The Antitrust Movement and the Rise of Industrial Organization

The modern science of industrial organization grew out of a debate among lawyers and economists in the waning years of the nineteenth century. For Americans, the emergent business trust provoked a dialogue about how the law should respond. Many of the formal theories of industrial organization, such as the ruinous competition doctrine, the potential competition doctrine, and the post-classical concern about vertical integration, were actually borrowed from the law. Anglo-American and European economists disputed the proper domain of theory and description in economic analysis. The British approach was exemplified Alfred and Mary Paley Marshall\u27s Economics of Industry, published in 1881, which discussed such phenomena as economies of scale, multiplant economies, and plant specialization with scant mention of a single particular industry. Alfred Marshall took an even more theoretical approach to industrial organization in his 1890 Principles of Economics. By contrast, German economics of the same period was dominated by the historical school, which had survived a bitter methodological debate between the German and Austrian schools of political economy. The Austrians urged a theoretical model similar to English neoclassical price theory, while the Germans advocated a more empirical case-study approach. The historical method received a boost in the United States in 1876 when a prominent railroad regulator, Charles Francis Adams, Jr., endorsed it and criticized British political economy for its naivete about business firm behavior. In the 1870s and 1880s many American students who would become the prominent economists of the next generation selected German rather than English universities for their graduate education. Among these students were F.W. Taussig, Frank Fetter, John Bates Clark, Richard T. Ely, Simon Patten, and Edwin R. A. Seligman. Although the founders of the American Economic Association (AEA), formed in 1885, were careful to qualify their enthusiasm for the German historical methodology, part of the AEA\u27s agenda was to include more case-study analysis. The historical method was later critiqued by a rising group of positivist economists, particularly at the University of Chicago. The positivists tried to add rigor to their discipline by identifying economic science with the ability to predict. Frank Knight argued in The Limitations of Scientific Method in Economics that detailed historical inquiries add little to the ability to predict firm behavior. But the most famous expression of the new classicism in industrial organization theory was Ronald Coase\u27s essay on The Nature of the Firm