rent to the surplus of the producer and to the extra-profit of the monopoly.42 Furthermore, as regards the capital permanently invested in land, he too foreshadows the idea of sunk costs (De Viti de Marco 1902–03, p. 176), a concept he was to expand in 1921 by recalling the various levels of difficulty involved in disinvesting capital: from land where disinvestment is more difficult, to manufacturing industries, to commercial enterprises where it is easier to get out (1921, pp. 115 ff.). Another cause of market power identified by De Viti is the exclusive control over an input: the monopoly here depends on the possibility of ‘cornering a productive force’ (De Viti 1896–97, p. 12)43 or of ‘having exclusive control over a factor’.44 In one of the lithographic versions of his lectures (without the year of publication but 39

Pantaleoni writes: ‘If an industrial enterprise breaks up, it can only sell its machinery as old iron, and its buildings for the value of the bricks when demolished, and its iron girders and wooden rafters for a twentieth of what they cost originally’ ([1913b] 1925, p. 137). 40 In other words, from the diminishing marginal productivity of capital (De Viti de Marco 1892–93, p. 199). 41 See the lecture notes from the years 1907–08 and 1909–10 (p. 276 in both). 42 See De Viti (1907–08, p. 192) and also the lecture notes from 1912–13 and 1914. 43 Also 1914: ‘the monopolist managed to corner a productive force’ (1914c p. 25g; idem 1921, 27g). 44 De Viti (1896–97, p. 158; 1909–10, p. 158). For instance, on the production of olive oil in his region of southern Italy he writes, ‘it is good for our olive

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edited probably in the academic year of 1912–13) we find the following definition of monopoly: there is ‘a monopoly […] when a producer is able to exclude everyone else from the ownership and from the availability of the necessary production forces’ (De Viti de Marco 1912–13, p. 12). He adds that the exclusion ‘must be absolute and complete’ because as we will see for De Viti two firms are enough to eliminate market power (p. 12).45 Again in 1928 he repeats that ‘all large incomes […] are necessarily the product of costless factors’, referring to ‘the income from lands and buildings’, but also to ‘the more capable entrepreneur […] the more intelligent, the more skilled, or the stronger worker’ ([1928] 1936, p. 181).46 Again, for De Viti ‘The case of monopoly […] may […] be treated jointly with the case of land rent […]. In both cases [there is] a rent to the non-marginal producers and an extra profit to the monopolist’ ([1928] 1936, p. 156). In his Cours, Pareto traces his reflections on exogenous barriers to entry essentially to the ‘difficulty, or […] impossibility, that exists in transforming savings into certain kinds of capital’ (Pareto 1896–97, section 138).47 He also considers ‘capital whose quantity remains virtually constant in a closed market’ (1896–97, section 542). The holders of this type of capital, Pareto writes, ‘will enjoy a monopoly […] that in some cases may be absolute. They will therefore be able to secure very considerable gains’ (1896–97, section 543). In the Manual, Pareto reiterates that the entrepreneur may keep competitors out of the market ‘because he alone possesses certain commodities’ (Pareto [1906] 2014, p. 82). The barrier Pareto refers to here is also recalled by Schumpeter and many other scholars.48 They all underline the importance of his contribution to the generalisation of Ricardo’s theory of land rent to all factors of production; they regard temporary unreproducibilities of inputs as the main source of monopoly power in Pareto’s thought. growing to jealously preserve this kind of monopoly or supremacy that we still hold in the world trade of oils’ ([1905] 2008, p. 251). 45 The examples of absolute monopoly that he gives are the Tivoli waterfalls and the mines (1912–13, p. 29). 46 His public finance problem here is what fiscal measures to adopt in such cases. 47 The reasons adduced by Pareto against linear homogeneity of production functions are mentioned in Humphrey (1997). 48 Ricci (1924b, p. 151), Schumpeter (1949, p. 166, fn. 3), Zanni (1993, p. 254), Zanni (1995, pp. 456, 464). Bousquet (1960, p. 80) judges Pareto’s generalisation of the theory of rent and quasi-rent to be ‘one of the greatest advances in economics’.

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As we shall see, Barone analyses in greater depth the various situations in which it is difficult or impossible to reach perfectly competitive equilibrium. We start here with the cases of limited resources, which he examined; he too generalised the theory of rent: ‘Ricardo’s theory on land […] is applicable to all capital that cannot be reproduced’ (Barone [1908a] 1936, p. 67). The case we dealt with in the previous chapter, in which the imperfect mobility of inputs slows down the convergence towards equilibrium, is extended by Barone also to the extreme hypothesis of ‘capital in which savings are not transformed’ at all, ‘permanently’ (p. 69), giving rise to rent. For these ‘non-reproducible products and factors, the equilibrium price is the one determined by demand and by the quantity available; which does not imply equality between price and cost of production’ (p. 44). According to Barone, the difficulty of transferring inputs is exacerbated in international trade, for which he too resorts to Cairnes’ theory of non-competing groups ([1908a] 1936, pp. 141 ff.). This issue had also been examined by Pantaleoni in his ‘Some Observations on Syndicates and Associations’ where he wrote: when we are dealing with factors which are not supplied in conditions of free competition, or as Pareto puts it, when we are dealing with factors in which the new saving does not quickly transform itself, or which cannot quickly revert to being amorphous capital, the supply prices present sub or excess profits in the measure in which such is needed for the quantity supplied, or else for the quantity supplied to be wholly absorbed by a demand without elasticity. ([1903] 2001, p. 187)

Another work we think is relevant to our inquiry is Pantaleoni’s famous essay on economic dynamics, in which he illustrates afresh all the obstacles that are created to hinder the mobility of capital and labour, the effect of which is to make it impossibile to reach equilbrium ([1909a] 1955, p. 37).49 However, Pantaleoni states that the monopolistic equilibrium: is necessarily temporary. Except in one single case, a monopoly is always due to an artificial and transitory condition, for instance, a social organization, a

49 In a footnote, he adds: ‘When these obstacles are weak, or few though strong, it is possible to include them in the data of economic equilibrium, e.g. the conditions creating the non-competing groups, or those at the basis of the theory of international values’ (Pantaleoni [1909a] 1955, p. 37).

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legal privilege, a tariff, a form of property rights, a habit […]. Monopolistic equilibrium is pregnant with dynamism; it is ground mined with dynamite.50

What he adds in this long footnote seems particularly interesting for our purposes: The only form of monopoly which is not artificial is that due to superior personal skills, that is the natural inequality of men. The Ricardian rents it creates are necessarily permanent as a type of phenomenon, but transitory as individual phenomena since their distribution continually alters. ([1909a] 1955, p. 30)

In other words, the person gifted with ‘superior personal skills’ is the only one who deserves a significant (but temporary) degree of market power, and an economic profit. 3.4.2 Cost Structures We shall now examine the relationships that our economists identified between cost structure and the number of firms in the industry. 3.4.2.1 Minimum efficient scale In 1889 Pantaleoni was already aware that some industries can produce at decreasing costs, but he seemed to believe that the minimum efficient scale is always smaller than market demand.51 All the economists prior to him had already suggested that inefficient firms were destined to leave the market, and after him Marshall continued with the idea of the survival of the most efficient firms. However, the one who first broached this issue was Pareto in 1897 with the following words: A consideration of the size of industrial enterprises leads us to recognize that there exists in general a definite maximum at which the expansion of enterprises stops under a regime of free competition, there being no advantage in increasing them beyond or leaving them short of what corresponds to this magnitude. (Pareto 1897, p. 492) 50 In his relationship with dynamics, the issue of monopoly in Pantaleoni is also briefly dealt with by Giocoli (2003, p. 218). 51 Pantaleoni writes: ‘the supply curve […] may […] be decreasing, or partly decreasing and partly increasing, since it may happen that an increase of the quantity produced is, within certain limits, accompanied by a diminution of cost, but that beyond those limits, it involves increased cost’ ([1889] 1957, p. 193).

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Pareto’s argument was so convincing that the following year Pantaleoni (1898b) claimed that competition (in the sense of free entry), ‘if it is perfect’ ([1898b] 1925, p. 181), allows the survival only of firms that produce at the minimum average cost, thus determining the number and the size.52 Again, in 1900 he stated: ‘it is the law of the minimum means which determines the size of companies, their amalgamation into enormous globes, their subdivision or their crumbling into atomic units’ ([1900] 2001, p. 358).53 Here Pantaleoni expresses an extremely positive vision of collusion: he says that the purpose of improving efficiency can be accomplished by extending the dimensions of firms through mergers, or by forming trusts, or by every kind of agreement between firms. In his view, it is efficiency which ‘forms and shapes unions and workers’ associations, which endows them with the most appropriate size, now local, now national, now international, and which dictates their conduct’ ([1900] 2001, p. 359). Another very important paper for the purposes of our inquiry is the one specifically devoted by Pantaleoni (1903) to the nature of syndicates and cartels.54 Here again, following Pareto, he states that competition (or ‘selection’, as Pantaleoni often called it) endogenously determines firms’ efficient size – which he termed their ‘typical’ or even ‘optimum’ size ([1903] 2001, p. 148).55 He writes: ‘if […] [an] industry is subject to the law of diminishing costs, all those [firms] who do not work with the minimum cost will be eliminated’ ([1903] 2001, p. 146); Pantaleoni cites the famous book by J.B. Clark (1901) specifying that it is due precisely to the working of competition that the number of firms is reduced ([1903] 52 We dealt with this in Chapter 2, section 2.4.1.3. In his words, ‘it is […] clear that if this competition is perfect, in every industry the only firms it will allow to survive will be those that have found the most advantageous combination of factors of production; that it will determine the size of the firms, at times forcing them to be small, other times large, depending what is required by the technical and economic situation; that it will make sure that in every industry there are enough to avoid migration of labour and capital from one kind of industry to another’ (Pantaleoni [1898b] 1935, pp. 181–182). 53 Italian economists, from the classicals to the marginalists, called the purpose of improving x-efficiency one of the applications of ‘the law of the minimum means’; that is, the economic principle. 54 This paper is briefly analysed and contextualised within the literature of the period by Michelini (1993). 55 In a footnote, Pantaleoni suggests seeking statistical data ‘to establish the influence of competition on the formation of a size type’ ([1903] 2001, p. 149), meaning that in fact in some industries it takes longer to eliminate the firms that do not minimise their costs.

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2001, p. 165).56 In this essay, he also wants to demonstrate that syndicates and cartels – which he regards with approval – must not be confused with monopolies. According to Pantaleoni, there are two reasons for a syndicate to be established. He writes that: ‘the establishment of syndicates is at times nothing other than the manifestation of research and the implementation of the most efficient size, and at others is the formation of a bond, or cement, […] [among] companies who share labour’ ([1903] 2001, p. 145). Pantaleoni distinguishes between what we now call horizontal concentration and vertical integration – having already talked about the expansion of a firm on a ‘horizontal’ or on a ‘vertical’ plane (p. 185). We will deal with the former in section 3.5.2.1. On vertical integration (which he calls the ‘modern’ combination) his opinion is clearly favourable, because he sees it as the way for firms to find ‘the most appropriate or productive size’ (p. 163). In his articulate in-depth analysis of the conditions for the development of vertical integration, he considers the different forms it can take: from the concentration of firms into a single large company, up to the complete juridical independence of syndicated firms forming what he calls an ‘economic complex’.57 Pantaleoni states that syndicates are a good way to give stability to agreements drawn up by vertically integrated firms. In his Manual, Pareto returns to this theory on the existence of a minimum efficient scale; and writes: ‘for each kind of productive activity there is a certain size of firm which corresponds to the minimum cost of production’ (Pareto [1906] 2014, p. 168). It was on this foundation that Barone intervened in 1908, making theory take a great step forward. Having clearly explained for the first time in the history of economic thought that the average cost curve is U shaped,58 Barone sets out with similar clarity the idea of the minimum efficient scale of firms as follows: 56 The principle is similar to Stigler’s ‘survivor technique’, according to which ‘the competition of different sizes of firms sifts out the more efficient enterprises’ (Stigler 1958, p. 55). 57 Pantaleoni writes: ‘the size of the […] company A should be such that it can absorb the entire production of the […] company B […], and that the production of B, wholly absorbed by A, is then still produced on so large a scale that B can produce in more advantageous conditions, that is, work with a relatively minimum cost’ ([1903] 2001, p. 159). Elsewhere he writes, ‘as far as the cooperation extends between firms sharing their work, up to that point we have a single economic complex’ (Pantaleoni [1909b] 1932, p. 11). 58 The ‘curve [of total costs] is always rising; […] if it was reduced to a diagram with the unit costs of production on the y-axis, it would be diminishing until a certain point and then rising’ ([1908a] 1936, p. 14). Barone’s fundamental

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competition tends […] to define the size of firms; in other words the quantity produced tends to be shared out between the producing firms at the minimum cost so that each of them may produce the corresponding [quantity] at the limit of the diminishing costs. ([1908a] 1936, p. 15)

He examines the example of cooperatives and department stores, regarding them as an exemplification of his theory: by exploiting economies of scale, as we would say today, these new organisations enable prices and costs to be reduced; he states that the key to their success ‘is, above all, a matter of the size of the firm’ ([1908a] 1936, p. 291).59 Like Pantaleoni, Barone also does not limit the analysis of vertical integration only to vertical mergers, but extends it to the aggregates of cooperating firms (the ‘economic complexes’), which he considers ‘the most advanced form of syndicates’ ([1908a ed. 1919] 1936, p. 318). He finds its advantage in the regularity of the demand for the input-producing firms, while for those downstream, the advantage lies in cost stability. In this case too the effect is a reduction of the production costs.60 In a study of colonial economics of 1911, referring again to the theory of the minimum efficient scale, Barone accounts for the mergers and splits of agricultural companies that through history have occurred at changes in the price of land. He writes that competition ‘tends to oblige entrepreneurs to remain within the limits of decreasing costs’ ([1908a] 1936, p. 24). With characteristic clarity he describes the way the entry of new firms may drive the price down to the minimum average cost: competition […] forces each firm to remain within the limits of its diminishing costs […] making, for the part that was produced at rising costs, a new firm intervene which doesn’t go beyond the limits of its diminishing costs. (p. 25)

From this he derives the consequence that it is precisely the action of competition which determines the optimum number of firms in equilibrium. Lastly, we remember Barone’s seminal contribution to the socialist contribution to the development of the U-shaped average cost curve is highlighted by Dooley (2001), Keppler and Lallement (2006, pp. 748–750) and Mosca (2008). 59 Remember that 1883 saw the publication of Émile Zola’s novel Au bonheur des dames, which describes the sensational consequences, both economic and in customs, of the opening of a department store. Thanks to Giorgio Gattei for pointing this out. 60 In the United States on the contrary, from the 1900s, vertical integration was seen as ‘an ambiguous practice’, and a source of fears (Hovenkamp 1991, p. 337).

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calculation debate: for him ‘an omniscient minister of production […] would arrive at the same firm size as the entrepreneur under the spur of competition’ ([1912b] 1936, p. 323). In short, we may say that the concept of minimum efficient scale, together with that of optimal number of firms, was very clear to them; further ahead we shall see the consequences they foresee in terms of market power. 3.4.2.2 Natural monopoly As a public finance scholar, De Viti de Marco mainly deals with cases where the state has to replace private firms, for instance in sectors where costs are minimised with one supplier only, such as the means of communication (1886–87, p. 14).61 He too is well aware that the size of firms is a function of their cost structure; for example, he says that large scale industry triumphs when it can produce at lower costs than small scale firms (p. 6). Let us now focus on a very interesting source of monopoly power that can be found in De Viti’s writings: what he called economy of consumption ([1890a] 2001, p. 514). His analysis is very original when he takes the case of a concert, stressing the non-rival nature of its consumption.62 When the maximum number of people who can join in the consumption of a concert is 1,000 – De Viti writes – one theatre with 1,000 seats is more efficient than two theatres with 500 seats ([1890a] 2001, p. 514). We can say that this example corresponds to the case of the monopoly provision of what nowadays are called priceexcludable public goods – or ‘local public goods’.63 In showing how this kind of monopoly emerges, De Viti considers two processes by which a market where one firm can produce more efficiently than two becomes monopolistic. One process consists of collusion, the other of the price undercutting mechanism. It is difficult to know whether De Viti knew of the theories of Cournot (1838) and Bertrand (1883).64 In fact, it is almost 61

This also applies to the postal service, though with some initial hesitation (1886–87, p. 27). 62 In De Viti’s words: ‘This case is found when the same unit of goods produced can satisfy at the same time the identical need of many persons’ ([1890a] 2001, p. 514). 63 This expression was introduced by Charles Tiebout in his seminal 1956 paper. 64 What we do know is that De Viti had studied Jevons (De Viti de Marco 1925a, p. 168) who cites Cournot. Obviously, in 1890, Edgeworth’s 1897 article on the theory of monopoly had not yet been published in the Giornale degli Economisti.

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impossible to trace the origins of De Viti’s ideas back to previous economists, because he rarely cites others.65 Unlike Bertrand’s model, De Viti claims that price undercutting will lead to the survival of only one theatre. Comparing the above example of the theatre with those of the railway, and of the telegraph service66 ([1890a] 2001, p. 515), De Viti finds a similarity in that in all of them, one firm is more efficient than two or more. This is the reason why he considers it certain that ‘in the city the telephone service tends to be a monopoly’ ([1890a] 2001, p. 521). It is also worth noting that, probably for the first time in the history of economic thought, De Viti singles out the network-externality effect of the telephone industry: ‘The consumers enjoy a utility which is greater, the greater the number of subscribers with whom they can communicate when necessary’ ([1890a] 2001, p. 521). In this article, we also find an explanation of the existence of monopoly power in what De Viti called economy of production ([1890a] 2001, p. 514): large private monopolies […] are the characteristic phenomenon of presentday economic organisation and the natural result of three causes: division of labour, competition and big industry. The variously combined action of these forces leads in the market to the triumph of the most powerful and best organised company, which has reduced its overhead costs to a minimum and is thus able to offer its products at the best price and banish the small competing industries. ([1890a] 2001, p. 513)

When talking about ‘big industry’ we do not think that De Viti was referring only to the market share of a firm’s production, but also to the actual physical dimension of firms, which at that time was growing because of mechanisation.67 His analysis continues in the lecture notes of the following years, stating that ‘For the production of goods that satisfy a general need such a lot of capital is necessary that free competition on the market would not be possible’ (1892–93, p. 13): in other words, the technology for producing this kind of goods requires firms to be large 65 In the note to the reader of the third edition of his Principles (1928), De Viti wrote explicitly that the book did not contain ‘references to other authors’. As we will see, in the article on the telephone industry De Viti does cite two economists – Jevons and Marshall. 66 De Viti ([1890a] 2001, pp. 517, 527) cites Jevons (1867 and 1875) on the similarity between the post office, telegraphs, and railways, although his analysis of the topic completely differs from that of Jevons. 67 We have to keep in mind that for an observer of that age, division of labour and mechanisation were considered complementary processes. See Mosca (2005b).

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compared to the market. In the 1896–97 edition De Viti provides a more precise explanation of why some industries, such as the postal service, tend to become monopolies: they are marked by extremely high installation costs, and ‘not very large’ (1896–97, p. 120) marginal costs. In modern terms we can summarise De Viti’s ideas as follows: there are high fixed costs (part of which are sunk costs) and low marginal costs (as in transport networks, telegraph and telephone industries), or zero marginal costs (as for non-rival goods, such as theatres). In these cases, the economies of scale are so large, compared to the size of consumer demand, that a single firm can produce at a lower average cost than two or more firms. In other words, the minimum efficient scale of production is larger than the size of the market. Pareto, the engineer-manager turned economist,68 in the Cours writes: ‘There are branches of economic activity in which, by the very nature of things, free competition does not exist or at least is simply very imperfect. The railways are of this kind’.69 In the Manual (1906) he goes into the analysis of increasing returns to scale more deeply, given that it was by that time a more widespread phenomenon.70 Pareto in fact considers it to be ‘a very frequent phenomenon which occurs when overhead expenses are spread over the output in such a way that the cost per unit of output decreases as output increases – within certain limits, of course’ ([1906] 2014, p. 175). This last note is important: he explains that the lowest points of the average cost functions can rarely be ‘beyond the limits considered and in that case they might as well not exist’ ([1906] 2014, p. 93). For him, in the case of diminishing average costs,71 goods are produced ‘up to any terminal point which is imposed on [the firm] by

68 Pareto ‘had over twenty years of business experience’ (Pantaleoni 1923, p. 588). His last employment in 1890 was that of general manager of an ironwork company in Tuscany. Also, Schumpeter (1949, p. 150) mentions his thorough familiarity with industrial practice. On Pareto’s activity as a manager see Ingrao (2013), among others. 69 Here Pareto ([1896–97] 1971, p. 846) hopes for state intervention. We will return to this in Chapter 5. 70 Specifically, Montesano (1991a, p. 62) points out, ‘An example that Pareto examines at length […] is that of a production with a positive fixed cost and a constant marginal cost (therefore with a diminishing average cost)’. 71 As the editors of the Manual explain, Pareto calls this case ‘complete competition’, to distinguish it from the ‘incomplete’ kind marked by growing average costs. See Montesano et al. (2014, editor note 17, pp. 539–540).

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other conditions of the problem’ ([1906] 2014, p. 92).72 In other words, there are always external impediments thanks to which the firm stops its downward movement along the average cost curve.73 That is why he says: ‘It has been believed that firms operate under more favorable conditions the larger their output; and this view has given rise to a theory according to which competition must lead to the formation of a small number of large monopolies. The facts do not bear out this theory’ (Pareto [1906] 2014, p. 168). One of the causes of monopoly that Barone repeatedly returns to is economies of scale. He directly tackles the question of increasing returns to scale in the following terms: ‘If the cost of the unit of production indefinitely diminishes, to the extent that the quantity of the product increases, it would be advantageous for the production of every good to be concentrated in just one firm’ (Barone [1908a] 1936, pp. 20–21). Or as he also says, ‘In some cases it is […] the question of the most economical size of the firm that, through competition, leads to a single firm’ ([1908a] 1936, p. 25).74 With an implicit polemical reference to Cournot,75 he too affirms that in reality this does not happen, because average costs are generally U shaped.76 In his view, natural monopoly can occur only ‘whenever […] there exists […] a kind of firm, that at the limit of decreasing costs, is of a size sufficient to saturate, at the cost of production, the entire demand of the market’ (p. 289). However, Barone insists that in this case it is not a real monopoly (p. 25, p. 289): when Barone tackles this issue in Principi, he always distinguishes between ‘genuine monopolies, emerging from natural or legal conditions’ ([1908a] 1936, p. 289 and p. 292), and ‘single firms emerging from free competition’. He insists that, even in the case of a single firm, as long as 72 The ‘terminal points’ or ‘final points’ or ‘stop points’ generate equilibria that the editors call ‘non-marginal’ (Montesano et al. 2014, p. 527 and pp. 539–540). 73 Pareto is referring to the difficulty of managing large firms: ‘These difficulties are such that in general every firm has a certain limit beyond which the unit cost of the product grows instead of diminishing’ (Pareto 1896–97, section 719). 74 We dealt with this issue in Mosca (2008). 75 Barone writes: ‘It is what is admitted by certain authors, who foresee that one has to end up with a monopoly due to big firms constantly driving away small firms’ ([1908a] 1936, p. 21). We shall return to this issue in the section on competition policies in Chapter 5. 76 According to Barone the reason average costs rise is mainly the presence of a fixed factor and diminishing marginal productivity (Barone [1908a] 1936, pp. 20–26).

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there is free entry into an industry, competition would not disappear, since ‘potential competition’ is always just around the corner ([1908a ed. 1909] 1936, p. 289).77 We will now examine one of Pantaleoni’s four examples of dynamic phenomena mentioned in Chapter 2: the relationship between firm size and decreasing average costs ([1909a] 1955, pp. 41–51).78 Pantaleoni states that the aim of the firm is to minimise average total costs.79 He wants to demonstrate that these costs decrease as the production increases, because the average ‘overhead’ (fixed) costs decrease, while the average ‘direct’ (variable) costs remain constant. Here is his graph (see Figure 3.1). 600

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M. Pantaleoni ([1909a] 1955, p. 46).

Figure 3.1 Pantaleoni’s graph showing the relationship between firm size and average costs 77

All this terminology is similar to that used by J.B. Clark, on which see Maurandi (2001). 78 Sylos Labini (1997, p. 197) reminds us that Pantaleoni was ‘perhaps the first of the few economists who have dedicated a systematic, albeit brief, reflection on the question of overhead costs’. We have already recalled in the first chapter the connection with Sylos Labini. 79 In his words: ‘It is obvious that in any firm the sole aim is to have minimum total average costs’ ([1909a] 1955, p. 49). Manuela Mosca - 9781781003718 Downloaded from Elgar Online at 06/17/2019 05:31:05AM via American University of Beirut

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Figure 3.1 shows a linearly increasing curve of variable costs (‘Total direct cost’), a curve of constant average variable costs (‘Average direct cost’), a curve of constant fixed costs (‘Total overhead cost’), a curve of decreasing average fixed costs (‘Average overhead cost’), and a curve of decreasing average total costs (‘Total average cost’). As the size of firm increases, he states, it is profitable for the firm to raise fixed costs and to reduce variable costs80 because, he says, the first is a decreasing component of the total average costs, while the latter is a constant one. In Pantaleoni’s view, the connection between size and costs is circular: an increase in demand is followed by an increase in production; this increase in the size of the firm leads to a rise in the ratio of fixed to variable costs, which in turn determines a reduction of the total average costs, which is followed by a reduction of prices, finally allowing demand to rise again.81 The long term is presented by Pantaleoni as a succession of short terms: at the end of each term, fixed costs vertically increase, then they return to constant (he draws an increasing step function), while the average total costs decrease within every step. However vulnerable to criticism it may be,82 this example was intended to explain the phenomenon of large-scale firms in terms of dynamic efficiency, and to show that this dynamism makes it impossible to achieve any static equilibrium. We must not forget here that, thanks precisely to its intrinsic dynamism, monopoly is never a problem for Pantaleoni, because in his view what marks the ‘single firms set up and shaped by free competition’, is the presence of potential competition (Pantaleoni 1910–11, p. 396). In the following years De Viti connected monopoly to the ‘growing specialisation of functions and [to the] increasing supremacy of big firms over small ones’,83 and in 1921 wrote that production in a competition 80 In Pantaleoni’s words: ‘the larger the firm, the more profitable becomes a combination of overhead and direct costs in which the overhead is relatively large or the direct costs relatively small’ ([1909a] 1955, p. 45). 81 There is little point in recalling that in our contemporary economic literature the connection is only one way: ‘a good […] whose production entails large fixed costs and low variable costs, will be subject to significant economies of scale’ (Frank and Bernanke 2004, p. 225). 82 ‘Pantaleoni’s attempt to demonstrate that expansion of the firm necessarily involves absorption of direct costs into overheads […] rests on a subtle fallacy’ (Johnson 1956, p. 506). More recently Giocoli (2003, p. 220) finds an inconsistency in Pantaleoni’s theory. 83 This statement is found in De Viti (1907–08, p. 8) and (1909–10, p. 8), and in other later lecture notes.

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regime was increasingly giving way to monopoly because of the ‘growing division and specialisation’ (De Viti de Marco 1921, p. 28g).84 For De Viti de Marco the 1923 edition of the lecture notes marked a turning point, because it was the first printed edition of his manual,85 and it was where his thought took on its final form. Here, he speaks of ‘the growing division of labour, as a result of which the producing group sometimes finds itself in a quasi-monopolistic position’ ([1928] 1936, p. 40),86 and to give an example he explains that ‘free competition between railway enterprises [ends] either by a combination of the competing companies, or by the collapse of the weakest. In both cases, there is a waste of wealth, and the result is a monopolistic position more rigorous than ever’ ([1928] 1936, p. 76).87 And also: ‘railroad transportation is produced […] under decreasing costs […] about 75 per cent of railroad expenditures are fixed […] and 25 per cent are variable’ ([1928] 1936, p. 95).88 The same idea is expressed for water distribution (pp. 38–39).89 We will come back to these issues in Chapter 5, in the section on the role of the state. 3.4.3 Conditions of Demand Our economists also identified other structural causes thanks to which firms retain their market power, some of which are related to the 84

And adds: ‘so for instance today with electric lighting (which requires skilled technicians) it is easy to have a monopoly, while before with oil, each person could look after themselves perfectly’ (1921, p. 28g). His motivations here do not seem to be connected to the network effect. But the network is a cause of monopoly in an example of 1928 about the distribution of water: ‘in a large city, there emerges a group which distributes water to all the houses, and if the latter no longer have reservoirs of rain water and are therefore powerless to provide any form of competition, the producer becomes a de facto monopolist’ ([1928] 1936, p. 40). 85 Though still with a limited print run. The first official edition would be published in 1928. 86 Also in this case, the same sentence was found in De Viti de Marco (1923, p. 10). 87 The same sentence was already in De Viti de Marco (1923, p. 25). 88 This sentence was already present in De Viti de Marco (1923, p. 41). 89 De Viti de Marco’s case contradicts DiLorenzo’s thesis according to which ‘It’s a myth that natural monopoly theory was developed first by economists, and then used by legislators to “justify” franchise monopolies. The truth is that the monopolies were created decades before the theory was formalized by intervention-minded economists, who then used the theory as an ex-post rationale for government intervention’ (DiLorenzo 1996, p. 439).

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demand-side. Here we we can clearly see the influence of J.S. Mill.90 For example, Pantaleoni (1882) mentions the customers’ loyalty to firms which are located at a longer distance from the market (pp. 85–90), and in 1898 he refers to ‘frictions’ such as ‘ignorance, prejudices, habits [that] prevent consumers from going straight to the best offer’ (Pantaleoni [1898b] 1925, p. 160). Finally, in 1913 he repeats once more that ‘there is error; there is habit; there is custom’ ([1913a] 1925, p. 17). In the Manual, Pareto reaches the ‘lapidary conclusions [that,] ceteris paribus, the entry of new producers […] depends on the size of the market’ (Montesano et al. 2014, p. 489), while in the Cours he had acknowledged that the presence of substitute goods limits monopoly power.91 For De Viti, too, market power has limits, which he identifies as the ‘possibility of smuggling, and also of shrinking the demand directly, by limiting consumption, or indirectly, by resorting to substitutes’ (De Viti de Marco 1888, p. 93). Only a few years later, with reference to the telephone industry, he recalls the existence of substitute goods: ‘messenger boys, servants, the telegraph itself compete with the telephone within the same city. It is in the company’s interest to defeat these natural competitors, offering the service at the lowest price’ ([1890a] 2001, p. 522). This statement allows us to say that for De Viti market power also depends on elasticity of demand, and the demand for the telephone is elastic. However, this time quoting Marshall (1890a), he writes that ‘the demand lacks elasticity’ because in his opinion the price is low for the rich (so their demand doesn’t depend on the price), while it is too high for the poor (so they are out of the market) (De Viti de Marco [1890a] 2001, p. 519). Demand elasticity is included in a list of causes of market power compiled by De Viti in his Principles: much depends […] upon whether in the enterprise […] there is more fixed capital, which is difficult to disinvest, or circulating capital, which may be disinvested rapidly; whether the enterprise operates under increasing or decreasing costs; whether the goods involved are subject to an elastic or inelastic demand; whether the incomes involved are fixed or variable, and so forth. ([1928] 1936, p. 155)

90

On custom and competition in J.S. Mill see Schlicht (2006). Remember that ‘the elasticity of demand for the product of a particular firm’ is at the basis of the monopoly power index elaborated by Lerner (1934, p. 167). 91 Pareto writes: ‘the monopoly of a good that has substitutes is less harmful than the monopoly of a good that has no substitutes’ (Pareto 1896–97, section 974).

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In short, we can say that for the Italian marginalists there was clearly an inverse relationship between the degree of monopoly power and the demand elasticity faced by the firm.

3.5 STRATEGIC BARRIERS Strategic barriers are those that are intentionally designed by incumbent firms to exclude competitors. However, as we will see in the following sections, our economists were more interested in exploring how firms engaged in strategic behaviour intended to set the price of their products. 3.5.1 Parasitic Competition92 To the Walrasian93 condition that perfect competition requires an infinite number of firms, our economists sometimes juxtapose the idea that in the real world there may be industries in which the number of active firms is too large; that is, more than optimal.94 Here, a greater concentration would lead to a reduction of the average cost of production. This idea, picked up from Thornton, was also present in the classical literature: we will just mention the case of J.S. Mill, who saw the presence of numerous small businesses as a useless waste.95 It is also the basis of the theory of ‘ruinous competition’.96 There is a passage in the Cours where Pareto criticises the excessive number of small firms in the retail sector, an excess that ‘explains the easy success of the […] big stores and co-operative societies’ (1896–97, 92

This is the expression used by the editors of the Manual. See Montesano et al. (2014, editor note 30, p. 563). See also Montesano (2012). 93 But even earlier, Cournotian. 94 The Walrasian theory obviously requires the optimal number of firms to be infinite. 95 Referring to the case of the London water supply, Tynan confirms that for J.S. Mill ‘competition was largely illusory and that ultimately it was destructive due to excessive entry and over-investment’ (Tynan 2007, p. 50). The Italians were also aware of this problem: in Ciccone’s words, ‘Cases do arise, however, where excessive competition raises prices rather than lowering them’ ([1866–70] 1882, vol. II, p. 55). 96 Hovenkamp (1991, p. 309), recalls among others H.C. Adams, who in 1887 ‘argued that many American businesses had achieved economies of scale – they could operate more cheaply only if they were very large’. Hovenkamp (1988a) illustrates the theory of ruinous competition in the American economists of that generation.

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section 923). Since the retail trade is a sector where ‘fixed costs are quite important, it follows that the reduction of the coefficients of production depend above all on the increase of the sum of sales’ (section 923). This is essentially a passing reference to the concept of increasing returns to scale that are not exploited due to a cartel. As we shall see, Pantaleoni is also in favour of horizontal concentration, when it is a way to reduce the excess number of small firms and therefore to lower the cost of production (Pantaleoni [1903] 2001, p. 165).97 This case is examined in depth by Pareto in the Manual: he discusses it concisely and clearly in section 13; then in section 15 he writes that he is the first to give it such a precise exposition ([1906] 2014, p. 177).98 He explains that a syndicate sets a monopoly price above the average cost, corresponding to a certain amount of demand. If there were competition, the price would fall to the level of the minimum average cost; as the price is set by the syndicate and does not go down, the entry of firms that reduce the amounts produced by each of the incumbents makes them go back up the downward sloping line of their average cost curve. Thus, according to Pareto, the latter goes up as far as the monopoly price and only then does the entry stop. In other words, profit attracts entry and as the number of firms increases, it is gradually reduced until it reaches zero owing to the fixed costs (Montesano et al. 2014, pp. 499–500 and p. 563). In this case ‘a high number of firms and zero profits combine with production inefficiency’ (2014, p. 501). For Pareto ([1906] 2014, p. 175) the firms making up this market ‘live off production like parasites’, and he reiterates that they are mainly found in retail (pp. 232–233); that is, among the coalitions of small shopkeepers (p. 233) that set prices well above average costs. Barone too denounces those cases where the firms are smaller than their minimum efficient scale. He complains that competition is ‘lazy’, or ‘not very lively’ ([1908a ed. 1909] 1936, pp. 287–29199); in his words: ‘it happens that, […] because competition does not operate sufficiently, this 97 On the topic of the waste due to an excess number of firms Pantaleoni ([1903] 2001, p. 165) cites Sidgwick (1883). We can add that Pantaleoni had little respect for entrepreneurs running very small businesses which, being too many in number, did not allow selection to operate (Pantaleoni 1910–11, pp. 95–96). 98 Montesano (1991a, p. 63): ‘If there is a cartel of producers that sets the […] monopoly price […] then the free entry of firms causes the presence of a great many producers, each of which sells a limited amount of products, making zero profit’. 99 See also Barone ([1911–12] 1937, p. 316).

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maximum size of firms is not reached – and hence the number of these is not reduced to that minimum – to which corresponds the lowest cost of production’ (pp. 288–289). For him too the typical example is small scale trade (that is, retail shopkeepers), a sector he judges ‘one of the most imperfect parts of the current economic structure’ (p. 287) in which there is ‘a faulty pulverisation of firms’, owing to ‘habits’ that are hard to eradicate (p. 291), or in certain cases to the setting up of a cartel that protects inefficient firms. The excessive number of firms operating in the diminishing part of the average cost curve, and hence the chance to exploit further economies of scale, provides Barone with an argument in favour of the extension of firm size and the reduction of their number. Their ideas are confirmed also today, by the scholars of industrial organisation.100 3.5.2 Oligopoly: A Few Large Firms in the Market Oligopoly is a term that was not used then,101 but it was what our economists were dealing with when they examined how a few efficient large firms, or aggregates of firms (the ‘economic complexes’), behave strategically in order to acquire and maintain their market power. In particular, the Italian marginalists were interested in agreements among firms102 that cooperate among themselves, and that are in competition with other companies or other ‘economic complexes’. 3.5.2.1 Pantaleoni: large is better Our economists mainly feel that collusion is more likely in concentrated industries than in fragmented ones. Pantaleoni for instance says: ‘If the entrepreneurs are few, and act together as one man’, then the situation is similar to monopoly ([1889] 1957, p. 280). Furthermore, in an outstanding study highly praised by Sraffa (1924, p. 648), Pantaleoni, writing on the Italian stockmarket, says: ‘There are only a few brokers, always the same, and in case of [need] a cartel is easy to create’ (Pantaleoni [1895] 1936, p. 273); he also examines the affair of the cornering of the tin and copper market (pp. 381 ff.). However, Pantaleoni is not at all opposed to this practice; indeed, he wishes that the stronger 100 See for instance Cabral (2000, p. 285): ‘the smaller the size of the merging firms, the more likely the total effect of a merger will be positive’. 101 On the history of the term oligopoly see Chamberlin (1957). 102 Or also among consumers, or among workers. We will deal with the labour market in Chapter 4 (section 4.4.2).

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Italian banks would form a syndicate to push the weaker ones out of the market (p. 270). Another important essay to remember here, and one which we looked at in Chapter 2 (section 2.4.2.1), is his reply to Gide on the subject of cooperatives (Pantaleoni 1898b). We are not interested in his criticism of the cooperative system, but in the fact that Pantaleoni treats these firms exactly like cartels. He therefore presents a detailed theory on how a cartel behaves towards a potential entrant: it can welcome the newcomer or oppose it by cutting prices to below cost. Essentially, if the price set by the cartel is high, the profit attracts competitors, and if it is low there is no profit. Pantaleoni argues that, as with every firm, the size of cooperatives is determined by the minimum efficient scale, which once reached, makes them lose interest in the entry of new members. Relying on Pareto, Pantaleoni (1898b, p. 166) shows that this outcome, namely the closure towards newcomers, is reached sooner or later by every cooperative. Then, in the conference paper ‘The Twentieth Century Viewed by an Individualist’ (1900), he states that ‘the entire industrial and commercial world is subdivided into groups which struggle against other groups and the formation of each syndicate is greeted by that of a series of others: among consumers – in the form of consumer cooperatives – and among producers’ (p. 359); a little later he enthusiastically adds, ‘Just consider the vast reach of the commercial and industrial syndicates! Consider what trade unions mean as regards invention and organisational technique’ (pp. 363–364). In his 1903 essay Pantaleoni specifically addresses legal experts with the purpose of convincing them that industrial syndicates are not real monopolies and do not limit competition. We have already seen (in section 3.4.2.1) what Pantaleoni thinks of vertical integration. His opinion on horizontal concentration is in some way puzzling.103 On the one hand, he thinks that horizontal concentration is an ‘old’ form of syndicate, a means of obtaining monopoly power (p. 167) through legal protection or predatory pricing,104 or by incorporating new competitors in 103 Stigler (1950, p. 30) summarises the attitude of the American economists of the period toward the horizontal concentrations as follows: ‘Economists as wise as Taussig, as incisive as Fisher, as fond of competition as Clark and Fetter, insisted upon discussing the [merger] movement largely or exclusively in terms of industrial evolution and economies of scale’. 104 Pantaleoni writes: ‘a less convenient and certainly more costly means consisted in setting prices which would ruin a competitor; more ruinous for him than for the syndicate, if the newcomer’s overhead costs have not yet been amortised but those of the syndicate’s partners already had been, also if the

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the syndicate through incentives (pp. 194–195). On the other hand, he does not see in it any actual danger for the competitive process, because he believes that the threat of entry by new firms is always at work (pp. 164–165);105 he is even in favour of horizontal concentration as a way to lower the cost of production (p. 165). Pantaleoni is therefore well aware of the growing size of firms in his time, but he regards the phenomenon favourably, arguing that by joining together, firms achieve a reduction of costs that would otherwise be impossible ([1903] 2001, p. 150)106 We would add that for him competition is able ‘to hold cartels at bay’ ([1903] 2001, p. 166), and since the potential entrants are always at work, the prices fall, transferring ‘the benefit to the public’ (Pantaleoni [1903] 2001, p. 165). In the following years, in his lecture notes for students, Pantaleoni (1910–11, pp. 400– 406), whose analysis was strongly influenced by Barone’s treatment (which we shall examine later), remained in favour of large firms. We shall conclude with an article written by Pantaleoni (1918b) during the war where his focus on strategic interaction is very clear: in expressing the hope that Italian firms might be concentrated into a few groups, he explains that syndicates ‘are organisations in a permanent state of unstable equilbrium’; for him, ‘the most critical point of every syndicate arrives just as it is about to end’, since every firm’s risk of leaving the market is ‘very serious’, especially if average costs are declining (p. 122). In short, for Pantaleoni, cartels, trusts, mergers and every kind of agreement were useful and did not reduce competition. 3.5.2.2 Pareto: ‘a mixture of good and bad’ On combinations, Pareto in the Cours writes: ‘the desire to set up a monopoly is natural for all producers’ (1896–97, section 799), and explains that this is the reason they try to form coalitions. Initially, he is newcomer’s capital was insufficient to sustain a period of subprofits, where the greater capital of the syndicate could sustain such a loss’ ([1903] 2001, pp. 194–195). 105 He explicitly says that ‘virtual competition […] brakes prices’ (p. 166). On the role of potential competition Pantaleoni agrees with Clark (1901), while criticising Clark’s neglect of the consideration of vertical integration: ‘[Clark] sees no trusts other than those which consist of mergers or links between competing companies’ (p. 165). 106 Pantaleoni bows to Sidgwick’s authority but also to Collier in recalling the well-known truth that ‘a trust brings a saving of the waste which competition in other forms can cause’ ([1903] 2001, p. 165). This was the opinion of American economists such as Fisher, Fetter and Taussig (see Hovenkamp 1991, p. 219).

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in favour of the spontaneous formation of combinations, as he is convinced that without the support of government (which he decidedly opposes) these agreements cannot last (1896–97, sections 905–911). He also looks favourably on consumer cooperatives, which in his opinion ‘have introduced free competition where it existed only in imperfect form’ (1896–97, section 922).107 With the passing of time, however, Pareto’s faith in the market gives way to a more complex attitude. In Systèmes Socialistes (1902–03, vol. II, pp. 444–445) he has already expressed his new idea: in his view, trusts present a mixture of good and bad. They do good […] because they allow a considerable reduction in production cost; they can carry out works that would be beyond the power of smaller associations; they are one of the best forms of class struggle. […] Far from posing an obstacle to selection, like German cartels, trusts facilitate it, because they are made up only of firms that have the best probabilities of success, and they try to destroy those that are still-born. They are harmful because at times they raise the prices of goods.

In the same year Pareto (1903) wrote a short article for the Gazette de Lausanne, using empirical data to criticise trusts that are not created out of the need to reduce production costs. Since Pareto here considers syndicates, trusts and workers’ associations to share certain characteristics, we will look at this text in the following chapter (section 4.4.2 ‘Labour’). In the Manual (1906), Pareto provides an even less positive image of the agreements between firms. Of the entrepreneur, he writes: ‘by intrigue, deception, or intelligence – he edges out his competitors […] Finally, it should be noted that it often happens that a certain number of people form an association precisely in order to dominate the market’ (Pareto [1906] 2014, p. 82). And also: ‘powerful banking companies and syndicates […] thanks to substantial means – try to corner commodities’ (p. 81). He regards syndicates and trusts as phenomena that favour ‘certain segments of collectivities’ that try to maximise their own utility; 107

Pareto wrote to Pantaleoni (16 December 1897): ‘I don’t know why you think cooperation is opposed to free competition. […] In my opinion, it is a way of setting up a collective business […] Certainly there are syndicates, or there’s inertia among competitors, etc. What are the consumers to do in that case? Protect themselves, and if there are no individual competitors […] create a cooperative. […] When the cooperative is successful, it is very sure proof that in fact the competition was lacking […] You say that this however could act as competition (you mean: individual). Perfect, but there’s a conditional: could. And if it doesn’t? […] In short, in my opinion, cooperatives are not opposed to free competition, they complete it and they provide us with bodies that give the greatest utility’ (Pareto 1960, pp. 131–132).

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that is: ‘trade unions, producers enjoying tariff protection, and trade associations which exploit consumers’ (p. 185), and who therefore destroy the general wealth (pp. 185, 233, 266). Essentially Pareto thinks that combinations – workers’ associations, syndicates, trusts, cooperative societies, large department stores (p. 235), monopolies (p. 233) – would not be harmful in themselves, and would be welcome if they sold at lower prices (p. 235), but this does not happen. It is on these monopolistic agreements designed to raise prices that he mainly concentrates, in contrast to Pantaleoni who, as we have seen, prefers to examine efficient trusts. Pareto writes: ‘Modern syndicates have two principal aims: 1. To allow firms to attain the size that corresponds to minimum costs of production […] 2. To escape from the pressures of free competition, wholly or partially’ (Pareto [1906] 2014, p. 233). He is in favour of the first of these aims; that is, to the search for the minimum efficient scale, but on the theoretical plane he hardly mentions it, and on the practical level he considers it unimportant (pp. 233–234). Whereas he holds the pursuit of the second goal (to escape from competition108) to be futile in principle, because it is impossible to restrict competition in a free market, unless the government supports the trusts, thereby harming the consumers (Pareto [1906] 2014, pp. 234–235).109 3.5.2.3 Barone: the persistence of market power Barone speaks of the ‘limiting case to which free competition tends, in which there are one or more competing entrepreneurs who make no profit and who produce at the same cost’ ([1908b] 1935, p. 252). If in 1895 and 1896, following Walras, he stated that competition requires a multiplicity of economic agents, here Barone suggests it does not depend on the number of firms; in his words: ‘Between the greater or lesser multiplicity of firms […] and the greater or lesser effectiveness of competition, there is not always […] a necessary relation’ ([1908a ed. 1909] 1936, p. 287).110 In fact, he believes that, even in this case, exposure to 108

This aim in Pareto’s view is hidden behind false excuses to avoid ruinous prices, or to avoid unfair competition (Pareto [1906] 2014, p. 234). 109 Remember also that Demaria ([1952] 1980, p. 353) finds that Mind and Society (Pareto 1916) contains an admirable treatment ‘of the forms of limited competition, oligopoly, trusts and trade unions’ carried out by Pareto with the use of sociological concepts. 110 But still in the ‘Ministry’ Barone considers price taking behaviour as the result of the presence of ‘several competitive enterprises’ ([1908b] 1935, p. 251).

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competition would not disappear, since in his opinion potential competititors are always at work.111 Let us now look at the most innovative part of Barone’s thought, in which he tackles the strategic interdependence between competitors and questions his own beliefs. As we know, for him, if ‘the regime of competitive warfare’ ([1908a ed. 1909] 1936, p. 303) works, in some sectors the optimal number of firms may be low.112 In his view, the ‘process of eliminating high cost firms’ (p. 289) is a preliminary to the setting up of syndicates.113 Barone defines a cartel as ‘a syndicate of U individuals, the possessors of a service which, to their own advantage they can monopolize’ ([1908b] 1935, p. 261). While not elaborating a formal model, he explains that: It is not true that the cartelization renders the problem of price and quantity indeterminable. Given any particular agreement among members of the cartel on the distribution of the individual contributions to the total Q, supplied to the market, and on the distribution of receipts, the entire equilibrium is determinate. ([1908b] 1935, p. 261)

He therefore feels that the survivors of selection prefer to form syndicates, and indicates three kinds: corners, cartels, and trusts. Corners are occasional combinations designed to hoard a good in order to make the price rise and then sell it. But Barone does not consider this form of syndicate very successful since competitors are found outside their area, or in new firms attracted by profit, or in producers of substitute goods. Barone explains that cornering is almost extinct, due to the progress in communications, and that cornering was more successful in the past when the communications among different markets were more expensive. 111 The firms ‘left on their own, arising from competition, will always have to fear potential competition […] from other similar firms that could spring up’ ([1908a ed. 1909] 1936, p. 289, his italics). We therefore deduce that Barone believed that there were potential competitors also in the case of scale economies and sunk costs, so that his theory cannot be thought of as analogous to that of contestable markets. See Baumol and Willig (1981). 112 However, Barone’s statements are not very clear and this is all expressed cautiously: competition works by ‘exluding from the market many of the higher cost firms, and concentrating most of the production in firms whose size approximates the typical size’ ([1908a ed. 1909] 1936, p. 303, my italics). 113 In his own words: ‘The coalition regime […] doesn’t become really convenient […] unless the regime of competition has already been widely in operation, eliminating the weaker organisms from the market and leaving the majority of the production of a certain good in the hands of a few large firms’ (Barone [1908a ed. 1909] 1936, p. 320).

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The enduring syndicates on the other hand include cartels among independent firms that make agreements on specific matters (and that at times take the form of pools, with a central body that monitors and organises); then there are trusts, created by firms which can even merge. What are in his view the features of these enduring syndicates? Cartels are a simple association of firms that Barone judges intrinsically unstable and subject to ‘a latent state of war even during a peace’ ([1908a ed. 1909] 1936, p. 307).114 He gives examples of the contents of their agreements: minimum selling price, or maximum quantity to be sold, and division of the market among the members. Instead, trusts reduce production costs thanks to ‘achieving the most economical size’ (p. 310). Barone also distinguishes combinations of firms producing the same goods from those producing complementary or instrumental goods, which corresponds to cases of horizontal concentration or vertical integration. We have dealt with the latter in section 3.4.2.1 (‘Minimum efficient scale’). Of horizontal concentration Barone provides two examples. In the first, three firms produce at different costs. Here is his graph (see Figure 3.2).

N K H

3 0

2 1

M OM quantity produced OH average costs OK average costs

Source:

E. Barone ([1908a ed. 1909] 1936, p. 311).

Figure 3.2 Barone’s graph of three firms with different costs of production 114 Like Pareto, Barone contrasts the German cartels, which aimed at protecting inefficient firms, to American trusts, which instead aimed ‘at achieving the most economical firm size’, and therefore at eliminating less efficient businesses ([1908a ed. 1909] 1936, p. 308).

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The lowest cost firm is on the left of the minimum efficient scale; if it lowers its prices below the average costs of the other two firms, they exit the market, but then its profit is greatly reduced; if on the other hand it merges with the others, it can increase production without cutting prices (p. 311). The second example refers to two firms that both produce at decreasing average costs: Barone shows that in this case ‘there are only two ways: either war or coalition. War may exclude one of the two from the market; but its costs are enormous not only to the defeated one, but also to the winner’ ([1908a ed. 1909] 1936, p. 313). In Barone’s view the solution is dumping; that is, exporting a part of the production below cost (pp. 314–317). Looking more closely at this question, which he finds the most interesting one from the practical point of view, Barone concludes that dumping can never last long because of the reactions of competitors (pp. 335–336). How can incumbents set the price in a coalition system in order to maintain their market power? Barone uses graphs to show that the price set by a syndicate in an open market falls between the production cost and the monopoly price (p. 323). The syndicate cannot set the monopoly price because of foreign competition; it can only try to maintain its price at the international level, if it is above costs (p. 310 and p. 324). Then, considering potential competition, Barone argues at this point that ‘it is lazy and active intermittently. The struggle to rush into the fray against a vast trust, requires very great capital and is full of risks’ (p. 325). Nevertheless, it results in reduced profits since the syndicate ‘stays below the maximum that it could reach, in such a way that it does receive a profit, but one that is not high enough to encourage other firms to enter the fray’ (p. 325); in other words, it is below what could ‘re-awake the potential competition’ (p. 328). Here Barone also deals with the problem of the behaviour of a cartel towards a new firm: ‘If, instead of aggregating new firms, the syndicate decides to declare war on them to get rid of them, having recourse to the means of a momentary and abrupt lowering of prices to destroy them, and it succeeds, the expenditure of the struggle […] ends up […] by adding to the cost of production, thinning out the profits’ ([1908a ed. 1909] 1936, pp. 325–326). He concludes by explaining that the ‘syndicates […] do not raise prices, they keep them high and try to oppose their reduction’ ([1908a ed. 1909] 1936, p. 350), thus involving both a reduction of costs and an increase in prices. This example makes it clear that for Barone monopoly power might durably translate into higher profits ([1908a ed. 1909] 1936, p. 326), in contrast to what he himself claimed on other occasions.

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Then he suggests that when the firms are few, they continue to compete, although he thinks it better if they do not.115 Later, in 1921, Barone identifies the ‘limit state of competition’ as that in which the firms are ‘reduced to a few, of the same type, of the most economical size, zero profits’ ([1921] 1936, p. 411); but this is only in theory, because as we know in his view, in the real world, market power may persist. 3.5.2.4 De Viti de Marco: trusts and protectionism For De Viti de Marco, ‘a syndicate […] exists […] when a group of producers by means of an agreement replace the competition price with the monopoly price’ (1896–97, p. 86). It is therefore ‘a single producer or a syndicate, namely a union of producers that agree to replace the price of free competition with that of monopoly’.116 He too thinks that these agreements ‘have difficulty enduring, unless some productive force has a natural monopoly’ (1896–97, p. 13), but that does not prevent him from denouncing, for instance, the ‘Association of cellarmen of Milan [that], being in a few, have monopolised the wine trade of the South’ ([1903a] 1929, p. 31). De Viti de Marco above all links the development of large coalitions of firms to protectionism. For him, the protectionists defend ‘the exclusive interests of some producers – those aiming to monopolise the domestic market’ ([1903b] 1929, p. 47), since protectionism eliminates international competition. Referring to the American debates on the role of the antitrust, De Viti writes admiringly: ‘tariffs have long been the biggest political question on the United States of America and today it has become more heated being permeated with the problem of trusts, and according to all forecasts it will be the platform of the future presidential campaign’ ([1903b] 1929, p. 76).117 He repeats this opinion even more explicitly: Protectionism […] by eliminating the competition of foreign producers, puts domestic producers in a more favourable position to organise industrial syndicates and trusts. In the great homeland of trusts, in fact, it is thought that 115 To the point that he wishes for the good of society they would call something of a truce ([1908a ed. 1909] 1936, pp. 326–327). 116 Lithographed notes (1900–01, pp. 53–54, idem 1902–03, pp. 62–63, 1912–13, 1914, pp. 4 ff.). 117 On De Viti’s attitude to President Wilson’s America see Martelloni and Mosca (2018). His attitude to the antitrust will be a subject of discussion in Chapter 5.

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protectionism creates and strengthens them, and the battle against trusts also becomes the battle against protectionism. ([1904] 1929, p. 86)

As time passed this belief became stronger and stronger; a decade later he would write, ‘That customs protectionism […] encourages the formation of syndicates […] is a fact proven by science as very few others are’ ([1913] 1929, p. 330).118 In parallel with his denunciation of protectionism, we find in De Viti’s writings the hope for an extensive international competition: the great world industry with related syndicates is a long foreseen natural fact, which is gaining a growing reputation, replacing the great domestic industry, just as the latter replaced the city’s small industry. ([1914] 1929, p. 184)

Remember that De Viti has great faith in the free market: for example, in his lithographed lectures he writes ‘even two individuals are enough to create competition, and for the monopoly to disappear’ (1912–13, p. 12). What he opposes, besides protectionism, are corporations protected by legislation that prevents the entry of new firms; this is the case of, in De Viti’s words, ‘professional corporations, which would like to force those practising a certain profession to bend to the will of the majority of the members’119 and of the ‘few cooperatives of public works […] [that] have established a parasitic political monopoly’ to the detriment of the wages of all the other industries ([1913] 1929, pp. 328–329). From these examples, one can understand that the benign attitude of the Italian government toward industrial agreements was not due to its economic liberalism, but to its will to support the domestic industrial sector. In doing this, it was similar to other European countries where ‘State protectionism, publicly-owned firms, exclusive rights for public, and private firms, and consortia among private firms were common ingredients in the guidance of the economy’ (Amato 1997, pp. 39–40).120 Apart from price discrimination and product differentiation, both of which we addressed earlier in the chapter, there is not too much to add in the way of other strategies. We just recall that in his first book on the 118 It is interesting to compare this statement with Bond’s more recent conclusion: ‘The relationship between the level of trade barriers and the ease with which collusion can be sustained is not monotonic, and depends critically on the type of trade barriers’ (2004, p. 130). 119 The quote appears in the lecture notes of 1912–13 (p. 6) and also in those of 1914 (p. 6). 120 This is discussed further in Chapter 5.

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theory of the shifting of taxes, Pantaleoni ([1882] 1958, p. 77) sees an entry barrier in the lack of information about extra-profits obtained in some industries.121 We must also add De Viti122 and Barone’s consideration of firms which modify the quality of the product they sell. In Barone’s words: ‘Competition often takes place between private producers not in the sense of lowering the price maintaining the good quality of the goods, but in the sense of lowering the price but making the quality deteriorate and falsifying it’ ([1911–12] 1937, p. 118).

3.6 CONCLUSIONS Let us now try to express an assessment of the attitudes of our economists on the causes of market power. We shall make a comparison with their colleagues in the rest of the world in the final chapter, but we can already state with certainty that some of their ideas on these issues were very well known at the time, such as monopoly and duopoly models, price discrimination, and in part the early treatments of natural monopoly.123 For all the rest, however, there were no precedents. In Chapter 2 we saw that they were not satisfied with competitive equilibrium, because they believed that the reality was dynamic, and we stressed their attempt to formalise the dynamic theory of competition inherited from the classical economists. Like the latter, they continued to deal with problems related to entry and exit; that is, the question of transferring capital to profitable industries (think of the problems of input rigidity and sunk costs), and above all the problem of inefficient firms (think of Pareto and Barone’s parasitic competition). Naturally in the new era such problems were far more marked, and for this reason the marginalists identified more entry barriers than those traditionally examined by classical and late-classical economists. Furthermore, making use of mathematics, their analysis of cost structure and economies of scale became more rigorous and complete: they were very clear in explaining the link between cost structures and the size of firms, and in describing in detail how entry and exit determine the optimum number of firms. This is relevant to our theme: in the search for the causes of market power, as well as identifying the frictions that prevent the achievement of perfect equilibrium, they also considered cases in 121 On the role of ignorance (of buyers) as a source of monopoly power see Scitovsky (1950). 122 De Viti de Marco (1892–93, pp. 61, 117, 461), also in later editions. 123 On the history of the theory of natural monopoly see Mosca (2008).

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which, without any friction, the equilibrium was characterised by a small number of firms. Owing to entry barriers due to technology, demand conditions and strategies, these few firms were able to engage in strategic actions in order to create or maintain their market power. The economists therefore began to think that the classical idea of dynamic competition, related to small firms, was no longer enough to explain all the cases present in the economy of their time, and even less in that of the age to come.124 Alongside competition among many small businesses, there was the growing presence of oligopoly; that is, competition among a few large firms, which Mary Morgan called the ‘new competition’ (1993, p. 564).125 This posed completely new questions for our economists; which is why we said there were no precedents. In fact, they had to cope with a phenomenon that had never existed before: the face-off between giant business firms was unknown, and none of the economists of the previous generations had been called on to deal with it.126 Nevertheless, despite the fact that theirs was the first generation to analyse and write about the theme of big companies, for them the previous theory did not lose its validity because in reality they saw that the various market structures coexisted; Barone for instance wrote that a market economy ‘is essentially one in which free competition, monopolies and cartels are all present’ ([1908b] 1935, p. 234). What was their opinion on the ability of the new large firms to set prices above costs? For all of them, the number of firms was, in principle, not a good indicator of monopoly power. Although the presence of big companies posed new problems, they all saw potential competition as a way to temper the behaviour of incumbents, similarly to other colleagues of their generation.127 But it was only Pantaleoni who 124 We agree with Vinci (1948, p. 689) that these cases were ‘initially considered exceptional’, then ‘achieved such prevalence that they made a great deal of the […] classical theories seem unrealistic’. 125 ‘The new competition’ is also the title of an article published in Fortune in 1952, referring to the competition prevailing among oligopolies (quoted in Peterson 1957, p. 63). 126 This really seems to have been perceived as a new form of competition compared to that of the classical economists, unlike perfect competition which, as we saw in the previous chapter, they regarded in continuity with the classical conception. 127 Hovenkamp (1991, p. 323) writes that economists Hadley and Ely were ‘overwhelmed by the trust’s ability to achieve cost reductions’, and adds: ‘Even more cautious economists such as John Bates Clark argued in the 1880s and 1890s that potential competition would generally be sufficient to prevent monopoly pricing by the trusts’ (p. 325).

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stressed the positive effect of the selection process: for him, as long as there was free entry into each industry, agreements were not anticompetitive – we recall that for Pantaleoni an efficient outcome could be compatible even with no entry. On the contrary, Barone was convinced that market power might persist in the real world, both because competition is lazy, and because the strategic behaviour of the large firms could pose difficulties to potential entrants. Nor could Pareto share Pantaleoni’s optimism: in his view prices can be set above cost, mainly for institutional reasons, because for him, ‘Almost all the existing monopolies owe their creation to the direct or indirect assistance of the law’ (Pareto 1896–97, section 719).128 This is even truer for De Viti who, while believing that concentration leads to a reduction of costs, also sees the risk of monopolistic behaviour in the ‘surviving’ firms, especially helped by protectionism. On the whole, their position on the effect of big business was multifaceted, as is the case today.129 Can we say that our economists tried to find an economic theory of oligopolistic markets? From the preceding analysis, it seems that Pantaleoni and Barone treated this issue in depth, the former in a perspective that we could call Austrian,130 the latter in a manner more similar to today’s New Industrial Economics. Let’s move on now to the way they used their theories with the aim of explaining – and changing – the real world.

128

Pareto wrote to Pantaleoni (21 December 1897): ‘On monopoly prices, you see things through rose-coloured glasses. The monopoly price is only in a few cases the reward for greater ability, activity etc. Often, very often, it emerges from criminal, or at least harmful, understandings, or from understandings that have the purpose of saving the weak, incapable, etc. This is the kind of understandings found in small retail’ (Pareto 1960, p. 135). 129 For a review of the many ways in which the recent literature on mergers answered the question ‘to what extent have mergers led to increases in economic efficiency, and to what extent have they led to increases in market power?’ see Mueller (2004). 130 Some expressions from Hayek ([1946] 1948, p. 105) seem to follow Pantaleoni’s positions, for example when Hayek states that competition is always at work ‘even if more slowly, so long as it is not outright suppressed with the assistance or the tolerance of the state’.

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4. Monopoly power, competition and reality 4.1 INTRODUCTION1 After focusing in the previous chapters on our marginalists’ theoretical identity, we will now concentrate on their equally authentic nature as applied economists. As we shall see, this shift from abstract analysis to real-world issues is indispensable if we are properly to grasp the essence of their ideas, including those on pure economics. In this chapter, we will look at some of the historical events of the age, linking them to the development of our economists’ thought and to their efforts to understand how reality works. We will show that they saw their analysis as serving to explain phenomena also outside the boundaries of the economic realm. We will then see what operative importance they attributed to their theories on competition and monopoly power; and examine some of the practical situations in which they used them. The cases we will analyse here are not only economic, but also social and political. They are: gender issues, the labour market, socialism, and the Great War. We will scrutinise their writings in search of the relationship between theory and applications, following up on these various leads. Firstly, however, we wish to point out that in this chapter we will at times use the notions of competition and monopoly power in a broader sense than in the previous chapters, since here we are also examining issues that are not strictly economic.2 Finally, let us clarify that we are not dealing here with their vision of the state and economic policy, which will be the subject of Chapter 5.

1 A previous version of this chapter was presented to the 21st ESHET Conference (Antwerp, 18–20 May 2017), and to the 15th AISPE Conference (Rome, 23–25 November 2017). 2 Hartmann and Kjaer (2015) explore different forms of competition in different spheres of sociology.

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4.2 APPLIED ECONOMISTS With applied economists, we are not referring to empirical testing, but to the application of economic theory to specific issues, not only in the realm of economics. We begin with Pantaleoni, who always used economic theory as a tool for interpreting reality: armed with selectionism, he was determined to explain facts in detail and to provide penetrating analyses of practical phenomena.3 To achieve this, he worked doggedly at the cutting edge of economics: on the one hand, he incorporated categories and methods borrowed from other disciplines, and on the other he applied economic reasoning to facts that were not just economic, but also political, historical and social.4 In the case of Barone, too, it is particularly easy to find the link between theory and applications since for him ‘every theory that does not correspond to the facts, must absolutely be rejected’ ([1911–12] 1937, p. 6). He therefore contended continually with episodes taken from current affairs or from history.5 For instance, the subject of the ‘destruction of firms (those with higher costs) by free competition’ ([1908b] 1935, p. 288), which we dealt with in the previous chapter, is taken up by Barone also with specific reference to concrete episodes, such as the attempt to provide remedies for the wine producing crisis – an attempt Barone thought absurd because he could see no other way of escaping the crisis than through reducing production levels; in other words, the bankruptcy of the producers with higher costs ([1911–12] 1937, p. 242).6 Twenty years of political activism, allied to his position as an expert on public finance, provided De Viti de Marco with abundant opportunities to intervene in debates on current issues; in fact, his political writings are more numerous than his purely theoretical. In this chapter, we will 3

According to his dear friend De Viti de Marco (1925a, p. 169), Pantaleoni’s ‘most ingenious and original and prolific scientific production’ was marked by a ‘complete fusion of theoretical principles with the elaboration of concrete facts’. 4 Reference has already been made to the many times that Pantaleoni complained of the narrowness of the field of enquiry in economics, and the connection of his research with that of Pareto in sociology. 5 Barone ([1908a] 1936, p. 6) wrote: ‘Deduction, […] mathematics, statistical induction, historical research, comparison of economic facts with other facts of social life, it all helps to discover the uniformity that economic facts present’. We should recall that among his other activities, Barone was also a teacher of military history and modern history (from 1887 to 1901). See Gentilucci (2006, p. 17). 6 The case of the sugar industry is similar ([1911–12] 1937, pp. 243–251).

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examine a series of passages, some taken from his political interventions, others from his lecture notes in Scienza delle finanze, where he examined the ‘liveliness of today’s competition’ (De Viti de Marco 1885, p. 216) and practical situations involving the exercise of monopoly power. As to Pareto, the relationship he established between theory and facts, to which he constantly returned,7 can be summed up in these terms: (1) real science springs only from facts (this statement was always accompanied by harsh criticism of the ‘metaphysicals’); (2) in the relationship between those facts, one looks for uniformity, or laws, which enable theories to be formulated (for him this statement also had a strongly polemical thrust, this time against the historicists); (3) theories must necessarily be verified by observation8 (and here Pareto was finding fault with all those who make do with the deductive method9). In his words: ‘The sole guide and master of scientific theories is experience. The only, absolutely the only question to ask in order to judge a scientific theory is the following: does it or does it not comply with experience? The rest does not count’.10 And also: ‘For me there exist no valuable demonstrations except those that are based on facts’ (Pareto 1897, p. 491). This is his famous ‘experimental method’, which he himself said he had not used in his works prior to the Manual,11 but which we feel he never applied completely.12 7

Think of the title of the book Fatti e teorie (Facts and Theories, Pareto 1920) and that of a part of the Cours (‘Applied political economy’, Pareto 1896–97) and of the Manual (‘The concrete economic phenomenon’, Pareto 1906). 8 He thought observation was necessary because in the social sciences it is impossibile to carry out experiments. See Pareto (1916, Ch. I). 9 Pareto (1973, p. 978) writes: ‘Observation without theory is empiricism, theory without observation runs the risk of being mere imagination’ (Letter to A. de Pietri-Tonelli, 8 August 1917). 10 Letter to Felice Vinci, 19 August 1912 (Pareto 1973, p. 783). 11 This statement is found in the same Manual (Pareto [1906], 2014, p. xiv). On this, of particular interest is a letter from Pareto to Emanuele Sella of 11 June 1913 in which he briefly outlines his intellectual biography (Pareto 1973, pp. 831–833). 12 For Schumpeter (1949 p. 168), Pareto’s experimental method was: ‘a complete delusion’. By contrast, Barone ([1924] 1936, p. 443) considered it his greatest contribution to science. Pantaleoni credited Pareto with awareness of the fact that ‘nothing is more uncertain, nothing is more disputable, nothing is more difficult than the observation of a fact’ (Pantaleoni [1924] 1938, p. 352). This was confirmed by Pareto himself ([1896–97] 1971, p. 140) when he stated: ‘We do not know, and we will never know, any concrete phenomenon in all its details’. For his part, in 1889 Pantaleoni wrote to Loria: ‘pure and simple

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4.3 EXPLANATORY RELEVANCE OF THEORY In this section, we will examine the explicative power our four economists attributed to their ideas on competition and monopoly power. In Pantaleoni’s first work, competitive equilibrium was a result of pure theory, but also a concrete fact often found in reality: ‘most of the products of which the quantity can be increased with a proportional increase in cost are produced […] in conditions of perfectly free competition’ (Pantaleoni [1882] 1958, p. 88); in today’s terms, when the long-run supply curve is horizontal, it is a sign that there is free entry in that market.13 He therefore found perfect competition realistic as well: referring once again to Cairnes, Pantaleoni ([1882] 1958, p. 90) stated that the mobility required of the factors of production in order to achieve the effects of competition only involved a small part of the total.14 That said, we know that the more mature Pantaleoni preferred to concentrate on ‘dynamic phenomena, which in industrial and commercial practice are the most common object of interest’ (Pantaleoni [1909a] 1955, pp. 28– 29).15 We have seen that the dynamic competition which he endows with explicative power was of a selectionist kind. The struggle for existence in all its forms, including competition, even among large firms, was in his view pervasive.16 If competition has ‘always upheld the social world’ (Pantaleoni [1900] 2001, p. 356), it is because when it is opposed it does not disappear but makes way for more primitive, barbaric forms of

observation, be it historical or statistical, is totally silent in itself and only speaks when it is laid out in the context of a theory’ (Fiorot 1976, p. 472). 13 Obviously, this is true in a sector with constant returns to scale. Pantaleoni’s reasoning, expressed in current terms, seems to be the following: an upsloping supply curve means a surplus for inframarginal firms; if such a situation persists it means there are entry barriers. This interpretation is suggested by his examples (Pantaleoni [1882] 1958, pp. 85–88), and also by the following passage: ‘If [competition] were viable, the extra-profit is such a lure that it would have disappeared due to the large size of the supply. Therefore, the presence of an extra-profit is proof that in point of fact there is no possible competition’ ([1882] 1958, p. 108). 14 See Chapter 2, fn. 65. 15 This is also the interpretation of Michelini (1993, p. 22) for whom: ‘economic dynamics must become, according to Pantaleoni, a heuristic tool to interpret real world phenomena’. 16 We have already encountered (in section 2.4.2.3 of Chapter 2) the statement that from a certain time onwards for Pantaleoni ([1892] 1925, p. 16) competition was nothing more than a special aspect of the struggle for survival.

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struggle, typical of prior civilisations.17 He had already asserted that if one risks losing when fighting under rules established by the progress of civilisation, one resorts to ‘primitive systems of fighting and competing for survival’ (Pantaleoni [1892] 1925, p. 41). Now, with recursive reasoning, Pantaleoni goes so far as to state that ‘the forms of competition themselves are subject to the law of competition’, and that this law is even confirmed by history (Pantaleoni [1900] 2001, p. 356): it is in fact ‘historical selection’ that eliminated kinds of competition that were less ‘fecund of progress’ ([1900] 2001, p. 362). Pantaleoni opened the twentieth century by stating his belief that ‘never or rarely in past ages was there more intense competition’ ([1900] 2001, p. 362), and would always continue to express the conviction that his selectionist ideas were dictated by ‘long and repeated historical experience’ ([1921] 1922, p. 196). The outcome of selection was inequality: Pantaleoni found that in history the confirmation of the ‘inequality in the distribution of physical and mental force among men’ ([1900] 2001, p. 351) had always existed and would continue to exist.18 Later Pantaleoni was to say that ‘perfect free competition does not exist but nor does perfect monopoly’ ([1913a] 1925, p. 17). These declarations by him, along with those on the highly unstable nature of monopolies and cartels, and on the irrelevance of obstacles to competition that we have already analysed, suggest that Pantaleoni’s attitude was essentially a faith, and one which he would continue to profess using ever harsher terms.19 As regards Pareto, Schumpeter believes he emphatically denied that competition rules in our society; and points out that for him ‘the virtues therein [in his Cours] predicated on pure competition have no bearing upon the actual economic process, since pure competition does not actually prevail’ (Schumpeter 1949, p. 153, fn. 6). In fact for Pareto the 17

For Pantaleoni ([1901] 1925, p. 61) there was ‘a law of hierarchy among the forms of struggle and a law governing the choice of the form’. Remember that this idea came from Spencer; on the way the English philosopher inspired Pantaleoni, see Sunna and Mosca (2017). 18 We will return to this topic in the next chapter when considering Pantaleoni’s concept of the state. Here, we want to stress again the importance of history for Pantaleoni and the others: Pareto (1973, p. 615) declared that he was looking for general rules by ‘Studying and restudying history’ (Letter to Antonucci, 7 December 1907); Barone was a teacher of military history; De Viti was a historian of economic analysis (Mosca 2005a); as for Pantaleoni, see also Chapter 2, fn. 170. 19 We believe it was like a faith, although Pantaleoni claimed that freemarket and free-trade for him was ‘not a question of faith, but of rationality, and of experience, and of history’ (Letter of October 1922, in Fiorot 1976, p. 591).

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static theory of competition refers to an ideal world: competitive equilibrium is ‘marked by Walras’s hypothesis of an ideal entrepreneur who made neither profit nor loss’ (Pareto [1896–97] 1971, p. 168). The concrete case in which ‘one finds phenomena that are closer to those studied by pure economics’ is for Pareto that of ‘wholesale production’ (Pareto [1906] 2014, p. 233). However, also for him, the part of the theory that could really represent reality is the dynamic part: ‘I have endeavoured to extend to dynamic questions the use of the equations given for the static equilibrium. The most accurate description possible for the economic phenomenon is to be reached in this way’ (Pareto 1897, p. 492). Proof of this is that the static approach to competition is actually missing in Chapter IX of the Manual, the chapter being entitled ‘The concrete economic phenomenon’.20 In general, as his student Amoroso (1938, p. 6) stated, for Pareto ‘the dynamic aspect is the essential, not the contingent of economic reality, and this latter is not polarized around an ideal configuration, but moves incessantly in an eternal change’.21 Lastly, notice that all Pareto’s comments on trusts are found in this same chapter of the Manual, a sign that he considered them the most widespread market structure. For Barone, as for Pareto, reality was exclusively dynamic (Barone [1908a] 1936, p. 6).22 Barone had no doubts: perfect competition was only a hypothesis by Walras,23 of a limit state to be postulated in order to study equilibrium.24 In fact, one of the reasons he believed that Walras’ general economic equilibrium theory by itself was no use in interpreting the real world, was the very fact that it ‘starts from the assumption of indefinite free competition, while in reality it is not so’ ([1908a] 1936, p. 45). As we have seen, the most frequent case for Barone is that the 20 Kirman (1998, p. 18) is right in pointing out that Pareto’s analysis of the concrete economic phenomenon ‘already figure[s] largely in the two preceding chapters’. 21 Backhouse (1990), too, deals with these aspects of Pareto’s thought, although he includes him among the theoreticians of the static concept of competition. 22 On this point, a few years earlier Barone wrote, ‘when we move into the field of theoretical abstraction, we must not lose sight of reality. And reality suggests that disturbances succeed one another’ (Barone [1894b] 1992, p. 25). 23 Barone wrote, ‘Walras […] always makes the hypothesis, referring back to the limit case of free competition, of businessmen who make neither profits nor losses’ ([1911–12] 1937, p. 279). 24 Besides the examples already given on this, also notice the following: ‘let us confine ourselves now to the limiting case to which free competition tends’ ([1908b] 1935, p. 252).

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adjustment process toward perfect competition equilibrium is slowed down by the presence of ‘frictions’ ([1908a] 1936, p. XVII). The study of the transitional period is essential for Barone because it confers descriptive realism on economic theory; in his own words, ‘The analysis of equilibrium – which is indispensable […] – if it is not then integrated with the analysis of all these dynamic phenomena, of all these phenomena of adaptation, would give rise to very different conclusions from the phenomenon in the real world’, and he adds significantly: ‘In this lies the aspect missing in many economic theories’ ([1908a] 1936, p. XVII).25 Notice that for Barone, unlike the other marginalists, the expression ‘free competition’ is not just a synonym of ‘free entry’, but also a realistic approximation of the limit concept of perfect competition.26 He states that the characteristics of free competition are ‘realized all the better, the more perfect it is’.27 However, while it is true that the theory of economic equilibrium ‘is only an initial, rough approximation of the real phenomenon’ ([1908a] 1936, p. 45), it is also true that he considered it a very powerful theory, the indispensable ‘general fabric’ on which to ‘embroider’ (as he calls the analysis of dynamic phenomena) what is needed to explain the real facts.28 Like Pantaleoni, for Barone pure monopoly, akin to perfect competiton, is an ideal concept.29 The need to formulate a theory that can explain more recent economic events makes Barone devote great attention to the ‘coalition regime’ that is oligopoly: he includes this argument in his economics textbook for the very reason that such a regime ‘in the current economic world moves towards increasing development’ ([1908a] 1936, p. 303). 25

As we know, Barone was referring to Walras. Concerning this point, Blaug argues that Walras ‘simply gave up the effort to provide a convincing account of how real-world competitive markets achieve simultaneous multimarket equilibrium’ (Blaug 1997, p. 72). 26 For example, in Barone ([1896] 1936, pp. 155, 190, 207; [1908a] 1936, pp. 34, 36). 27 The translation of this sentence in the English edition is not faithful to the original Italian: ‘the maximum is more nearly attained the more perfectly they [the characteristics] are realized’ (Barone [1908b] 1935, p. 289). In Italian: ‘tanto meglio realizzate quanto più questa [competition] è perfetta’ (Barone [1908b] 1935, p. 294). 28 The term ‘embroidery’ often appears in Barone, see for instance also ([1908a] 1936, p. 45) and ([1911–12] 1937, pp. 275, 282). 29 This can be deduced from his difference of opinion with Loria, whom he accuses of reasoning ‘nearly always […] as if the capital were concentrated in the hands of just one capitalist’ (Barone [1895a] 1936, p. 125).

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In the works of De Viti de Marco pure theory is the essential foundation of every other dimension: it must not be forgotten that he was the one that gave public finance its theoretical character30 by applying the laws of economic theory to financial phenomena. Nevertheless, we can also say that for De Viti – public finance scholar and committed politician – pure theory is of interest above all if it can provide secure guidance for intervening in economic and political life.31 Regarding our topic, we have already mentioned the difficulty of extrapolating from De Viti’s writings a theory of the various market structures, which he keeps concealed amid his thoughts on public finance; it is therefore no surprise that in De Viti we find neither a specific discourse on its explanatory power, nor an explicit analysis of its operative importance. What we know is that in his view, apart from ‘natural or legal’ monopolies, all the rest is competition (De Viti de Marco 1885, p. 25). We can therefore find in his works not only the belief that, in the presence of certain basic freedoms, if the ‘natural play of the economic forces’ (De Viti de Marco 1893, p. 93) is allowed, there is a benefit for society,32 but also the certainty that economic theory was capable of demonstrating the existence of this outcome. The basic freedoms that De Viti was talking about, and which he strenuously defended throughout his whole life, are freedom of contract ([1890b] 1898, p. 39) – that of ‘buying and selling wherever we like’ ([1903a] 1929, p. 36) – and ‘the ancient right of going and coming’ ([1919a] 1929, p. 356). However, if his faith in the market formulated in these terms is to be identified as faith in the concrete operation of competition, we must interpret the latter in a very broad Smithian sense.33 In his works, this ideal economy in which the market is truly free serves more than anything as a reference point for the policies he envisaged, as we shall see in the next chapter. He is actually well aware of the existence of monopoly power, and he uses the specific cases in which it appears both to assess the wisdom of state intervention and to denounce the harmful effects of protectionism.

30

That was De Viti de Marco (1888). On the question of priority between De Viti and Sax, see Mosca (2010). 31 The relationship between theory and applications in De Viti is examined in Mosca (2005a). 32 Except in the specific cases we saw in the previous chapter. 33 We share the opinion of Blaug (1997, p. 67), when he maintains that for Smith competition was simply the system of natural liberty. On this conception of competition in the classicals see Giocoli (2017).

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4.4 THEORY APPLIED TO THE FACTS In this section, we will examine some of the concrete occasions when the four economists used the concepts of competition and monopoly power. We will see how they made use of their ideas on these issues to explain, comment on and judge some of the phenomena of the time. As we have already said, the ‘facts’ we are dealing with are: gender issues, the labour market, socialism, and the Great War. 4.4.1 Women While keeping a firm grip on their theory, let us start by looking at some of Pantaleoni’s incursions into fields other than economics that he investigates boldly, or as he would say of himself, with virility.34 The word ‘virility’ invites us to consider how his ideas on competition apply to gender issues: while for him ‘virile’ describes someone who accepts a fight without weakness,35 competition in its modern form helps women because, unlike previous kinds of struggle, it is not based on physical strength (Pantaleoni [1900] 2001, p. 364); instead, the female influence on politics is anti-selectionist.36 In anticipation of the next Chapter’s themes, let us just recall that for Pantaleoni ([1908] 1925, p. 372) women belong to the masses and not to the elite; and if the vote was given not only to the most ignorant of men but also to women, the level of the arguments that politicians would have to use in talking to the masses

34

This is the implicit meaning of the following utterance addressed to the public at the headquarters of the Journalists’ Union in Naples at the end of a talk on post-war prospects: ‘If you don’t like what I’ve said to you, that doesn’t change my opinion. But for future talks, don’t call men: invite women’ (Pantaleoni [1916a] 1917, p. 160). 35 The cooperative idea is virile and not charitable ([1898] 1925, p. 138), virile and not demagogical is true democracy (1918e, p. 158), in which a virile education must counteract the ‘feeble, sweet’ character of the Italians ([1918d] 1919, p. 189). ‘Male’ obviously describes the energy ‘of the new Italy living in fascism’ (1922, p. XXIII). 36 Pantaleoni ([1909a] 1955, p. 35) writes, ‘So far women’s influence in politics has showed itself and everywhere favourable to systems of legal and political intervention, paternalism, supervision, egalitarianism, anti-critical and religious tendencies. General phenomena have tended to be insufficiently appreciated owing to too lively a concern for the particular’. This appears in a footnote added in 1924.

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would suffer a disastrous decline (1919d, p. 192).37 The tune does not change with Barone, who compares the irrational behaviour of crowds to that of the individuals on the lowest rung of the ladder of evolution, and adds that such behaviour ‘presents the features seen in savages, children, and women’ (Barone [1898] 1928, p. 29). For his part, Pareto has no hesitation in defining feminism ‘a disease that can only affect a rich people’.38 To digress for a moment: today such attitudes to women strike us as extremely offensive, but we have reason to believe that to a certain extent they were offensive even then. It is enough to remember that the Italian Risorgimento was for the women of the time an age of awakening and of participation in political life.39 Even Pareto, with his usual detached, sarcastic tone, describes the change that had taken place in customs:40 ‘In very poor countries, women are treated with less consideration than domestic animals; among civilized nations, among the extremely wealthy people of the United States of America, they have become luxuries who consume without producing’ (Pareto [1906] 2014, p. 202).41 For that matter, there were also some among them who thought differently on the female question, such as De Viti de Marco who, being

37

We will confine ourselves here to competition; and will not quote all the times when Pantaleoni talked about women with irony and sarcasm. Among the many examples, see Pantaleoni (1918f), concerning the collapse of Russia. 38 Pareto ([1906] 2014, p. 202). The expression is also recalled by Schumpeter (1949, p. 156, fn. 9). De Rosa talks about the ‘ironic, contemptuous’ tone in writing about ‘all the public demonstrations that reveal to Pareto a decline in class consciousness and in the sense of responsibility of ruling groups: from the first women’s congress to the social legislation of Giolitti’s period’ (De Rosa 1960, vol. III, p. 79). 39 Remember that in 1908 the first congress of the Italian National Council of Women took place in Rome. Keep in mind that our four economists were contemporaries of enterprising women like the journalist and novelist Matilde Serao, and only slightly older than women like the 1926 Nobel Prize-winner for literature Grazia Deledda, and Maria Montessori, still famous for her pioneering approach to pedagogy. 40 Pareto was divorced from his first wife and, a few days before his death, he married another woman after nearly twenty years of living together. 41 Also: ‘The growth of democracy has strengthened the sentiment of equality between the two sexes; but it is probable that the cessation of war has had still more to do with it, because it is war that above all brings out man’s superiority. This sentiment of equality has given rise to the theory of a single sexual standard for both man and woman’ (Pareto [1906] 2014, p. 52).

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married to a very active American woman,42 was in favour of the vote for women and of divorce. 4.4.2 Labour Pantaleoni ([1882] 1958, p. 80), in dealing with the subject of labour, uses the concept we have already encountered, of non-competing groups, which he believes ‘so important for the application of economic laws’ in the real world ([1889] 1957, p. 287).43 Remember that for Pantaleoni the only source of monopoly power that endures in the economy is skill; in one of the many cases when the economist pays homage to ‘genius’, he cites J.S. Mill to write ‘special skill is a source of extra profit or rent’ (Pantaleoni [1889] 1957, p. 285). As far as workers’ associations go, in Pantaleoni’s view they are identical to the ‘old’ kind of syndicate44; as such, he thinks that they have started to obtain monopolistic positions, which nevertheless are not dangerous (thanks to the pressure of competing workers), and which can even reduce the ‘cost’45 of labour (Pantaleoni [1903] 2001, pp. 207–212). Like Pantaleoni, Pareto (1903)46 also deplored the disastrous effects of workers’ unions, which he found identical to the kind of trust set up not for the sake of efficiency, but to monopolise the market, which is what he is referring to when he writes that ‘trade unions sometimes impose a uniform level of wages’ (Pareto [1906] 2014, p. 82). Though convinced that workers’ unions tend to establish monopolies, Pareto was not opposed to workers’ associations and to the right to strike, because he

42

Hariet Lathrop Dunham (1864–1939), from New York; among her many activities in support of women, she signed the petition to Parlamento by the national committee for universal female suffrage. We have research underway on her (with Elena Laurenzi). 43 For a critical interpretation given by an economist of their time of the notion of non-competing groups as applied to the labour market, see Davenport (1925). 44 Remember from Chapter 3 (section 3.5.2.1) that Pantaleoni was referring to horizontal concentration. Loria (1925, p. 108) criticises this argument, maintaining that workers in combination are still in a weaker position than capitalists in combination. 45 Pantaleoni ([1903] 2001, p. 212) correctly specifies: ‘Cost in the sense indicated by Cairnes’. 46 Pareto’s (1903) article is quoted by Pantaleoni ([1903] 2001, p. 207). Remember from Chapter 3 (section 3.5.2.1) that Pantaleoni was referring to horizontal concentration.

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thought they facilitated ‘the game of free competition’.47 The rest of his analysis on the question of labour can be linked to the theory of the circulation of elites. In the light of this analysis, well before the ‘two red years’,48 Pareto denounced the fact that workers received new privileges every day, because the rulers needed their consensus.49 In his view, the working class, having gone from oppressed to oppressors, was the new elite;50 he saw the revolutionary unionist in particular ‘as the inevitable working-class answer to the “plutocratic and demagogical” bourgeoisie’ (De Rosa 1960, vol. III, p. 79 and 1964, p. xxxi). We will examine all this in more depth in the next chapter. Barone was in favour of workers’ associations, even in relation to the ‘violence that in this period marks social conflict, and that accompanies the initial rise of the workers’ movement’ ([1908a ed. 1921] 1936, p. 283). The development of trusts determined, in his view, a new situation where the workers’ organisations had their counterpart in great coalitions of firms, the effect of which was higher, more stable wages ([1908a ed. 1909] 1936, p. 339). On strikes, in Barone’s Principi there are two successive versions: in the first one he argues that, if kept ‘within the limits of free competition’ ([1908a] 1936, p. 119), strikes can actually raise wages, because they speed up the process of adjusting to equilibrium, which at times is extremely slow (p. 120); if on the other hand ‘they try to replace the price that […] free competition would determine with a monopoly price’ (p. 125), strikes simply generate a deadweight loss.51 This version was modified by Barone in 1920: after the passage quoted on the acceleration of adjustment, he says that in a system of free competition, wages can rise only if labour productivity also rises; otherwise strikes will only achieve ephemeral results ([1908a ed. 1920– 21] 1936, pp. 122–123).52 This comment gave Barone the opportunity to 47

The mechanism is the same as the one we described for cooperatives, in Chapter 3, fn. 107. Avagliano (1975, pp. 77–78) shows that for Pareto competition in the labour market required the right to strike. 48 By ‘two red years’ we refer to 1919–20, in which workers and agricultural labourers were involved in social and political struggles in Italy. 49 As we will see in the next chapter, Pareto’s theory of the circulation of elites was dated 1900. 50 Pareto ([1906] 2014, pp. 66–67 and pp. 236–238). 51 Barone wrote: ‘the device certainly gives the group of workers an advantage, but produces […] a general destruction of wealth far greater than the benefit it grants the few’ ([1908a] 1936, p. 127). 52 As already noticed, Barone is well known (and mentioned by Walras himself in the third edition of his Eléments in 1896) for elaborating the theory of marginal productivity.

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speak very harshly against the abuse of striking, which in the post-war period had become common as a political rather than an economic weapon (pp. 125–127). The issue of labour was initially also dealt with by De Viti de Marco using, like Pantaleoni, the category of non-competing groups.53 He later provided an explanation of the agricultural revolts of 1894–97 based on economic theory: for him the reason for the peasant uprisings lay in the drop in rural wages, due to the excess supply of labour created by the government’s protectionist policy. Using the language of economic dynamics, De Viti explains that owing to this policy, ‘the equilibrium previously established was upset’ (De Viti de Marco [1897a] 1929, p. 233). He then illustrates the working of competition among workers which brings the equilbrium wage down to a lower level, explaining that ‘where there is lively competition among workers, it just takes one individual too many, to lower the wages of thousands of other individuals’ (pp. 233–234).54 After drawing great public attention with an article in the Giornale degli Economisti on this question (De Viti de Marco 1898),55 and after the unrest of 1902, the year the Federation of Labourers was created in Italy, De Viti indicated various possible ways of solving the problem of the pressure of labour supply on wages. One possibility was on the demand side: ‘the wage level’, he wrote, ‘depends on the demand for labour, and the demand for labour depends on the amount of capital available’ ([1903b] 1929, p. 53); this capital is channelled towards the ‘more remunerative’ industries which are ‘for that very reason more capable of paying high wages’ ([1904] 1929, p. 120). Another possibility is on the supply side; and acts through ‘the total 53 De Viti (1885, p. 164) wrote, ‘as the workers have to consider themselves as non-competing groups according to the crafts they belong to, they are not in a condition of immediate competition’. 54 And he continued, ‘Suppose 10 workers are employed on a certain job and are enough to complete it. The eleventh arrives in search of work; he will try to cut the tenth out, by offering to work for less. The tenth will do the same to the ninth, the ninth to the eighth, and the first will be the one actually eliminated. But he will re-commence the same strategy, offering a further wage cut, which will end up becoming generalised. And so on, until one of them finds another job paid at the rate of the greatest cut that he would have been willing to offer against the other ten workers, or until he dies or emigrates, or until he has induced the employer to use the work of 11 workers at a lower price’ (De Viti de Marco [1897a] 1929, p. 234). 55 This attention was due to the fact that this article was reported and commented on in many national daily papers. See Mosca (2016c).

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freedom to emigrate’, a freedom that De Viti actively supports.56 As well as these proposals, there are others involving union action in defence of wages. As we have seen, freedom of association was also interpreted in a liberal key, as a freedom which itself facilitates adjustments in the labour market.57 It was from this angle that De Viti interpreted it when he wrote that ‘a strike, […] the threat of a strike, […] the offensive and defensive organisation of the workers, increases the degree to which and the speed at which a wage rise must follow the firm’s increased productivity’ ([1904] 1929, pp. 85–86). Striking, in fact, is in his view simply ‘a way of obtaining a higher wage when the firm’s productivity allows it’ ([1914a] 1929, p. 170). Equally compatible with the liberal viewpoint is the idea that ‘worker organisations have the same justification as all the other syndicates and industrial monopolies’ ([1897a] 1929, p. 234), and therefore that competition can be oligopolistic from both sides of the labour market.58 On this, De Viti explicitly wrote that for ‘liberal economists the struggle between workers and entrepreneurs is the means of achieving the highest possible monetary wage’ ([1904] 1929, p. 127). In 1897, in one of his works, we find passages in which the support for freedom of association seems to serve the achievement of market power. He in fact states that ‘organisation is necessary to prevent the law of numerical competition from working’ ([1897a] 1929, p. 234), and even augurs an agreement to fix wages above the equilibrium level, letting firms decide how many workers to employ, and therefore accepting the solution of a reduction of the number of workers employed instead of a reduction of wages.59 The theoretical justification for this argument is expressed by De Viti in these terms: wages depend (a) on the firm’s 56

He did so on many occasions. We have quoted from De Viti de Marco ([1919a] 1929, p. 356), but we could also quote: ‘Emigration abroad […] is the only safety valve that can numerically attenuate the effect of the workers’ internal competition’ ([1897] 1929, p. 233), and other passages. 57 De Viti recalled giving the prime minister Giovanni Giolitti a vote of confidence only twice, once ‘in 1902, when it was a matter of guaranteeing the working class the right to organisation’ ([1919b] 1929, p. 381). The political battle for trade union rights was fought alongside the radical-freetraders and socialists. De Viti called it a ‘liberal policy on striking’ ([1904] 1929, p. 81). 58 De Viti ([1904] 1929, p. 86) wrote, ‘I do not think some of you are willing to admit that strikes would be more successful if they were organised against industrial syndicates rather than against individual industrialists’. 59 According to De Viti, in response to the problem described in fn. 54: ‘the workers agree to compensate so that one of them, in turn, abstains from work to leave only ten at work at any one time, obtaining higher wages’ ([1897a] 1929, p. 234).

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productivity and (b) on the ‘organised struggle of workers against capital’ ([1904] 1929, p. 84). The ideological reason to explain why he calls for higher wages is that the working class is the most numerous ([1919b] 1929, p. 379);60 as can be seen, unlike the other three Italian marginalists, De Viti de Marco was a real democrat, concerned about the conditions of the greatest number.61 While it is true that his theory of competition would more coherently give rise to a defence of consumers rather than workers, it is also true that he tried to draw attention to the fact that the interests of these two groups were the same: ‘The worker’s loss […] is far greater when he is considered a consumer of goods’ ([1904] 1929, p. 95), and he calls for action ‘the population of workers, avenger of the collective interest of consumers’ (p. 128). Lastly, the political justification for his position lies in the fact that in those years De Viti de Marco temporarily became an ally of the socialists in order to strengthen the free trade campaign.62 In his words, ‘part of the workers’ oganisations have decided to join the campaign against protectionism, considering it a form of politics and legislation hostile to the proletariat’ ([1904] 1929, p. 82). The alliance was based on the belief that the 1887 protectionist tariff63 reduced ‘the demand for agricultural work’ ([1904] 1929, p. 83), and since agriculture was the most labour-intensive sector, overall this caused an excess supply of labour. That is why De Viti spoke against competition amongst workers ‘brutally incited by the Italian protectionist politics’ ([1897a] 1929, p. 233) and denounced the ‘speed with which the

60 De Viti ([1919b] 1929, p. 379) wrote, ‘High wages are the condition for the material and moral elevation of the working class; and since this class is the biggest, its elevation automatically brings with it the elevation of the whole country; this flows through to the advantage of all the classes, also economically, including the owners’. 61 He wrote: ‘the politics that I work for is a democratic politics, and it must benefit the greatest number’ (De Viti [1919b] 1929, p. 379). 62 In fact, the quotes on work were taken from anti-protectionist situations, as in De Viti de Marco (1903b). This was a conference organised by the Association of owners and farmers and by the Democratic league for the revival of the South of Italy. Here De Viti, quoting Cavour, briefly dealt with the issue of the destiny of rural wages. See also De Viti de Marco (1904), which contains three speeches in which De Viti announced the establishment of an Antiprotectionist league which free-traders and some socialists helped to found. Finally, see De Viti (1914a), about his speech to the Anti-Protectionist Congress in Milan in which he illustrates the movement of wages in relation to the 1887 customs tariff; by 1913 he had already broken with the socialists. 63 In 1887 a tariff war started between Italy and France.

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stroke of a pen changing the customs tariff breaks up an existing equilibrium’ (p. 233).64 4.4.3 Socialism J.S. Mill, referring to the socialists, wrote, ‘I utterly dissent from the most conspicuous and vehement part of their teaching, their declamations against competition’ (1848, IV. 7. 7). The main ‘fact’ to which Pantaleoni applied his theory of competition is socialism, against which he fought strenuously all his life. After a few years as an ally of the socialists, in opposition to the government and to denounce the corruption of parliament,65 he accused them of colluding with power; almost all his writings have socialism as their implicit, or more often explicit, target. Following J.S. Mill, he accused the socialists of wanting to avoid competition in order to maintain their position of power.66 Pantaleoni saw that the masses were terrified of change (and of the competition that triggers it) ‘due to its cost’ (Pantaleoni [1907] 1925, p. 220); this allowed him to state that socialism exerts leverage on this very fear.67 For him, socialism always tries to hinder competition (Pantaleoni [1907] 1925, pp. 220– 221), as in the case of the protection it offers to public employees ([1913b] 1925, pp. 151–152). In 1902 Pantaleoni was a member of parliament, and when a workingmen’s association invited him to speak, he explained that one of the ideals of democracy is ‘political equality which is obtained in practice by destroying all forms of monopoly […] not recognising social levels other than those created by the selection of the fittest in a battle fought on an even footing’ (1902, p. 81). However, Pantaleoni believes that the socialist version of equality is simply unnatural, because for him it causes: (a) the rebellion of the skilled who, deprived of a reward, cease to work, causing a loss; (b) the return to primitive, violent systems of conflict through which selection continues to operate, since competition can never be suppressed; (c) the end of collectivism itself, swept away by the social mobility of the population 64 The situation of rural wages was inverted during the war; with the call-up, in fact, there was a ‘rapid increase in wages caused by the competition of the owners’, which however ‘no longer produces any increase in working energy’ (De Viti de Marco [1917c] 1918, p. 108). 65 The time of his break in 1902 is illustrated by Fiorot (1976, p. 574). 66 See for instance Pantaleoni ([1913b] 1925, p. 151). This is also the interpretation of Bellanca ([1995] 1997, p. 117). 67 Also Tusset (2009, p. 278), interpreting Pantaleoni, recalls the ‘social resistance’ and the ‘social aversion to change’.

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and of the international market, on which ‘flow men and goods from here and there’ ([1900] 2001, p. 279).68 Another reason why Pantaleoni saw competition as the antidote to socialism lay in his conviction that the ‘most noble ends’ (p. 367) of collectivism were achieved spontaneously by competition, and not artifically by socialism.69 In fact, he points out that solidarity in workingmen’s associations is the result of individualism and is governed by competition.70 While continuing to insist that socialist aspirations were illusions doomed to shatter against competition,71 at the same time he occasionally admitted that in some cases socialists manage to prevent that happening. For instance, in 1917 he wrote that ‘the Russian socialist contagion will be […] a strong delaying factor for the development of great economic complexes’ ([1917c] 1918, p. 89). In his view, as we know, such complexes were the efficient outcome of the ‘new’ competition. Like the other economists we are dealing with here, Pareto was also initially a liberal who wanted to form an alliance with the socialists with anti-statist and anti-protectionist intentions.72 For example, when writing to Filippo Turati, one of the leaders of Italian socialism, Pareto concedes that ‘it may well be that to achieve economic freedom one first has to have socialism. If socialism is able to educate the people, it will have 68 The issue is dealt with in his work entitled Socialismo e commercio estero (Socialism and foreign trade, Pantaleoni 1920a). In the same year, he again underlined ‘the technical impossibility of socialism and of the state to conduct foreign trade’ (1920b, p. 41). 69 An example of this statement is: ‘It is in the United States and England where public spirit is more generous, where the commitment of large fortunes is nobler than elsewhere, where men’s conduct towards women is more gallant and honourable, where the use mankind makes of animals is more merciful’ ([1900] 2001, p. 354). A similar attitude to the good effects of free markets on cooperative behaviour has recently been expressed by Zupan (2011). 70 In fact, Pantaleoni wrote: ‘to be efficient, competition imposes union among those who have common interests’ ([1900] 2001, p. 358). 71 The arguments are identical year after year: (1) one cannot suppress ‘the inequality deriving from selection, from competition, from individualism’ ([1918c] 1919, pp. 146–147), because it dries up the source of wealth; (2) foreign trade is incompatibile with socialism: the director of a business open to international trade only behaves ‘according to his competence, demonstrated by his […] success, and constantly tested by a selection process’ ([1920a] 1922, p. 15). 72 On 31 December 1891 Pareto wrote to the socialist member of parliament Napoleone Colajanni: ‘it seems to me that a stretch of road should be travelled together by socialists and economists, to oppose the bad arts of those who govern us’ (Pareto 1973, p. 175).

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made its contribution to the world’.73 The alliance with the socialists, having proven to be wishful thinking,74 gave way to anguish among our economists at the growing threat of a socialist triumph. This threat was already being discussed by Pantaleoni and Pareto in private correspondence in 1897, and then in two articles published in 1900, the first denying that socialism could ever prevail, the second affirming instead that ‘its victory is highly probable and almost inevitable’.75 This belief was examined further by Pareto in Systèmes Socialistes, in which he argues that socialism is ‘an extremely strong current, that sweeps away everything in its path’ (1902–03, vol. I, p. 73). The reasons for this resigned, but admiring, prediction76 seem to be based on the fact that, for him, socialism: (1) like every belief system, had the merit of instilling strength and morally elevating the lower classes; (2) gave a noble guise to the feelings of greed and envy of these same classes; (3) appealed to the universal feeling of benevolence towards our fellow men, a feeling that in the decadent bourgeoisie degenerated into the sensual pleasure of losing heart and surrendering; and (4) was used by the dissident members of the elite to gain the support of the lower classes. In the light of his sociological and political writings, we feel we can hypothesise that Pareto built his immense theoretical edifice around precisely this specific case: his prediction of the defeat of the bourgeois elite and the victory of the socialist one.77 This was the core around which he constructed his generalisation, the emblematic case that was trumpeted as a universal law 73 Letter of 11 November 1893 (Pareto 1973, p. 235). On the alliance between socialists and liberals, Pareto’s opinion is expressed at length in the article Liberali e socialisti (Pareto 1899, p. 215). 74 Also De Rosa (1960, vol. II, p. 398) recalls their hope ‘to be able to guide the socialist movement towards a political line of upright defence of the canons of free trade’ and adds: ‘All this was nothing but a dream that lasted the classic espace d’un matin’. 75 Pareto ([1900] 1991, p. 36) wrote: ‘Professor Pantaleoni, in a recent treatise denies that socialism will win; I have maintained that this victory is most probable and almost inevitable’. On this, we recall, with Busino (1974a, p. 14), that for Pareto ‘liberalism is an appeal to reason; socialism is a continual appeal to the feelings. And since human action is based on feeling, socialism remains more politically successful than liberalism’, even though, when all’s said and done, the aim of both is to win power. 76 Busino ([1979] 1980, p. 348) rightly thinks Pareto highlighted ‘the logical inconsistency of all the socialist doctrines and at the same time their extraordinary success, being catalysts of passions, instinct, feelings, will-power’. 77 Missiroli (1921, p. 26) underlines Pareto’s bitterness towards the bourgeoisie that give in without a fight, and towards the common people that win power. De Rosa (1960, vol. III, p. 9) explains that ‘He would prefer not to

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thanks to the ‘experimental’ confirmation that he found in other epochs of history.78 When the Bolshevik peril became urgent, Pareto maintained his (presumed) detachment, inevitably predicting, after the probable triumph, the future decline (Pareto 1919a).79 We have already pointed out that he felt it was impossible for economic theory to provide a criterion for the choice between collectivism and the market (Chapter 2, section 2.5.1), but when put to the test he said he was sure that no political regime, not even that of the socialists, could offer a ‘system more favourable to the utility of the people’ than the system then in force (Pareto 1919b, p. 272). Barone, too, targets socialism, although in terms different to both Pantaleoni and Pareto. In his famous essay on the ‘Ministry of Production in the Collectivist State’ (1908b) he affirms that the planned economy can theoretically be achieved, while demonstrating that it does not correspond at all to the Marxist idea of collectivism, since it would include the same economic categories found in the market economy. However, he reiterates its real impossibility, unless there were ‘higher beings, capable of achieving outcomes that are obtained with free competition’ (Barone [1908a] 1936, p. 63). For mere mortals, reaching the collective optimum would require a process of trial and error and large-scale economic ‘experiments’,80 as we have already seen in section 2.4.2 of Chapter 2. All the same he claims that in practice this wouldn’t happen in the collectivist regime, because even the omniscient Ministry would be under political pressure to let ‘firms survive that it would be in the interests of society if they disappeared’ ([1908a ed. 1909] 1936, p. 340). He therefore states the impossibility of economically efficient collectivism in practice. A different attitude is found in the democratic-radical De Viti, whom we have seen to be a consistent supporter of universal suffrage, of proportional representation and the list vote, of the right to strike, and the witness the spectacle of the higher classes abdicating before the proletariat’. As we shall see in Chapter 5, he changed his mind with the rise of fascism. 78 Busino (1974a) deals with the relationship between Pareto and socialism. On Pareto’s attitude to socialism until 1901, see Mornati (2001). 79 Avagliano (1975, p. 35) distinguishes between Pareto’s aversion for bureaucratic socialism and his undecided attitude towards socialist or trade unionist rules. In our opinion, Pareto was also opposed to the latter. 80 Barone argues that ‘having to proceed by trial and error and experiments […] the collectivist ministry of production could not in any way avoid for higher cost firms […] those destructions that one thinks are an exclusive effect of the present economic regime’ (Barone [1908a ed. 1909] 1936, p. 645). Michelini (2005) has gone very thoroughly into this subject.

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right to form trade unions, the importance of which he equated with freedom of the press. After the breaking of the agreement between socialists and free traders, he did not miss a chance to denounce the collusion of the socialists with the government intended to extend the state’s role in the economy. He saw the Italian socialists as a pressure group demanding social laws for the benefit of the industrial workers, who offer their electoral support in exchange. However, he continued to seek the consensus of the masses and defend the workers, especially those in the agricultural sector. In 1897 these political positions also aroused criticism from Pareto (1960, vol. II, p. 102) who wrote of De Viti: ‘he is an optimist, that is one who believes that with fine words one may change a country’s system for the better’. 4.4.4 The Great War Before examining, with examples, how the Italian marginalists used the categories of competition and monopoly power to deal with the issue of the Great War, it will be useful to sum up their political positions on the question. Pantaleoni was deeply anti-German: he saw in Germany a strong economic threat ([1916e] 1917, p. 67), but above all he considered it the epicentre of the spread of socialism.81 He was convinced that, with the support of Jewish high finance,82 the Central Powers were bankrolling the European socialist parties.83 Finance and socialism (along with journalism) for him were extremely powerful international forces, due to their enormous influence over the masses,84 and because they undermined the nationalist spirit of the allied countries. The first among 81

In his words: ‘The gang has its epicenter in Germany [and] connects […] the ringleaders of socialism everywhere’ (1917e, p. 232). Also: ‘the Germanic International, that is, German socialism, has devastated Russia’s political, military and economic organism, and it very nearly brought Italy to its knees’ ([1916b] 1917, p. 66). 82 For example, Pantaleoni wrote: ‘The Jews […] dominated the world during this war [with] their operation in high finance in all countries and in the socialist movement in all countries’ (1919b, pp. 223–224). On Pantaleoni’s attitude towards the Jews see Michelini and Maccabelli (2015). 83 Here are two of the many examples: ‘There are still Germans and Austrians in Italy […] they are in the official socialist party’ (1917a, p. vii). And also: ‘The Bolsheviks were in the pay of Germany’ (1919c, p. 179). 84 ‘By means of the triad: financial experts, journalists and socialists […] the total mass of innocent idiots will be entirely carried away by a movement simultaneously of growing violence and consonance and will gyrate, like a band of wild-eyed dervishes’ (1917e, p. 221).

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them was Russia, devastated by the 1917 Revolution, for which he blamed Germany;85 then there was Italy, where the socialists sabotaged the war;86 France, too, seemed to be partly vulnerable to a similar danger.87 As for the United States, Pantaleoni saw a threat to the ‘individualist industrial spirit’ ([1916c] 1917, p. 206) from internal movements whether they be pro-German (due to the descendants of German immigrants), anti-English (due to the descendants of the Irish),88 or internationalist (due to Jewish financial experts, linked on the one hand to Germany and on the other to Russia).89 Against this disturbing background, let us now examine how Pantaleoni’s ideas on monopoly power and competition were applied to the war, pointing out yet again that in many of his political analyses he used the categories of economic theory.90 At the outset of the Great War, Pantaleoni, whose field of interest had in the meantime been further broadened, was still using the concept of equilibrium to indicate the state towards which the economic system converges after a shock, including the immense shock of war. By means of marginalist categories, he dealt with the adjustment of the markets after the new demand and supply generated by the war. The 85 Pantaleoni wrote: ‘A […] formidable blow has been suffered by the allies from the triumph of German socialism in Russia, which has profoundly perverted the mentality of the Russian masses’ (1917a, p. xi). See also Pantaleoni (1918f). 86 Pantaleoni said: ‘The heads of the [socialist] party are the saboteurs of the war’ (1917a, p. vii). He often returns to the attempts by socialist leaders ‘to sabotage our war’ (1917f, p. 251). 87 For example, Pantaleoni talked about the danger of the ‘action of socialist officers in France’ (1917a, p. xii). 88 According to Pantaleoni, during the war in America there was ‘an anti-English and anti-Latino movement [supported] by about 30 million Americans of German descent and still German in spirit and in essence’ ([1916a] 1917, p. 133). Also, in the United States ‘there are the Irish and the descendants of the Irish’ ([1916c] 1917, p. 200). 89 He explained that ‘after Germany, the country where […] the few giants of finance, journalism and socialism […] are better organised […] is the United States, and […] they are nearly all of German-Jewish origin’ ([1917e], p. 222). His tone got worse after the war: in America ‘Jews […] act as a bridge between Americans and Russians, and between Americans and Germans’ (1919b, p. 231). Also, ‘The Israelite bank in New York and the Russian one, also Israelite, both of German origin, are extremely close’ (1919c, p. 178). Also: ‘Lenin and Trotzki are in constant contact with American Israelitic and American-German high finance’ (1919d, p. 205). His accusations of the Jews, Bolsheviks and Germans date to prior to the Great War, as can be seen from his reconstruction of the causes of the French Revolution (Pantaleoni [1913a] 1925, pp. 46–47). 90 Pantaleoni’s economic theory of war is examined in Barucci (2016).

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latter requires men and capital, and to procure them skilled technicians are replaced by incompetent bureaucrats, movable capital is used to obtain war weaponry, and the government requisitions what it needs. The remedies for the serious problem of public finance deriving from this include one proposed by Pantaleoni: ‘rough competition and selection, which afflicts humanity at every hour, making it just as hard to preserve wealth as it is to acquire it’ ([1916b] 1917, p. 103). In his later writings, which are exclusively political and nonsensical, as we have seen, he used his theory about trusts as a metaphor to explain the possible post-war situation. For example, Pantaleoni ([1916a] 1917, pp. 135–136) stated that at the end of the war the Central Powers would behave like a failing firm that sells below cost, damaging the other firms in the industry: just as the latter prefer to come to an agreement, similarly the allies would have to negotiate to adopt shared defensive measures. Furthermore, he believed that the peace treaties would create ‘new initial positions’ for competition and future selection (Pantaleoni 1917d, p. 195). He also compared the Central Powers to an entrant who seeks an understanding with the organisation of allied countries: their peace proposals are dangerous because they ‘concern to different degrees the special interests of the members of the syndicate’ (Pantaleoni 1917b, p. 258), thus triggering contrasting responses that divide the cartel. Moreover, Pantaleoni compared the perils of the moment when the agreements between firms are about to expire to the moment when commercial treaties are about to expire: ‘it is necessary to have made sure that the initial power relationships have not greatly changed in favour of one of the parties’ (Pantaleoni [1918a] 1919, p. 123). In an interesting article on imperialism he distinguished between, on the one hand, enormous corporations based on the international division of labour and, on the other, autarkic businesses; to reach the optimal size, the former in his view require alliances between countries, while for autarkic firms it is necessary for the country, through conquest, to expand over all the territory needed by the business. He added: ‘International alliances are to an imperialist construction, as a cartel or industrial syndicate is to a trust, or to a complete merger of various anonymous firms into one’ (Pantaleoni 1918f, p. 129). Pantaleoni (1919a) feared that the new geopolitical situation that came into being after the war could lead to autarky; and recalled that the pre-war territorial distribution of industries was regulated ‘by selection, or competition’ (p. 75), so as to minimise costs ‘with no concern for the political divisions of the territory’ (p. 76). After the war, the state became the target of more and more violent gibes, in which

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Pantaleoni repeated that ‘from selection, from competition, from individualism’ came inequality ([1918c] 1919, p. 147).91 He still believed in the biological competition outlined in his early writings: the theory of ‘organic’ equilibrium constantly upset by the ‘disturbing dynamism of the selecting environment’ (1924, p. 331) therefore remained the fulcrum of his reflections until his death.92 Pareto, like Pantaleoni, was a nationalist,93 but unlike him he saw the war as the unintended outcome of the ‘plutodemocratic’ governments of France and England (Pareto [1915] 1920, p. 47), and harboured doubts about the war’s effectiveness in defeating socialism.94 In his articles from 1913 to 1920 he saw a progressive growth in the power of the socialist leaders, fawned upon by governments; admittedly he saw them give ground before nationalism (Pareto [1913] 1920, p. 13), but he also saw the countries of the Entente poorly defended on a military level due to the waste of public money on electoral spending ([1915] 1920, p. 47). In 1919, he wrote that the governments at war made promises they could not keep because it was too long and too costly, and that this gave rise to disillusionment ([1919d] 1920, p. 230). He derided the positions of democratic interventionists, a movement opposed to Italian neutralism and also to the interventionist nationalism to which De Viti de Marco belonged, which held positions in step with those of President Wilson.95 91

In the same year, he stated that laws must allow ‘the inequality in economic and social conditions that are the result of selection and competition’ (1918e, p. 161). He also argued that economic theory had demonstrated the incompatibility of equality and freedom, showing the ‘effects of free competition, of selection, of the struggle for existence’ (1918e, p. 188). Bellanca ([1995] 1997, p. 125) talks about political doctrine deriving from his conception of competition. We will come back to this in Chapter 5. 92 We are referring to the article in memory of Pareto, who died on 19 August 1923, written by Pantaleoni shortly before his own death on 29 October 1924 (Pantaleoni 1924). 93 See for instance the article ‘Realtà’ (Reality, Pareto 1919c), one of the articles published by Pareto in the nationalist journal L’Idea Nazionale (The National Idea). 94 Pareto wrote to Pantaleoni on 19 August 1914, ‘I don’t know that it is so certain that the present war will harm socialism; it could instead be of not insignificant benefit to it’ Pareto (1960, vol. III, p. 173). 95 In the letter to C. Placci of 26 October 1914, with reference to the democratic interventionists, Pareto wrote: ‘I fear the war will be very long and that those who believe that afterwards there will be a lasting peace, are deceiving themselves’ (Pareto 1973, p. 883). Pareto missed no opportunity to ridicule the ideals proposed by W. Wilson, even calling him, in a letter to his follower Guido Sensini of 2 July 1919, ‘a scientist (?) of the tenth rate’ (Pareto 1973, p. 1024).

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He also interpreted the war according to his theory of the circulation of elites (Pareto [1919d] 1920, p. 245):96 in the next chapter, we will see the link that can be established between this theory and competition. Nationalist from the start, Barone was in favour of Italy’s entry into the First World War against the Triple Alliance.97 As we know, he was an expert on military history and during the conflict he produced detailed analysis of the war strategies. The intervention of the government in this circumstance is for him justified by the ‘suddenness of catastrophes, for which private initiative is either paralyzed or would arrive late’ (Barone [1908a ed. 1919–20] 1936, p. 678). Commenting in detail on the measures adopted during the Great War, especially the fixing of a ceiling on prices, he states that in time of war situations arise that reduce competition: more rigid demand, more limited supply of inputs, greater difficulty importing (p. 696); in these circumstances it is possible, by stockpiling goods, to determine price rises. According to Barone, to avoid such increases the state should when possible increase the supply of the scarcer goods, importing them at lower prices and reselling them where they are scarce; if this is not done, in order to rightly limit the damage suffered by the common people, the state should ‘take directly from some to give to others’ (p. 697), for example by price discrimination. For Barone, it would therefore be better to nationalise the production of those goods so as to do ‘what an intelligent minister of production and consumption would do in a collectivist state’ (p. 699), thus reproducing the outcome of competition.98 In Barone’s view, imposing a price ceiling lower than the equilibrium price, however, has the opposite effect, which

96 In a letter of 24 July 1917 to the economist Tullio Martello, a follower of Francesco Ferrara, Pareto said: ‘the war has hit the middle class who live on rent; the workers have huge pay-packets’ (Pareto 1973, p. 976). And on 16 August 1920 to Arturo Linaker: ‘Not poverty, but greed moves the multitudes, the same greed that made many in the rich class want the war’ (Pareto 1973, p. 1043). 97 It was the name of the secret agreement between Germany, AustriaHungary and Italy. In 1915 Barone was the creator of the first full-length film filmed on the battlefields. 98 The government ‘should have done what an intelligent ministry of production and consumption would do in a collectivist state […] It would have been a monstrous centralisation […] a mammoth bureaucracy […] but at least, somehow or other, even if with more tortuous, cumbersome provisions, it would have finished by approaching that maximum that, automatically and without being aware of it, competition and speculation bring about’ (Barone [1908a ed. 1919–20] 1936, p. 699).

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for him consists of triggering a chain of measures that ‘kill commerce and dry up production’ (p. 692).99 A very different position was taken by De Viti on the question of the Great War. He too was interventionist, but in a democratic, antinationalist way and was convinced that the ‘free nations of Europe’ were stronger than the Central Powers and would frustrate their ‘dream of dominance’ (De Viti 1918); from 1917 on, as we have already said, he was aligned with the positions of President Wilson.100 As for the issue of market power, De Viti’s enemies continued to be ‘monopolistic groups belonging to the industrial and grain-growing parasitism’ who wanted to ‘obtain an increase in import duties’ ([1914b] 1918, p. 31). Moreover, in recommending the subscription of the fourth public loan to finance the war, he admired the ‘colossal, perfectly organised factories’ of German companies that have ‘been able to reduce costs and prices so much that the customs barriers have been overcome’ ([1917b] 1918, p. 157). He also pointed out that the war had accelerated the process of ‘municipalising public utilities’ such as lighting and the distribution of water,101 a subject on which his opinions will be examinind in the next chapter. The theme of competition was recalled in his works on the war to illustrate the importance of having available various trade routes between nations ([1916] 1918, p. 73),102 or the idea of allowing the development of national industries that were ‘natural, […] intelligently exploited by science and by vocational education’ ([1917a] 1918, p. 113). Lastly, he denounced the difficulty of introducing farm machinery during the war, with the observation that ‘if the price of the machines had been lowered by competition, their use would have increased’ (1918, p. 181). We shall conclude this section by remembering Barone’s praise of the market economy for having held out during the upheaval of the war, both in practical terms and in theory. He wrote, ‘the “anarchic” organising – as the socialists call it – created by individual initiative and competition’ was robust enough to stand up to the turmoil of events and, at the level of economic ideas, to avoid generating any ‘scientific revolution’ ([1908a ed. 1919–20] 1936, p. 709). 99

Barone was referring to requisition (to prevent the creation of secret stockpiles) and state supply, which meant the provision of goods where requested, thus replacing the free market. 100 On this see Martelloni and Mosca (2018). 101 Among the services necessary for the community at that time, De Viti also included bread-making (1921, p. 92g). 102 The reference is to the Yugoslav problem and to communication between the Adriatic and the Danube.

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4.5 CONCLUSIONS In the moving, heartfelt obituary written by De Viti on the death of Pantaleoni we read: For him science was a system of principles that had to explain the events of real life, historical events, the events in the business world, political events, as well as the behaviour of the men who were the actors […]. [He] moved with lightning speed from the abstract principle to diagnosing the actual event, and from that to judging the men. (1925, pp. 165–166)

In this chapter, we have found confirmation of the fact that theory, for the marginalists of that generation, was the sound basis on which they built their general vision of social reality. We have seen that for them the explicative capacity of theory was of the utmost importance. As we know, our four economists were champions of theoretical economics, but here we see that they never moved away from the real world: they never accepted economic theory without a grasp of facts, and when this seemed to be lacking, some of them were willing to abandon it. We have seen that Pantaleoni believed in competition, initially even in static competition, but above all he believed in selection: in examining gender issues, the labour market, the different forms of institutions, the geopolitical situation, and many other topics, he trusted the market, which he used as a metaphor to find order in non-economic fields as well. De Viti, too, firmly believed in the free market, but the analysis we have conducted shows that for him it was more an ideal to aim for and a reference point to guide his political efforts than a mechanism operating spontaneously.103 Barone was convinced that mathematical economics would have the final word on concrete phenomena, even very significant ones; just think of his groundbreaking comparison of the capitalist economy with the planned economy. Pareto on the other hand ended up no longer believing either in competition or in general in the explicative power of economic theory: as a sociologist, he saw pure economics as the realm of logical actions, while reality was dominated by non-logical actions. That is why he regarded abstract economic theory as just the first stage from which he moved away in order to remain anchored to reality ‘by theories keep conforming more closely to it’ (Pareto [1906] 2014, p. 6). 103 This position was similar to that of the American right-wing progressives, on which see Leonard (2015). We will come back to this in Chapter 5.

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In this chapter, we have seen that ideas of competition and market power have been applied in many different fields; and have been used by our economists as daring experiments at the cutting edge, in the belief that in the social world, even in non-economic domains, they could find laws to explain real phenomena. Since their work, intellectual exploration in these same fields has undergone significant developments: today the impact of the economic situation on the condition of women is the domain of gender economics, the labour market is studied by economists using bargaining models, the economic calculation problem is dealt with by experts in mechanical design theory, and political scientists make models of international relations. The method used to deal with all these cases is that of game theory, which – following the 2005 Nobel Prize-winner Schelling (2006) – is applied to ‘strategic activities, things like promises and threats, tacit bargaining, the role of communication, tactics of coordination, the design of enforceble contracts and rules, the use of agents, and all the tactics by which individuals or firms or governments committed themselves credibly’.104 Today’s experts will perhaps find a few pointers in the ideas of these economists of the past; for that generation, all these lines of research did not appear specialistic, but derived even then from the application of similar conceptual templates to various fields in the social sciences.

104 T.C. Schelling (2006), ‘Autobiography’, in Les Prix Nobel, The Nobel Prizes 2005, editor Karl Grandin, [Nobel Foundation], Stockholm, available at https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2005/ schelling-bio.html, accessed on 3 March 2018.

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Conclusions The time has come to take stock of the results of our enquiry, to establish whether and why it was important to identify the place occupied by the Italian marginalists in the development of the idea of market power, of its causes, its effects and possibly its remedies. To do this we shall start, as we have said at various times in this book, by comparing their theories of competition and monopoly power in order to outline their overall positions. We shall then consider these economists as a group, a specific intellectual tradition, highlighting their similarities and differences, before going on to investigate the relation between this group of Italians and their contemporaries so as to verify whether what Schumpeter ([1954] 1976) claimed is really true; that is, that the Italian economists of the period were ‘second to none’ (p. 855). We will once again underline the importance of the real world for their theoretical elaboration on the issue of monopoly power. Lastly, we will explain the reasons this research seems to us to be important for the history of economic thought.

COMPETITION AND MONOPOLY POWER In Pantaleoni’s work there was, as we know, an initial phase in which he correctly identified all the conditions for a competitive equilibrium, and then one in which he adopted a vision nearer to what Blaug (2001b, p. 40) called the ‘dynamic process-conception of competition [which] is precisely the old classical conception that Schumpeter, Hayek, Clark and modern neo-Austrians have urged us to adopt’. This latter vision is the one that most closely corresponded to his idea of market power: in his view, the power to set prices was always temporary, the minimum efficient scale most of the time was smaller than market demand, monopoly (including the few cases of natural monopoly) was ‘pregnant with dynamism’, trusts were always efficient and contestable; the only element that deservedly generated lasting profits was in his opinion

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talent, intelligence, genius.1 This vision, which we have called an authentic creed, made him look to the future with confidence: competition would overcome all obstacles, sweeping away all resistance, no other policy was needed, apart from the (not easy) prerequisite of having a ruling class that defends competition, perpetuating it, and if necessary imposing it not only on society but also on itself.2 Although universally praised in the literature,3 Pareto’s static theory of perfect competition was regarded by its creator as only ‘a special case’. He was more interested in processes of adjustment due to innovations, but also to frictions and delays. The market power of large firms did not concern him; he considered it to be temporary and limited, since he did not believe that in practice they would reach their minimum average cost. By contrast, he encouraged very small firms to take advantage of returns to scale and to expand. However, with time he became convinced that trusts genuinely have the power to keep prices high. Moving on from theory to policy, Pareto adopted the attitude of a detached observer, powerless to say what is good for society, above all regarding the decisions of the ruling class: in his view, they will always do what they deem convenient for themselves. As for Barone, after the excellent formalisation of perfectly competitive equilibrium (and of the planned economy) that made him famous, he devoted his energy to other market structures. It was very clear to him that reality presents a multiplicity of situations, such as provisional equilibria, firms that innovate, inputs that are temporarily and permanently scarce, monopolies, firms that produce in the downward sloping part of the average cost curve, active or lazy potential competition, large firms that form unstable cartels, and highly turbulent oligopolies. His belief was that it was possible to make a rigorous examination of all these cases using mathematical tools; and derive guidelines for economic policy based on the calculation of social welfare. Lastly, let us look at De Viti de Marco, whose position on the level of economic theory was, as we have seen, rather nuanced. However, it was 1 Remember that in this period the first systematic studies on intelligence were undertaken. According to Cianciolo and Sternberg (2004, p. 2): ‘much of what we know about intelligence has been discovered since the late nineteenth century’. 2 There is an interesting recent paper on the fact that while elites claim to be in favour of competition, they avoid it for themselves (Rothwell 2016). 3 It is significant that in the economic literature, the term ‘Paretian’ is normally considered synonymous with ‘static’. Among the innumerable examples, see Ekelund and Hébert (1999, p. 329).

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not so for economic policy: free market oriented, he insisted that two firms were enough for active competition through innovation and other strategies. He elaborated a very precise theory of market power due to economies of scale, sunk costs and input scarcity, and tried to identify policies that could rectify the situation; in the end, he saw protectionism as the main obstacle to competition. To sum up, it can be said that De Viti de Marco, unlike Pareto, always had in mind the reference point of an ideal world, but he was also aware that reality was different. He believed that in theory the action of the state was a means of overcoming the disparity between the ideal and the practical, but at the same time he did his utmost to oppose the tendency he found in governments to cause further distortions.4 His position on economic policy was in principle in step with the social liberalism of Asquith and Lloyd George, and, in some respects, it was a precursor of ordoliberalism (see Schnyder and Siems 2013), but in practice De Viti was closer to the disenchanted vision expressed later by public choice.5

THE GROUP OF ITALIAN MARGINALISTS One of the original aspects of our research has been the presentation of the Italian marginalists as a close-knit group. The originality lies in the fact that this group has never been recognised as a distinct intellectual tradition by historiography.6 Their close personal ties have been discussed in Chapter 1 (section 1.3.3.1), while in the rest of the book, to present their ideas, we have taken two different approaches. 4

De Viti’s attitude was criticised by H. Simons, who wrote a harsh review of the American translation of his First Principles: ‘the discussion moves in a sort of intellectual no-man’s-land between “explanation” of existing institutions and description of a vague set of norms or […] ideal arrangements. These norms are described sometimes as imperfectly realized goals of actual political process, sometimes as requisites of “political equilibrium”, and sometimes as things which democratic nations ought to cherish’ (Simons 1937, p. 713). 5 On how De Viti’s models of the state may be reconciled with his political realism, see Giuranno and Mosca (2018). 6 Among the many examples, see the History of Economic Thought website, created and written by G. Fonseca (http://www.hetwebsite.net/het/), in which only the Lausanne and Austrian schools are considered to be representative of the marginalist period. See also the second volume of the recent Handbook on the History of Economic Analysis, edited by G. Faccarello and H. Kurz (2016), in which the German and Austrian school, British marginalism and the Lausanne school are the economic traditions of the period to appear.

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At times, when appropriate for the topics being dealt with, we have adopted an incremental approach. In these cases, we saw that many of their writings were an immediate reaction triggered by previous work of the others, with the intention of developing the analytical aspects in a cumulative process. For instance, in economic dynamics, in the static notion of competition (including welfare considerations), in the identification of the different market structures and of the structural barriers to entry, and finally in the theory of elites, the four economists clearly developed a common view, building their theories as an enrichment and expansion of ideas previously expressed by the others. Nevertheless, this does not imply a constant and complete agreement of views. To the contrary, we found great differences in the method of theoretical inquiry between Barone and Pantaleoni on the one hand, who admired Marshall’s partial equilibrium analysis, and Pareto on the other, who exclusively followed Walras’ general economic equilibrium. Also, the relationship between economics and sociology was very different in the conception of Pareto, for whom the two fields had to remain separate, and for Pantaleoni, who regarded them as intertwined. The secondary literature tells us that there were contrasts on other specific theoretical issues, but they are all beside our topic. However, we can note that Pantaleoni and De Viti clashed on the issue of collective needs, and that De Viti and Barone disagreed about the application of marginalist calculus to public needs. The latter pair also differed in their vision of the road to Italian economic development: Barone was in favour of the idea ‘of the transformation of Italy into an industrial country’,7 while De Viti advocated the development of agricultural exports. On the political plane, too, there were profound differences, such as the one between Pantaleoni and Barone on one side, and De Viti on the other, on the subject of Italian nationalism. Remember that in the joint adventure of the Giornale degli Economisti there had been disputes, especially between De Viti and Pareto. The cultural models they took as reference points were different: we have often emphasised the AngloSaxon inspiration and anti-German feeling marking the thought of De Viti and Pantaleoni; by contrast, Barone was a great admirer of Germany. We have also shown the differences of opinion between Pareto and De Viti on the role of intellectuals in society, between Pantaleoni and De Viti on the class that should take on the ruling role, and between Pareto and De Viti on the contractualist vision of the state. 7 See the letter from Barone to F.S. Nitti of 17 July 1901, in Gentilucci (2000, p. 84).

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In this book, whenever we have encountered divergent views we have highlighted them, devoting a separate section to each one. For instance, regarding the dynamic conception of competition we saw that, since none of the four economists accepted Walrasian tâtonnement, believing that it did not explain how equilibrium is actually attained, they devoted a great deal of time to analysing the process of adjustment and the frictions that slow it down, as well as its consequences in terms of welfare. On this issue, as on the identification of strategic barriers to entry, or on economic policy, there was not a common view, and the four tried out different methods, discussed their findings and continued with their research armed with fresh insights and new ideas. Our exposition in most of these cases reflects an order that was quite typical of the way their various theoretical proposals were developed. By bringing together their writings in a single chronological list it can be seen that in most cases it was Pantaleoni that opened the discussion, often by throwing out a challenge; Pareto then framed the topic, criticised it and offered his analysis; Barone developed it formally and gave it a place in his system, using a different method of investigation; and, lastly, De Viti usually shifted the debate into his specialist field, often reaching divergent results. Their differences of opinion led them to criticise one another, argue, answer back, but even then, it is clear that their close ties played an essential role in the elaboration of their ideas: each time one of them wrote was an occasion of critical reflection for the others. This research therefore confirms the idea that the production of scientific knowledge is a collective phenomenon, in which discovery and analysis develop thanks to the interaction among scholars.8 In this choral quality lies the evidence that the group of Italian marginalists should be considered a well-defined intellectual tradition. From their personal bonds, and their deep, constant, reciprocal influence on one another, it is obvious that they deserve a place apart in the history of economic thought, on an equal footing with the British marginalists, or the group of Swedish economists.9 8

On this see Russo and Santoni (2010), with reference to the case of Italy. Only Einaudi (1934a, p. 19), referring precisely to our four economists, wrote that ‘the Lausanne school […] should really be called the Italian school’. Dennis (1977, p. 264) claims that: ‘it is hardly justifiable to speak of Pareto and Walras in the same breath as if they constituted a “school”’, while McLure (2007) identifies a specific school of thought in Pareto and the group of Paretians. Schumpeter (1949, pp. 153–154) does the same; he also (pp. 159–164) describes the interactions involving Pareto, Pantaleoni and Barone, and also those with other economists of the period, such as Fisher and Edgeworth (see next section). 9

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THE ITALIANS AND THE OTHERS Throughout the book we have repeatedly commented on how the thinking of previous generations of economists influenced the Italian marginalists’ research. We know for instance that the static conception of competition came from Jevons and from Walras: from the first came the ‘law of indifference’, from the second the notion of competitive equilibrium. We also know that for dynamics they had drawn on the classical economists, principally J.S. Mill and Cairnes, as well as on Menger.10 We could continue at length, but here we want to establish some connections between their ideas on the notions of competition and monopoly power and the thoughts of other non-Italian economists who were their contemporaries.11 In Chapter 1 we focused on the Italians’ great knowledge of the international economic literature, and how this corresponded to their very precise idea of the progress of scientific knowledge: ‘science is international’ Pantaleoni enthusiastically wrote.12 When in 1882 he specified all the conditions that had to be fulfilled for perfect competition (free entry and exit, perfect information, large number of sellers, product substitutability), Edgeworth (1881) had just recently formulated a similar list and, following up on Cournot, had set out the first duopoly model of price competition with product homogeneity. This may also have been a reason why it was so clear to Pantaleoni (1882) that the structures of the market were as numerous as ‘the colours of the spectrum’ (p. 91). Remember that Edgeworth was one of the protagonists of the lively debate revolving around the developments and criticisms of Walras’ theory of general economic equilibrium, and in particular his tâtonnement hypothesis. The English economist had a close relationship with the Italians: for instance, he seems to have been the one that urged Barone to produce his article on Wicksteed (Barone 1895b).13 For us it is especially 10

In particular on Pantaleoni, certainly influenced by Menger’s evolutionist vision. He firstly accused Menger of plagiarism (Pantaleoni 1887 and 1889), then praised him in his complimentary preface to the Italian translation of Menger’s Grundsätze (Pantaleoni 1909a). 11 This section makes use of many secondary sources already cited in the rest of the book, and of others that we be indicated here, Asso and Fiorito (2001b) is the main one. 12 Letter from Pantaleoni to S.P. Duggan and, for information, to E.R.A. Seligman of 18 August 1921, in Asso and Fiorito (2001b, pp. 175–176). 13 Barone’s article was then rejected by the Economic Journal, seemingly on Marshall’s wishes (D’Amico 1975, p. 194).

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relevant that Edgeworth (1897) contributed an article in Italian to the Giornale degli Economisti, before it came out in English, on the very theme of monopoly, and that there was close interchange with Pareto in the elaboration of the Pareto optimum, the indifference curve and the Edgeworth box.14 He was also the one (Edgeworth 1911–13) that summed up the theories that led to the definition of natural monopoly, following the contributions of De Viti de Marco (1890), Pareto (1896–97, 1906), Barone (1908) and Pantaleoni (1909a) on the issue. It is therefore no surprise that in 1922 Pantaleoni judged Edgeworth ‘an original thinker of very first class, […] above Marshall’.15 The latter is another solid reference point for our Italians: Pantaleoni and De Viti had read Marshall carefully and quoted him extensively as early as 1889 (for Pantaleoni) and 1890 (for De Viti) on the issue of determining the equilibrium price in competition, and on the concept of elasticity. It may well have been Marshall’s idea of competition as ‘the racing of one person against another’ that prompted Pantaleoni’s 1892 paper on the horse race;16 the latter was certainly influenced by Marshall’s evolutionary conception of competition.17 Pantaleoni even compared Marshall to Pareto, arousing the anger of the latter.18 Furthermore, it must not be forgotten that Barone used the method of partial equilibrium analysis in most of his theory to deal with the adjustment speed of supply, and that the elaborations of our economists on the question of natural monopoly and on big business owe a great deal to Marshall (Kerstenetzky 2010). The correspondence between Pantaleoni and Barone is full of references to Marshall’s work (Bellanca and Magnani 1991). Finally, we agree with Zanni (1993, p. 260) that the adjustment process described by Pareto has to be seen as inserted in the controversy of 1891 between Marshall and Edgeworth. 14

On the latter, see Montesano et al. (2014, pp. 541 ff.). Letter to E.R.A. Seligman (24 June 1922), in Asso and Fiorito (2001b, pp. 177–178). He also stated that Pareto ‘would not have been what he has been’ without Edgeworth and Fisher (Pantaleoni 1923, p. 584). 16 Groenewegen (1998, p. 45) briefly reconstructs the relationship between Marshall and Pantaleoni. Dardi (2014) reconstructs their respective positions with regard to sociology. Pantaleoni certainly had the same attitude as Marshall with respect to the classical theory and the use of mathematics (see Pantaleoni’s letters in Augello (1998, p. 271), and in Fiorot (1976, p. 480)). 17 On competition and evolution in Marshall, see Groenewegen (2003). 18 Pareto wrote to Pantaleoni (15 September 1907): ‘I’m happy with Walras, who was my teacher, with Fisher, but I’m not at all happy with Marshall, and not very happy with Edgeworth’ (Pareto 1960, vol. III, p. 61). 15

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As we said in Chapter 2 (section 2.4.1.2), Wicksell and Wicksteed were both well known to Barone, who had discussed them in his articles of 1894–95 (Dooley 1998, pp. 69–70). Barone was similarly conversant with the full range of mathematical literature of the time, such as the contributions by Launhardt (1885) to the theory of price competition, and by Auspitz and Lieben (1889) to the discussion of the dynamic problems generated by Walras’ tâtonnement (Dennis 1977). Wicksteed was in perfect harmony with Barone and Pareto in the process of mathematisation of economic theory, which he saw as a momentous shift in the history of the discipline.19 Wicksteed was also well known to Pantaleoni: one of his letters to Seligman in 1912 opened with a long passage on the calculation of the costs and benefits of letter-writing, taken from The Common Sense of Political Economy published two years earlier (Wicksteed 1910).20 As for Wicksell, we know that in 1901 he advanced a great deal further along the path towards defining perfect competition, and provided examples of imperfect competition due to large overhead costs, joint supply, and location. His results were very similar to those presented by our economists, such as the definition of minimum efficient scale, and the role of entry in driving profit to zero (Backhouse 1990); as we have seen throughout the book, these themes had previously been proposed by Pantaleoni (1889 and 1900), and by Pareto (1897), and later formally analysed by Barone (1908). Strong reciprocal influences are also clearly detectable in the figure of J.B. Clark. Our economists interacted with him at a distance21 on various themes of shared interest. Besides the question of the theory of distribution based on marginal productivity (J.B. Clark 1899), which linked him 19 Talking about the theoretical contribution of Jevons (Wicksteed [1894] 1992, p. 59), he states: ‘its exact mathematical expression in mathematical language has made an epoch, and is making a revolution in economic science’. 20 Letter from Pantaleoni to Seligman of 14 January 1912, in Asso and Fiorito (2001b, p. 172). Pantaleoni (1913b 1925, p. 70) recalls Wicksteed’s thesis that every human action is the result of an economic calculation, and while finding some exceptions to this ‘law’, he judges the English economist’s analysis to be of great finesse. 21 But not only at a distance, because J.B. Clark appeared in a letter in which Pantaleoni listed the names of the American economists he had met personally (also Taussig, and Fisher). See the letter from Pantaleoni to S.P. Duggan and, for information, to E.R.A. Seligman, of 18 August 1921, in Asso and Fiorito (2001b, pp. 175–176). On another occasion Pantaleoni used J.B. Clark to send greetings to Seligman (Letter from Pantaleoni to Seligman of 14 January 1912, in Asso and Fiorito (2001b, p. 172)).

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to Barone (1896),22 and besides the fact that the American economist had written a review of volume I of Pareto’s Cours (J.B. Clark 1896), there is the previously discussed (in Chapter 3) issue of trusts.23 Since 1882 J.B. Clark had taken an interest in the ‘inadequacy of the principle of competition’ (1882, p. 837) for his contemporary reality; he had therefore applied the concept of non-competing groups to the analysis of the combinations that were becoming increasingly important (J.B. Clark 1887). In 1901, he published The Control of Trusts (J.B. Clark 1901), thanks to which he took an active part in the reform of U.S. antitrust legislation. His theory had a great impact and Pantaleoni, in his articulate analysis of trusts, agreed with him on the role of potential competition, while criticising his neglect of the consideration of vertical integration: in Pantaleoni’s words, the American economist ‘sees no trusts other than those which consist in mergers or links between competing companies’ (Pantaleoni [1903] 2001, p. 165). J.B. Clark is credited with systematising the static definition of competition (Stigler 1957), as well as being the author of dynamic considerations related to innovations and to potential competition;24 we also know (from our discussion in Chapter 2, section 2.3) that in Italy the theme of economic dynamics had already been treated by Barone (1894) and by Pareto (1896–97). In fact, the themes of statics and dynamics, along with the issue of effective and potential competition, were the focus of reflection on both sides of the Atlantic. Like Pantaleoni, J.B. Clark (1899) is remembered for having ‘acknowledged the conceptual difficulties in integrating monopoly into static theory’ (Corley 1900, p. 85), but it was his Essentials of Economic Theories (J.B. Clark 1907) that prompted a response from Pantaleoni (1909a) in the form of the essay on the issue of economic dynamics.25 It was to this essay that J.B. Clark, with S.N. Patten and F.A. Fetter (1910), devoted a meeting of the American Economic Association. 22 On Barone’s contribution to the theory of income distribution, see Chapter 2. 23 J.B. Clark’s thought on trusts is dealt with by Fiorito and Henry (2007) and Fiorito (2013), among others. 24 See Peterson (1957) and MacNulty (1968). His son, the economist J.M. Clark, specifies that his ‘father’s basic conception that the analysis of static equilibrium, for which he is chiefly known, is properly not an end, but an introduction to the study of dynamics, in which it should find its fulfilment’ (J.M. Clark 1961, p. ix). An in-depth treatment of competition in J.B. Clark is to be found in Morgan (1993). 25 The influence of this book by J.B. Clark on Pantaleoni is also examined by Michelini (1993, pp. 20–21).

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In 1906 the American economist Henry Ludwell Moore, one of Walras’ disciples, wrote the first article explicitly devoted to the issue of competition, in which among other things he pointed out that Marshall’s definition of competition as ‘the racing of one person against another’ is not suited to economic equilibrium (Moore 1906, pp. 212–213). After travelling to Italy, and meeting frequently with Pareto, Barone and Pantaleoni, Moore declared that he had been greatly influenced by the Italian economists, and in fact his works follow Pareto’s line. Another American traveller who met our economists was a scholar of extraordinary stature: Irving Fisher.26 His work was appreciated by all four Italians from the very beginning, but his reference point in Italy was Pantaleoni, whom he held in great esteem and by whom he was called ‘our friend’ in the letters to Seligman.27 Pantaleoni once wrote ([1907] 1925, p. 197) that in a hypothetical Exposition of Economic Science he would display Fisher’s hydraulic machine; and as we have seen, a version of this machine appeared in Barone’s Principi; the Italian having met Fisher in Florence and thinking very highly of him.28 As to Pareto, his relationship with Fisher was not straightforward: Fisher respected the Italian economist, but thought he had added only negligible innovations to Walras.29 In turn, in his correspondence with Pantaleoni, Pareto was sarcastic about both Fisher and Moore.30 A proper analysis of this network of economists is beyond the scope of this book; here we have simply outlined a general picture of the relationships and reciprocal influences of the Italian marginalists with the generation of economists who spread and consolidated the neoclassical theoretical system, specifically focusing on our themes.

26

Among the very few books in English in Pareto’s library, Bousquet (1960, p. 150) found books with dedications by Moore and Fisher. 27 See the letter of 8 January 1900 in Asso and Fiorito (2001b, pp. 168–170). 28 In a lively letter of 21 January 1894 Fisher wrote: ‘Yesterday I was awakened by the announcement that Capitano Barone was waiting to see me […]. He had a copy of my book with him […]. He praised my book very highly’. See Pavanelli (2003, p. 373) who deals with the reception of Fisher’s theories in Italy. 29 See his review of vol. I of the Cours (Fisher 1896). However, let us quote a phrase from Fisher about Pareto taken from a letter to J.H. Rogers of 22 July 1915: ‘his work is among the ablest I know’ (in Asso and Fiorito 2001b, p. 183). 30 See for example the letter of 29 May 1897 in Pareto (1960, vol. II, pp. 78–82). But Pareto liked Fisher more than his comment to Pantaleoni suggests.

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THE IMPORTANCE OF REALITY Regarding this generation of economists, we have pointed out both the achievement of the formalisation of perfectly competitive equilibrium, and the continuity with the classical idea of dynamic competition, as well as the new aspect of this period, namely competition among large firms. In Chapter 1 (section 1.3.2) we wondered whether it was theory or reality that generated their interest in situations where monopoly power was present. We can now say with certainty that it was not the new theory of perfect competition that drove their research in that direction, but the continuity with the classical economists’ dynamic method, the explanatory power of which they admired, and above all the effort to fully understand a totally unprecedented reality using the new tools that were gradually becoming available. All this was well summed up by Pareto in remembering his youthful credo: ‘Political economy, as constituted by the economists defined classical, was a perfect – or almost perfect – science: all that remained to be done was to put the principles into practice’.31 It was therefore not the change in theoretical model that made them focus on the causes of market power, but a new economic situation marked by firms of large or very large size.32 This occurred for two reasons: the first is that, until the 1930s, perfect competition had not yet been defined as perfect elasticity of the firm’s demand curve, and since it is only with this definition that competition is antithetical to market power, this could not have been the instrument that influenced their studies. The second is simply that the marginalists did not believe in perfect (or, rather, free) competition,33 which they defined in the way we saw in Chapter 2, because, as the formalisation went ahead, the conditions needed for perfectly competitive equilibrium became increasingly stringent while the situation of the firms, especially starting from those years, clearly disproved the premises of that model.34 31

Letter to Antonucci, 7 December 1907, in Pareto (1973, p. 613). Machovec (1995) maintains the opposite: ‘The equilibrium paradigm changed how economists were taught to think about the market in general and competition in particular’ (p. 161), but he applied this thesis only from the 1920s on, and not to the period of our marginalists. 33 As we have said (Chapter 2, fn. 60) initially Pantaleoni, referring to an argument put forward by Cairnes, also finds it realistic to see competition in the sense of free entry. 34 Referring to Marshall, Martin (2007, pp. 27–28) writes: ‘Economists of the period were aware of the disconnect between the implications of this theory of competitive markets and the industrial world around them’. 32

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Essentially, the marginalists honed the models of perfect competition despite knowing full well that it did not exist and that the world was made of oligopolies and imperfect competition.35 In spite of the static model, competition for them continued to be based on strategic actions, as it had been for the classicals and as it is again today in the modern industrial organisation.36 Remember, as we said in Chapter 1 (section 1.2.3.2), that nobody in the history of economic thought has ever really believed in perfect competition; it was in fact fully defined by Knight, and then by Sraffa and Robinson, purely in order to criticise it. If we then think about the fact that our marginalists also used the categories of competition and monopoly power to analyse cases outside the strictly economic sphere (such as those examined in Chapter 4), we can state that we are definitively facing a typical case of economic thought shaped by reality.

A DIFFERENT HISTORY Why do we think it has been important to follow up this notion of monopoly power historically? Which ‘arcane ideas’ are revealed when the history of economic thought is reconstructed making use of this category? In other words, what makes the question we have raised a good historical question? We have several times stated that there are no studies on this subject: the suspicion may arise that if this history has not yet been written, it is because it is not important. We have tried to show why we think it is. Finding the causes of monopoly power is as useful as finding entry barriers. The reason why it is important to know the sources of market power is the same as why it is important to know what entry barriers are; both allow us to understand why some firms are able to set prices above cost. We know that the historiography has not dealt with the answers that were given to this question in the years before the studies of Bain and of Sylos Labini. Here we have seen that in fact, from the marginalist age 35

It is worth remembering that in the entry ‘Competition and regulation’ in Palgrave’s Dictionary of Political Economy (H. Higgs (ed.), New York: Kelley, 1963, pp. 378–380), Edgeworth (1925) also defines competition by describing its decidedly realistic aspects. 36 The idea of competition as strategic behaviour used today by industrial organisation is considered to be linked to the classical conception of competition by many scholars; see for example Vickers (1995), Blaug (1997), Salvadori and Signorino (2013 and 2016), and Mosca (2016).

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onwards there was a great deal of thinking on the question of entry. What was lacking therefore before Bain and Sylos Labini was only the formal treatment of entry: it was only in the formal models, not in the theory, that this subject was not considered.37 So, our study serves to avoid erasing from historical memory a huge chunk of theoretical thinking that is not mentioned in the history of the models, only because they are non-formalised theories.38 Thanks to our study, we are now able to reject clearly and definitively the widespread myth that up until the 1930s in economic theory only the two extreme situations of perfect competition and monopoly were considered.39 On the contrary, the economists were well aware of the hybrid situations, and worked out theories to explain them. In the literature there are numerous, if sometimes vague, references to this awareness; for example, Chamberlin declares that his theory does not break with the past;40 Galbraith describes the state of theory in the early 1920s in these terms: ‘Competition was not supposed perfect. Those who already operated in economic activity would have impeded 37

Martin’s (2007, p. 31) recognition of Marshall is significant on this: ‘There are many anticipations of the limit price model, including Marshall’; then he quotes from Marshall (1980b): ‘“The leaders in the movement towards forming Trusts seem to be resolved to aim in the future at prices which will be not very tempting to any one who has not the economies which a large combination claims to derive […] from its vast scale of business and its careful organization […]”’. Hovenkamp (1991, p. 309) claims that concepts such as ruinous competition or potential competition ‘have a long history in a field as informal and antitheoretical as the law’; here we have shown that this is true also in the field of political economy. 38 For a different use of the terms ‘theory’ and ‘model’ see Goldfarb and Ratner (2008). 39 Joan Robinson ([1933] 1969, p. 3) states this: ‘In the older text-books it was customary to set out upon the analysis of value from the point of view of perfect competition […] But somewhere, in an isolated Chapter, the analysis of monopoly had to be introduced’ and adds: ‘the books never contained any very clear guidance as to how these intermediate cases should be treated’. Martin is also of this opinion: ‘The mainstream price theory of the early twentieth century consisted of a theory of competitive markets and a theory of monopoly, with a vast wasteland in between’ (2007, p. 27). Hill and Myatt (2003) argue on the other hand that in the 1940s textbooks were still much less focused on perfect competition than they are today. Backhouse (1985, p. 139) credits Chamberlin with demonstrating ‘that economists had to analyse a variety of market structures, not simply perfect competition and monopoly’. 40 ‘Although the idea has never been developed into a hybrid theory of value, it represents, so far, no departure from currently accepted doctrine’ Chamberlin ([1933] 1962, p. 66).

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access in various ways to new operators’.41 And again, Schumpeter writes that Marshall considered pure competition and pure monopoly as limiting cases, and the hybrid ones as fundamental.42 Our theoretical category of market power therefore enables us to demonstrate quite clearly that, even if not formalised in a model, a theory of the situations in which firms do have market power did in fact exist. Here we have written for the first time the Italian part of the neglected history of barriers to entry before Bain. As already mentioned, there are possible influences of these economists on later generations. As seen in Chapter 1, some of these influences encouraged us to direct our historical research into the causes of market power towards the thought of the Italian marginalists. Unfortunately, up until today their legacy could be described in the words Corley (1990, p. 85) used for Marshall’s: with the passing of time, his ‘rich verbal insights, based on detailed personal knowledge, were progressively set aside in favour of analytically rigorous models concentrating on limited aspects of the firm’s activity’. We cannot deal here with this legacy,43 but we are convinced that it is time to expand this narrow perspective, and to undertake new research into the history of entry barriers, in order to discover new links of thought between generations. The notion of entry barriers is also important for its implications for microeconomic policy. If there are causes of market power that bring about inefficiency, and it is not a short-run phenomenon, then it is necessary to intervene;44 and in order to identify these causes, theory is required. The singling out of entry barriers is therefore the theoretical premise to the call for public intervention. And this was so also before Bain, even though the causes of monopoly power were not yet called ‘entry barriers’. In Chapter 1 we argued that the history of the concept of market power cannot be found by looking at the origins and development

41

Galbraith ([1948] 1953, p. 120). Schumpeter ([1954] 1976, pp. 974–975). 43 We have cited some examples in the book including, among others, Schumpeter, J.M. Clark, Knight, Sraffa, Modigliani, Buchanan, and Sylos Labini. 44 On the recent tendencies of antitrust on this subject, Grillo (2006, p. 47) writes critically: ‘Today, antitrust is greatly concerned with dynamic competition. The critical point is that incentives to innovative activity require some sort of ex-post monopoly. The need to foster “competition through innovation”, with its corollary of necessarily protecting monopoly, allegedly temporarily, is making its way in contemporary antitrust grounded as it is on dynamic “efficiency” arguments, and this is setting new challenges to the received perspective’. 42

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of antitrust legislation; however, as we discovered in Chapter 5, this does not at all imply that it was not developed with the aim of being applied. Especially as far as our four marginalists are concerned, we can be certain that they wrote with the aim of influencing economic policy.45 Since, as we have shown, there was a correspondence between the reform proposals put forward by the economists and the explanations they gave to the phenomenon of market power, then the marginalist age should be considered the age when for the first time,46 and not only in the United States, the ideas on the non-legal causes of market power formed the theoretical basis for competition policies. Our study therefore serves to afford proper recognition to those contributions that are not mentioned in the histories of competition policies. The explanation of monopoly power is as crucial now as it was then. We have seen how the Italian marginalists made extensive use of this notion as a means of interpreting reality and intervening in it. Today this category is even used to contrast two different visions of the world: one focused on competitiveness, the other ‘focused on what gives rise to power, how it is maintained and strengthened’.47 Investigating an era through a category that has never been applied to it means shedding light on one of the many ‘invisible cities’48 relegated to the past. The use of the idea of monopoly power to investigate the history of economic thought has raised new questions, revealed new contributions, outlined new directions taken by ideas, disproved current theses, identified significant milestones and missing links; in short, it has enabled a different history to be written.

45 Meacci (1998a, p. 6): ‘The call for reforms […] is a prominent feature of the Italian tradition’. 46 Since we saw that for the classicals the obstacles to competition were not really a problem. 47 See Stigliz (2016). In this recent educational article entitled ‘The New Era of Monopoly is Here’ he also writes: ‘the battle against entrenched power is not only a battle for democracy; it is also a battle for efficiency and shared prosperity’. 48 I am obviously referring to the book by Calvino (1972). This metaphor was applied to the history of economic thought in the presentation of a paper by Bellanca and Guidi; unfortunately, it is no longer present in their published article (Bellanca and Guidi 1997).

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Name index Abu Turab Rizvi S. vi Adams H.C. 13, 22, 106 Amato G. 117, 165 Amatori F. 29 Amoroso L. 34, 45, 66, 75, 86, 87, 126 Andrews P.W.S. 19 Antonucci A. 125, 150, 196 Arachi G. vi Arena R. 38 Armentano D.T. 14, 16 Arrow K.J. 38, 83 Aspromourgos T. 3 Asquit H.H. 188 Asso P.F. 34, 81, 191, 192, 193, 195 Augello M.M. 28, 31, 50, 82, 164, 165, 192 Auspitz R. 6, 87, 193 Avagliano L. 82, 132, 139, 167 Backhouse R.E. 9–13, 25, 32, 36, 39, 41, 58, 62, 74, 78–80, 126, 193, 198 Bailey S. 10 Bain J.S. 1, 15, 17–20, 34, 197–199 Baldin C. 32 Barbieri G. 154, 156 Barucci P. 2, 141, 149 Baumol W.J. 77, 113 Bellanca N. 30, 72, 73, 75, 136, 143, 192, 200 Benassi C. vi Benham F.C. 65 Bernanke B.S. 103 Berta N. 9 Bertrand E. vi Bertrand J. 6, 12, 14, 98, 99 Bianchi P. 82 Bientinesi F. 82

Bini P. 31, 32, 82 Bismarck O. 181 Blaug M. 3, 9, 10, 13, 33, 36, 39, 41, 71, 73, 74, 127, 128, 186, 197 Bobbio R. 163 Boccardo G. 40 Bond E. 117, 170 Bork R.H. 15 Boven P. 58 Bowley A.L. 6 Boykin S.A. 163 Bradley M.E. vi, 3, 9, 10, 11, 33, 36, 42, 53, 59, 60, 70, 76, 87 Brown J.H. 23 Buchanan J.M. 34, 149, 151, 199 Busino G. 86, 138, 139, 155, 157, 167, 172 Cabiati A. 86 Cabral L.M.B. 68, 71, 73, 108 Caffè F. 151 Cairnes J.E. 10, 30, 39, 41, 46, 49, 50, 52, 61, 63, 85, 86, 90, 93, 124, 131, 191, 196 Calvino I. 200 Canard N.-F. 41 Cantillon R. 21, 42 Cardini A. 32, 162, 169 Cardoso J.L. vi Carey H.C. 40 Carlton D.W. 15 Cavour, Camillo Benso Count of 135 Cesarano F. 41 Chadwick E. 178 Chamberlin E.H. 6, 12, 13, 17–20, 23, 24, 32, 36, 58, 75, 108, 198 Chauvel L. 30 Chirco A. vi Cianciolo A.T. 187 237

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Ciccone A. 40, 106 Ciocca P. 29, 149 Clark J.B. 12, 14, 23, 45, 46, 90, 95, 102, 109, 110, 119, 186, 193, 194, 199 Clark J.M. 19, 23, 34, 65 Clifton J.A. 38 Cobden R. 165 Colajanni N. 137, 171, 182 Colander D.C. 3 Colli A. 29 Collier W.M. 23, 110 Corley T.A.B. 12, 17, 194, 199 Cossa L. 40 Cournot A.A. 1, 6, 11, 14, 27, 41, 49, 52, 55, 67, 85–87, 89, 98, 101, 106, 191 Dahl R. 163 Dal Pont Legrand M. vi Dalla Volta R. 28 Dalton H. 184 D’Amico M. 191 D’Angelo L. 168 Dante Alighieri 150 Dardi M. 33, 36, 43, 47, 69, 73, 76, 192 Davenport H.J. 131 De Jong H.W. 17, 20, 21, 22, 26, 27, 28 De Pietri Tonelli A. 58, 123 De Roover R. 1 De Rosa G. 30, 130, 132, 138, 167, 171 De’ Stefani A. 184 Del Buttero A. 184 Del Vecchio G. 76 Deledda G. 130 Demarco D. 73 Demaria G. 45, 79, 112 Demsetz H. 16, 25, 178 Dennis K.G. 13, 32, 36, 51, 57, 62, 74, 190, 193 DiLorenzo J.T. 13, 26, 104, 174 Donzelli F. 41, 43, 45, 46, 62, 78 Dooley P.C. 29, 59, 97, 193 D’Orlando F. 38, 44

Dos Santos Ferreira R. 11, 12, 14, 19, 37, 55 Duggan S.P. 191, 193 Dupuit J. 1, 6, 22, 27, 49, 85, 89 Dutt A.K. 38 Eatwell J. 38 Edgeworth F.Y. 6, 11, 12, 14, 28, 39, 57, 61, 81, 86, 87, 98, 164, 190–192, 197 Ege R. 55 Einaudi L. 30, 150, 151, 190 Ekelund R.B. 6, 22, 27, 187 Ellet C. Jr. 27 Ellig J. 37 Ely R.T. 23, 119 Elzinga K.G. 1, 19 Etro F. 8 Faccarello G. vi, 188 Faucci R. vi, 155, 164 Fellman S. 165 Ferrara F. 40, 41, 49, 55, 60, 61, 77, 144, 150 Fetter F.A. 109, 110, 194 Finoia M. 30, 149 Fiorito L. 34, 81, 191–195 Fiorot D. 30, 49–51, 56, 77, 124, 125, 136, 165, 171, 192 Fisher I. 23, 44, 87, 109, 110, 190, 192, 193, 195 Fitoussi J.-P. 30 Fontanelli C. 40 Fornari T. 40 Fossati A. vi, 149, 183 Frank R.H. 72, 103 Fukagai Y. vi Galbraith J.K. 17, 198, 199 Garegnani P. 38 Gattei G. 97 Gentilucci C.E. 30, 53, 59, 122, 161, 170, 189 Gerber D. 28 Gide C. 63, 109 Giocoli N. vi, 7, 8, 25, 26, 34, 39, 46, 60, 72, 73, 76, 79, 94, 103, 128

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Name index

Gioia V. vi Giolitti G. 130, 134 Giretti E. 168 Giuranno M. vi, 149, 153, 188 Goldfarb R.S. 198 Gossen H.H. 87 Graswinckel D. 21 Grillo M. vi, 6, 8, 16, 17, 82, 199 Groenewegen P.D. 31, 83, 192 Guccione A. 40 Guidi M.E.L. vi, 28, 82, 164, 165, 200 Hadley A.T. 12, 22, 119 Hahn F. 38 Hall R.L. 19 Harrod R. 19 Hart D.M. 11, 26 Hartmann E. 121 Hayek F.A. 59, 120, 163, 186 Hazlett T. 36 Hébert R.F. 6, 22, 27, 187 Held A. 90 Henry J.F. 194 Hicks J.R. 6 High J.C. 13, 26, 79, 174 Hill R. 198 Hitch C.J. 19 Hobson J.A. 2 Hotelling H. 6, 23, 24 Hovenkamp H. 7, 11, 22, 23, 25–27, 97, 106, 110, 119, 198 Howe A. 149 Howey R.S. 2 Humphrey T.M. 92 Hutchison T. 38 Ingrao B. vi, 41, 57, 79, 86, 100, 166–168 Israel G. 166, 168 Jaffé W. 54, 61 Jevons W.S. 11, 14, 30, 41, 49–53, 56, 60, 87, 98, 99, 155, 191, 183 Johnson H.G. 103 Julien L.A. 9

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Kaldor N. 19 Kalecki M. 19 Keppler J.H. vi, 15, 17, 29, 33, 34, 36, 59, 76, 97 Kerstenetzky J. 192 Keynes J.M. 155 Kirzner I.M. 71 Kjaer P.F. 121 Kleiman E. vi Kleinwächter F. 28 Knight F.H. 13, 23, 31, 34, 197, 199 Komine A. vi Kovacic W.E. 7, 8 Krattenmaker T.G. 1, 8 Kurz H.D. vi, 188 Lallement J. 29, 33, 36, 59, 76, 97 Lambertini L. 69 Lampertico F. 40, 49 Lande R.H. 1, 8 Lathrop Dunham H. 131 Launhardt W. 6, 87, 193 Laurent A. 150 Laurenzi E. 131 Legris A. 32 Leonard T.C. 146, 183 Lerner A.P. 17, 19, 34, 105 Levy D.M. 21 Lieben R. 6, 193 Liefmann R. 78 Lin D. 37 Linaker A. 144, 168, 172 Lloyd George D. 188 Lombardini S. 32, 36, 38, 74 Loria A. 30, 49, 50, 56, 85, 90, 123, 127, 131, 165 L.R.P. 10 Lucas R. 42 Maas H. 3 Maccabelli T. 140, 153, 172 Macchioro A. 30, 77 Machovec F.M. 9, 10, 13, 25, 27, 28, 32, 33, 36, 48, 60, 68, 75, 79, 87, 196 MacNulty P.J. 9, 71, 194 Magnani I. 30, 85, 164, 182, 192

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Marchionatti R. 34, 82, 159 Marcuzzo M.C. vi, 17 Marescotti A. 2, 40 Marshall A. 12, 22, 31, 43, 44, 48, 52, 61, 63, 67, 77, 79, 87, 94, 99, 105, 189, 191, 192, 195, 196, 198, 199 Martello T. 40, 144, 167, 183 Martelloni F. 116, 145, 149, 159 Martin S. vi, 1, 7, 16–20, 37, 48, 196, 198 Marx K. 20, 22, 39, 139, 159 Mason E.S. 16–19 Maurandi P. 45, 102 Mazzocchi G. 82 Mazzola U. 30, 164 McAfee R.P. 15 McLure M. vi, 30, 41, 149, 172, 190 Meacci F. 32, 200 Meese A. 7 Meisel H. 155 Menger C. 22, 52, 191 Menzel A. 174 Michelini L. vi, 31, 46, 49, 50, 59, 68, 76, 95, 124, 139, 140, 152, 161, 164, 170, 194 Mill J.S. 10, 12, 21, 24, 25, 49, 63, 85, 105, 106, 131, 136, 174, 191 Mills D.E. 1, 19 Minghetti M. 60 Misaki K. vi Missemer A. Missiroli M. 138 Modigliani F. 6, 19, 20, 29, 199 Monsalve F. vi Montesano A. 46, 47, 57, 64, 66, 67, 70, 75, 79, 86, 100, 101, 105–107, 177, 192 Montessori M. 130 Moore H.L. 12, 13, 50, 55, 74, 195 Morgan M. vi, 12, 14, 26–28, 82, 90, 119, 194 Morgenstern O. 32, 76 Mornati F. 60, 70, 139 Mosca G. 150, 151, 162 Motta M. 8 Mueller D.C. 120 Musgrave R.A. 87, 151

Mussolini B. 184 Myatt T. 198 Naldi N. vi Niehans J. 6, 22, 27 Nitti F.S. 189 Nocco A. vi Nti K.O. 20 Numa G. vi Orsini R. vi Papandreou A.G. 19 Parisi D. vi, 82 Park D. 61 Patten S.N. 194 Pavanelli G. 165, 195 Peacock A.T. 151 Peart S.J. 21 Peritz R.J.R. 7 Perrotta C. vi Pesciarelli E. vi Peterson S. 12–14, 119, 194 Petretto A. 33, 34, 37, 70, 76, 163 Placci C. 143 Pomini M. 46, 152 Porrini D. vi Posner R.A. 14, 16, 20 Prato G. 170 Puu T. 6 Ragni L. 32, 33, 36, 75, 76 Rainer J.A. 79 Ranchetti F. 41 Ratner J. 198 Ricardo D. 41, 46, 49, 50, 52, 90, 92, 93 Ricci U. 31, 52, 63, 86, 92, 176, 182 Robinson J. 6, 13, 17–19, 22, 23, 197, 198 Rogers J.H. 195 Roll E. 90 Roncaglia A. 38 Rosado Cubero A.I. vi, 15 Rothschild K.W. 19 Rothwell J. 187 Russo L. 190

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Name index

Salop G. 16 Salop S.C. 1, 8 Salvadori N. 21, 24, 38, 197 Samuels W.J. 41, 149 Santoni E. 190 Sartori G. 163 Sax E. 31, 51, 128 Schelling T.C. 147 Schlicht E. 105 Schmalensee R. 15 Schmidt T. vi Schnyder G. 188 Schumpeter J.A. 3, 6, 10, 12, 13, 19, 24, 25, 27, 28, 31, 32, 36, 39, 40, 46, 55, 59, 61, 65, 74, 76, 79, 86, 87, 92, 100, 123, 125, 130, 163, 167, 189, 190, 199 Schütz M. 79 Scialoja A. 40 Scitovsky T. 19, 62, 118 Screpanti E. 2 Scrimitore M. vi Seligman E.R.A. 191–193, 195 Sella E. 123, 169 Semmler W. 38 Senior N.W. 10, 50, 90 Sensales A. 49 Sensini G. 143, 172 Serao M. 130 Shanahan M. 165 Shapiro C. 8 Shepherd W.G. 16, 17, 20, 26, 27 Shoup C.S. 87 Shubik M. 20 Sidak J.G. 174 Sidgwick H. 39, 72, 107, 110, 152, 166 Siems M. 188 Signorino R. 21, 24, 38, 197 Silva F. 6, 16, 17, 82 Simon F. vi Simons H.C. 17–19, 188 Sitta P. 150 Smith A. 1, 10, 20, 21, 24, 25, 38, 128, 159, 167, 176 Somaini E. vi, 149, 163, 184 Spencer H. 33, 125, 167

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Sraffa P. 13, 17, 23, 29, 32, 38, 108, 152, 197, 199 Stackelberg H.F. 86 Stefani G. 150 Sternberg R.J. 187 Stigler G.J. 6, 7, 10–13, 15, 20–23, 25, 32, 36, 39, 43, 74, 96, 109, 163, 170, 174, 194 Stigliz J. 200 Sunna C. 33, 68, 125 Sylos Labini P. 12, 15, 19–22, 29, 32, 34, 36, 102, 197–199 Taussig F.W. 23, 109, 110, 193 Tedesco L. 171, 172 Teece D.J. 174 Teira D. vi Tiebout C.M. 98 Todde G. 40, 41 Trebing H.M. 22 Tricou F. 9 Triffin R. 86, 89 Turati, F. 137 Turgot R.-J. 41 Tusset G. vi, 41, 42, 44–46, 72, 75, 76, 136 Tynan N. 106 Utton M.A. 12, 22 Van Horn R. vi Vickers J. 79, 178, 197 Vinci F. 82, 119, 123, 148, 168 Virgilio I. 40 Vito F. 82 Von Thünen J.H. 27 Vromen J.J. 69 Wagner R.E. vi, 149 Wakatabe M. vi Walker F.A. 90 Walras L. 14, 31–33, 41, 43, 50, 53–55, 61, 62, 70, 74, 75, 78, 86, 87, 106, 112, 126, 127, 132, 167, 168, 189–193, 195 West E.G. 6 White H.G. Jr. 20

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Wicksell K. 12, 13, 53, 61, 193 Wicksteed P.H. 31, 54, 191, 193 Willig R.D. 113 Wilson W. 116, 143, 145, 159 Yagi K. vi Yarrow G. 178

Yturbe C. 163 Zamagni S. 2, 27 Zanni A. 64, 75, 92, 192 Zola E. 97 Zorli A. 164 Zupan M.A. 137

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