The Economics of Welfare
By Arthur C. Pigou
WHEN a man sets out upon any course of inquiry, the object of his search may be either light or fruit—either knowledge for its own sake or knowledge for the sake of good things to which it leads. In various fields of study these two ideals play parts of varying importance. In the appeal made to our interest by nearly all the great modern sciences some stress is laid both upon the light-bearing and upon the fruit-bearing quality, but the proportions of the blend are different in different sciences. At one end of the scale stands the most general science of all, metaphysics, the science of reality. Of the student of that science it is, indeed, true that “he yet may bring some worthy thing for waiting souls to see”; but it must be light alone, it can hardly be fruit that he brings. Most nearly akin to the metaphysician is the student of the ultimate problems of physics. The corpuscular theory of matter is, hitherto, a bearer of light alone. Here, however, the other aspect is present in promise; for speculations about the structure of the atom may lead one day to the discovery of practical means for dissociating matter and for rendering available to human use the overwhelming resources of intra-atomic energy. In the science of biology the fruit-bearing aspect is more prominent. Recent studies upon heredity have, indeed, the highest theoretical interest; but no one can reflect upon that without at the same time reflecting upon the striking practical results to which they have already led in the culture of wheat, and upon the far-reaching, if hesitating, promise that they are beginning to offer for the better culture of mankind. In the sciences whose subject-matter is man as an individual there is the same variation of blending as in the natural sciences proper. In psychology the theoretic interest is dominant—particularly on that side of it which gives data to metaphysics; but psychology is also valued in some measure as a basis for the practical art of education. In human physiology, on the other hand, the theoretic interest, though present, is subordinate, and the science has long been valued mainly as a basis for the art of medicine. Last of all we come to those sciences that deal, not with individual men, but with groups of men; that body of infant sciences which some writers call sociology. Light on the laws that lie behind development in history, even light upon particular facts, has, in the opinion of many, high value for its own sake. But there will, I think, be general agreement that in the sciences of human society, be their appeal as bearers of light never so high, it is the promise of fruit and not of light that chiefly merits our regard. There is a celebrated, if somewhat too strenuous, passage in Macaulay’s Essay on History: “No past event has any intrinsic importance. The knowledge of it is valuable, only as it leads us to form just calculations with regard to the future. A history which does not serve this purpose, though it may be filled with battles, treaties and commotions, is as useless as the series of turnpike tickets collected by Sir Matthew Mite.” That paradox is partly true. If it were not for the hope that a scientific study of men’s social actions may lead, not necessarily directly or immediately, but at some time and in some way, to practical results in social improvement, not a few students of these actions would regard the time devoted to their study as time misspent. That is true of all social sciences, but especially true of economics. For economics “is a study of mankind in the ordinary business of life”; and it is not in the ordinary business of life that mankind is most interesting or inspiring. One who desired knowledge of man apart from the fruits of knowledge would seek it in the history of religious enthusiasm, of martyrdom, or of love; he would not seek it in the market-place. When we elect to watch the play of human motives that are ordinary—that are sometimes mean and dismal and ignoble—our impulse is not the philosopher’s impulse, knowledge for the sake of knowledge, but rather the physiologist’s, knowledge for the healing that knowledge may help to bring. Wonder, Carlyle declared, is the beginning of philosophy. It is not wonder, but rather the social enthusiasm which revolts from the sordidness of mean streets and the joylessness of withered lives, that is the beginning of economic science. Here, if in no other field, Comte’s great phrase holds good: “It is for the heart to suggest our problems; it is for the intellect to solve them…. The only position for which the intellect is primarily adapted is to be the servant of the social sympathies.”… [From the text]
First Pub. Date
1920
Publisher
London: Macmillan and Co.
Pub. Date
1932
Comments
4th edition.
Copyright
The text of this edition is copyright © 1932. This book is available through Transaction Publishers, Inc. Direct all requests for permissions and copyrights to Transaction Publishers, Inc.
- Preface to the Third Edition
- Note to the Fourth Edition
- Part I, Chapter 1
- Part I, Chapter 2
- Part I, Chapter 3
- Part I, Chapter 4
- Part I, Chapter 5
- Part I, Chapter 6
- Part I, Chapter 7
- Part I, Chapter 8
- Part I, Chapter 9
- Part I, Chapter 10
- Part I, Chapter 11
- Part II, Chapter 1
- Part II, Chapter 2
- Part II, Chapter 3
- Part II, Chapter 4
- Part II, Chapter 5
- Part II, Chapter 6
- Part II, Chapter 7
- Part II, Chapter 8
- Part II, Chapter 9
- Part II, Chapter 10
- Part II, Chapter 11
- Part II, Chapter 12
- Part II, Chapter 13
- Part II, Chapter 14
- Part II, Chapter 15
- Part II, Chapter 16
- Part II, Chapter 17
- Part II, Chapter 18
- Part II, Chapter 19
- Part II, Chapter 20
- Part II, Chapter 21
- Part II, Chapter 22
- Part III, Chapter 1
- Part III, Chapter 2
- Part III, Chapter 3
- Part III, Chapter 4
- Part III, Chapter 5
- Part III, Chapter 6
- Part III, Chapter 7
- Part III, Chapter 8
- Part III, Chapter 9
- Part III, Chapter 10
- Part III, Chapter 11
- Part III, Chapter 12
- Part III, Chapter 13
- Part III, Chapter 14
- Part III, Chapter 15
- Part III, Chapter 16
- Part III, Chapter 17
- Part III, Chapter 18
- Part III, Chapter 19
- Part III, Chapter 20
- Part IV, Chapter 1
- Part IV, Chapter 2
- Part IV, Chapter 3
- Part IV, Chapter 4
- Part IV, Chapter 5
- Part IV, Chapter 6
- Part IV, Chapter 7
- Part IV, Chapter 8
- Part IV, Chapter 9
- Part IV, Chapter 10
- Part IV, Chapter 11
- Part IV, Chapter 12
- Part IV, Chapter 13
- Appendix I
- Appendix II
- Appendix III
Part II, Chapter XV
MONOPOLISTIC COMPETITION
§ 1. A CONDITION of monopolistic competition exists when each of two or more sellers supplies a considerable part of the market with which they are connected. In these circumstances it can be shown that there is no tendency for them to devote to the industry in which they are employed that amount of resources which I have called the ideal investment, namely, that amount which will make the value of the marginal social net product there equal to the central value of marginal social net products in general.
*63 A demonstration of this proposition, possible differences between social and private net product of the type examined in Chapter IX. being ignored, can be given in ordinary language as follows.
§ 2. Let us first ignore all forms of action which aim, by sacrifice in the present, at obtaining an advantage against rivals in the future. We have, then, to do with the pure problem of “multiple monopoly.” This problem assumes its simplest form when two monopolists only are supposed to be present; and, in this form, it has been much discussed among mathematical economists. Cournot decided, as is well known, that the resources devoted to production under duopoly are a determinate quantity, lying somewhere between the quantities that would have been so devoted under simple competition and under simple monopoly respectively. Edgeworth, on the other hand, in an elaborate critique, maintained that the quantity is indeterminate. In more recent discussions there is apparent some measure of return towards Cournot. If, it is held, each of two monopolists, in regulating his action,
assumes that the other will not alter his
output in consequence of what he does, the quantity of resources devoted to production by the two together is determinate at the amount calculated by Cournot. If each monopolist assumes that the other will not alter his
price in consequence of what he does, then, in a perfect market, the quantity of resources devoted to production by the two together is determinate at the amount proper to simple competition; in an imperfect market—that is to say, a market in which some of the buyers have a
preference for one monopolist over the other—this quantity is determinate at an amount less than that proper to simple competition, and falling short of it more largely the more imperfect the market is.
*64 More generally, if each seller makes and holds to
any definite assumption about the conduct of the other, it would seem that the quantity of resources devoted to production by both together is determinate at some amount not greater than that proper to simple competition, and not less, in a perfect market than the Cournot amount, in an imperfect market than the amount proper to simple monopoly. In real life, however, it is, I suggest, very unlikely that either seller will hold any consistent view about his rival’s state of mind. His judgment will be variable and uncertain. As in a game of chess each player will act on some forecast of the other’s reply; but the forecast he acts on may, according to his mood and his reading of that opponent’s psychology, be one thing or another thing. Hence, as it seems to me, we may properly say that the aggregate amount of resources to be devoted to production is indeterminate in the sense that from a mere knowledge of the demand conditions and of the cost conditions affecting the two monopolists—whether the cost conditions are independent or inter-linked—we cannot foretell what it will be. The range of indeterminateness extends over a distance which is larger in a perfect than it is in an imperfect market, and in either sort of market is diminished as the number of monopolists is increased above two. In no case can the aggregate investment be greater than the quantity proper to simple competition. We have learned, however, from Chapter XI. that, except in industries in which imported
materials subject to increasing supply price are employed, this last quantity cannot be greater than the ideal investment. It follows that, except in these industries, the investment which is forthcoming under multiple monopoly cannot be greater than the ideal investment. It may, however, easily be, and, in view of what has been said, in general seems likely to be, substantially less than this.
§ 3. Hitherto we have specifically excluded the effects of price warfare designed to secure future gains by driving a rival from the field or exacting favourable terms of agreement from him. The indeterminateness just described exists under monopolistic competition, even though neither of the monopolists “hopes to ruin the other by cut-throat prices.”
*65 In many instances of monopolistic competition, however, price warfare—or cut-throat competition—does, in fact, take place. It consists in the practice of selling at a loss in order to inflict injury on a rival. It must be distinguished carefully from the practice of reducing prices down to, or towards, prime cost, which frequently occurs in periods of depression. This latter practice may involve large reductions of price below the “normal,” and it is certain to do this when demand is variable and prime cost is small relatively to supplementary cost; but it does not involve “selling at a loss” in the strict sense. Cut-throat competition proper occurs only when the sale price of any quantity of commodity stands below the short-period supply price of that quantity. When it occurs, the range of possible aggregate investment no longer has, as an upper limit, the quantity proper to simple competition, but is liable to exceed this quantity to an extent determined by the opinion entertained by each of the combatants about the staying power of his opponent and by other strategical considerations. There is, obviously, no tendency for it to approximate to the ideal investment; but we can no longer say, as we could when cut-throat competition was ignored, that it is likely to be less than the ideal investment.
ante, pp. 223-4.
Economic Journal, March 1929.
Giornale degli economisti, November 1897, p. 405.
Part II, Chapter XVI