An Introduction to Industrial Economics

P.J. Devine, N. Lee, R.M. Jones, W.J. Tyson

• Publisher: Routledge
• Year: 2018
• Print ISBN:
  9780815372967
• eBook ISBN:
  9781351244619
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

This updated and expanded 1985 edition of the classic 1974 work covers deindustrialisation, industrial and competition policy, the public enterprise sector, regional and urban policy, and privatisation, as well as focussing on the firm and the industrial sector in all its facets. It remains the key work on industrial economics.

1 Scope and Method of Industrial Economics

1.1 INTRODUCTION

Although the study of industry by economists is as old as the study of economics itself,¹ the term ‘industrial economics’ is of quite recent origin. It appears to have crept into the literature in the early 1950s via the writings of Andrews.² Prior to this the economic analysis of industry was not recognised as a distinctive branch of economics in many quarters, and where it was, it was given a variety of different names, ‘economics of industry’, ‘industry and trade’, ‘business economics’, ‘commerce’ and ‘industrial organisation’ being the ones most frequently encountered. ‘Industrial organisation’ is still a commonly used term in the United States.

The absence of any generally accepted name for this area of economics is indicative of a lack of consensus not only as to the range of the subject but also as to its objectives and methodology. The editorial introduction to the American Economic Association’s Readings in Industrial Organisation and Public Policy, published in 1958, indicates that at that time:

… the field of industrial organisation and public policy has neither a well-defined content nor precise boundaries: Some [graduate] courses emphasize the organisation and characteristics of industrial markets in general and of some markets in particular. Others are designed to show the relationship between industrial markets and price theory and to modify and extend that theory in the light of the facts of industrial organisation. Still others are concerned primarily with public policy issues, with little attention given to an analysis of market organisation or price theory.³

A survey some ten years later of researchers and teachers in this field has drawn very similar conclusions : ‘The diversity [of replies] supports the view that industrial organisation is not a clearly defined, homogeneous entity … The field continues to be broadly eclectic and evolving.’⁴

The reasons for this absence of a consensus lie in the historical development of the economic analysis of industrial and business behaviour and cannot be properly understood without reference to it. This is the subject of section 1.2. Arising from this historical account it is possible to identify a number of areas of current controversy in the subject of industrial economics, principally related to the objectives, units, of analysis and methods of the subject. These are discussed in sections 1.3–1.5. In section 1.5 a basis is outlined for reaching a consensus on the objectives, scope and methodology of industrial economics that permits its closer integration into the mainstream of economic analysis. A short review of data sources, their methods of collection and their use in industrial economics is contained in an appendix to this chapter.

1.2 ANTECEDENTS OF INDUSTRIAL ECONOMICS

Central to the explanation of the historical development of the economic analysis of industrial activity is the methodological division that existed between the mainstreams of English economic thought and the Historical and Institutional Schools during the late nineteenth and early twentieth centuries.⁵ The former is evident in the writings of J. S. Mill, Jevons and the mathematical economists at the turn of the century, finding its clearest exposition in Robbins’s An Essay on the Nature and Significance of Economic Science.⁶ It has been characterised by the acceptance of certain behavioural assumptions about individual consumers and firms, which were believed to be of widespread applicability, economic analysis taking the form of searching out the logical implications of these behaviour patterns when confronted by resource scarcity. This form of analysis readily lent itself to generalised theorising and to the use of mathematical tools in relatively long and complex chains of reasoning. It also necessarily involved a high degree of abstraction from the events of the real world to enable this degree of generalisation to be achieved.

The Historical School, which initially developed in Germany, questioned the assumed universality of the behavioural assumptions and the mode of operation of economic forces that was central to the economic analysis of the English School. Rather, its members argued, these differed significantly from one country to another and from one period of time to another because they were conditioned by the institutions that existed within a country at any given point in time.

Three important inferences for economic analysis were derived from this basic institutional premise:

(1) Economic analysis should be based upon empirical investigations designed to establish the nature of the existing institutional framework and the manner in which it conditions the operation of economic forces. In this sense theory and analysis are not absolute or universal but relative to the institutional framework through which they operate.

(2) Since institutions evolve over a period of time they are conditioned by environments that may no longer exist. Therefore, a proper understanding of their nature and the way in which they may subsequently alter involves a study of their historical development.

(3) Institutions should not be treated as given in economic analysis, i.e. as unchanging and unchangeable constraints; rather they should be treated as capable of modification where in their existing forms they hamper the operation of economic forces in achieving desired objectives.

Not all economists within the Historical School placed equal emphasis on each of these three inferences. For some the first of these three points was the most important, and when pushed to its logical limit this became a methodological plea for inductive empiricism. The second inference led to an emphasis upon the study of the operation of economic forces through economic history. In certain cases this developed further into an investigation for lessons or ‘laws’ in history concerning the evolution of institutions, which could then be regarded as fundamental forces operating on the nature and form of economic activity. The third inference introduced a new radical tone into economic analysis.

During the 1880s a number of German economists emigrated to the United States. Prior to that date American economics had mainly fallen under the influence of the English tradition; but thereafter, especially through the Institutional School, the influence of the Historical School became quite strong. Its main protagonists were Wesley Mitchell, Thorstein Veblen and, later, J. R. Commons. The movement was instrumental in the establishment of the American Economic Association and exercised a significant influence on its early history, especially in its advocacy of institutional change.^{7, 8} The influence of this type of thinking subsequently reached Britain via both Germany and the United States, but its impact was considerably less than in those two countries. However, in one area of economics its influence was significant – the area subsequently called ‘industrial economics’.

The methodological differences referred to above were taking place during the period while Marshall was at Cambridge. In tracing their influence on the work of English economists it is natural to start with their influence on his writings. The view has been expressed that Marshall’s contribution to economic analysis was to reconcile divergent schools of thought. While limiting his contribution to that of a synthesiser is clearly a disservice to him, nonetheless a distinctive feature of his writings was his ability to draw upon and integrate methods of economic analysis that were apparently in open conflict with each other.⁹ This is true both of his Principles of Economics¹⁰ and even more so of his Industry and Trade,⁶⁵ which may be regarded as one of the early textbooks in industrial economics. In particular his ability to acknowledge the contributions of the Historical School and the institutionalists and to graft these on to the English tradition is very apparent in the following extracts from his writings:

For the sake of simplicity of argument, Ricardo and his followers often spoke as though they regarded man as a constant quality, and they never gave themselves enough trouble to study his variations … They were aware that the inhabitants of other countries had peculiarities of their own that deserved study but they seemed to regard such differences as superficial and sure to be removed, as soon as other nations had got to know that better way which Englishmen were ready to teach them … But their most vital fault was that they did not see how liable to change are the habits and institutions of industry.¹⁰

The acceptance of this view led in turn to a considerable emphasis on empirical studies:

… though no one life will reach out to a study in detail of the tactics of every fight which man has waged with his economic difficulties; yet no study of the broad problems of economic strategy is likely to be worth much unless it is combined with an intimate knowledge of the tactics as well as the strategy of man’s struggles against his difficulties in some particular age and country … the direct and formal study of facts, perhaps mainly those of his own age, will much exceed the study of mere analysis and ‘theory’, in its demands on the time of any serious economist.¹¹

Marshall, however, was not an indiscriminate empiricist who believed in collecting factual information for its own sake. His methods provided for the interplay between induction and deduction, the one complementing and reinforcing the other:

Induction, aided by analysis and deduction, brings together appropriate classes of facts, arranges them, analyses them and infers from them general statements or laws. Then for a while deduction plays the chief role: it brings some of these generalisations into association with one another, works from them tentatively to new and broader generalisations or laws and then calls on induction again to do the main share of the work in collecting, sifting and arranging these facts so as to test and ‘verify’ the new law.¹²

While Marshall in his own work integrated the methods of analysis originating from divergent schools of thought, this was not equally true of many of his contemporaries or successors. The most important illustration of this has been the development of microeconomic theory within the received English tradition separate from, and often in conflict with, industrial economics with its strongly institutional antecedents. The reasons for this separate development are not fully known, but two possible explanations merit consideration apart from the obvious divisive influence of doctrinaire adherence to particular schools of economic thinking.

The first explanation is that the synthesised method of study outlined by Marshall demands a wide range of different kinds of skill that may not be easily mastered by one person. This point has been emphasised by Jevons¹³ and more recently by Koopmans:

The task of linking concepts with observations demands a great deal of detailed knowledge of the realities of economic life as well as of processes of measurement. On the other hand the reasoning from postulates to conclusions, and the appraisal of the postulates with regard to their suitability as a basis for reasoning, increasingly demands logical and mathematical skills not often found united in the persons most suited for the first category of tasks. The testing of conclusions, besides requiring the skills involved in aligning concepts and phenomena, also depends in many cases on the handling of subtle procedures of statistical inference.¹⁴

One ‘solution’ to this problem is to seek refuge in the division of labour, and this was certainly accepted by Jevons, who advocated the breakup of the science into separate branches or even separate sciences. The practice of specialisation, however, has its disadvantages, and these are most pronounced, as we shall see, where there is no effective provision for the co-ordination of the specialist activities and for sufficient interplay between them.

A second ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Preface to the First Edition
• Preface to the Third Edition
• 1 SCOPE AND METHOD OF INDUSTRIAL ECONOMICS N. Lee
• 2 INDUSTRIAL AND MARKET STRUCTURE N. Lee (sections 2.1–2.6); R. M. Jones and N. Lee (sections 2.7–2.12)
• 3 THE FIRM P. J. Devine
• 4 CORPORATE GROWTH P. J. Devine
• 5 DIVERSIFICATION, MERGER AND INNOVATION P. J. Devine
• 6 PRICING AND ADVERTISING N. Lee
• 7 THE INVESTMENT DECISION R. M. Jones
• 8 PERFORMANCE MEASUREMENT N. Lee
• 9 STATE INTERVENTION IN THE PRIVATE SECTOR P. J. Devine
• 10 GOVERNMENT RELATIONS WITH THE PUBLIC INDUSTRIAL SECTOR W.J. Tyson
• 11 GOVERNMENT POLICY AND THE LOCATION OF INDUSTRY N. Lée
• 12 GOVERNMENT POLICY SINCE P.J.Devine, N. Lee and W.J. Tyson
• Index