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Oligopoly and Tacit Collusion at Harvard (1933-1952)

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Oligopoly and Tacit Collusion at Harvard (1933-1952) 23rd Annual Conference of the European Society for the History of Economic Thought (ESHET) Banks, Money and Finance in the History of Economic Thought Lille, France Oligopoly and tacit collusion at Harvard (1933-1952): A tool of Industrial Organization to reappraise American Capitalism Alexandre CHIRAT1, Thibault GUICHERD2 Abstract: This article comes back on the development of industrial organization in Harvard. More specifically, it aims at understanding the process of the emergence of the so-called “Harvard school” which is often presented as a “spontaneous generation” of authors. Indeed, except for the place (Harvard University) and the time period (from the 1930s to the 1950s), very little has been said about a potential research agenda or a set of common and identifiable tools and concepts. This article identifies a specific subject of study that seems to unify all these authors: the development of the theory of tacit collusion in oligopoly. This latter theory was developed in 1933 by Edward Chamberlin in the scope of his theory of monopolistic competition and was gradually taken up in several contributions from the 1930s and early 1940s, all of which authors (Mason, Galbraith, Bain, de Chazeau, Triffin, Kaysen, Schumpeter) were directly linked to Harvard during the publication or the writing of their work. The creation of the NRA in 1934 strengthens interest in the phenomenon. The possibility of tacit collusion in oligopoly then allows the authors to better grasp competitive mechanisms and obvious price rigidity. Simultaneously, these authors encountered a range of theoretical problems (such as the differentiated oligopoly, the notion of large group, the meaning of the concept of price rigidity, the hypothesis of rationality or behavior to be retained) that need to be solved and which guide the research of this community. The analysis of tacit collusion in oligopoly then enters into debates among economists about the “basing point system”. This pricing method was at the time used in the iron, steel and cement industries and led the authors to tackle questions about the effectiveness of existing anti-trust laws. Can this type of price- setting mechanism be considered truly competitive when it is an oligopoly-like situation where prices are rigid and differentiated? The development of tools for the identification of these oligopolies translates into a set of contributions focusing on strategic behavior, market typologies or the use of price administration. It leads some authors to reappraise the nature of the competition and the foundations of American capitalism. Keywords: oligopoly, tacit collusion, strategic behavior, Industrial Organization, American Capitalism, Harvard 1 Ph. D Student in Economics (Université Lumière-Lyon 2, France), TRIANGLE. Mail : [email protected] 2 Doctor in Economics (Université Lumière-Lyon 2, France), TRIANGLE. Mail : [email protected] 1 0. Introduction The Harvard Department of Economics of the 1930s is generally recognized as one of the main centers that fosters the theoretical innovations of this so-called period of “High Theory” (Shackle 1967). On one hand, Harvard is the Ellis Island of the Keynesian revolution3. On the other, it is the birthplace of both monopolistic competition theory and the emerging field of Industrial Organization (IO). The spreading and reshaping of Keynes’ ideas through America has drawn much attention, whereas the field of IO has been neglected regarding its impact on both economic analysis and policy prescriptions. Yet it has even governed some broader reflexions on the very nature of the American capitalism that echoes the spirit of traditional political economy. The literature on the birth of IO at Harvard is obviously far from being inexistent. For instance, Jean Tirole (1988) mentioned the “Harvard Tradition” and assimilated with to the “structure-conduct-performance” paradigm developed by Joe Bain4. Richard Posner (1978) mentions a “Harvard School on antitrust policy” which is defined through its post-war opposition to the Chicago School embodied by George Stigler. The existence of such “Harvard school” is taken for granted. Historians of economic thought have looked for its origin5. Emphasis has been put on the role played by the two Eds - Chamberlin and Mason. Harvard’s tradition of case studies, illustrated by William Ripley’s course on corporations, and it is put forward to explain the empirical stance of the subdiscipline. This literature also traces back the roots of IO to the work of first institutionalist economists (R. Ely, J. Commons, T. Veblen) and their successors of the interwar period (J. M. Clark, W. Hamilton, W. Ripley)6. In a recent paper on “American economists” such as A. Berle, A. Burns, E. Chamberlin, J. M. Clark and G. Means who “sought to explain the Great Depression as a failure of competition”, Roger Backhouse (2015) states that the links between this literature and the “Harvard school of industrial economics” is “easy to trace”7. However, this story has not been written yet since the demonstration of the existence of the Harvard school in IO is always out of scope. 3 Hansen, Harris and Samuelson generally play the prominent role in these stories. We could also add the impact of two young Canadians economists, Robert Bryce, who followed J. M. Keynes course at Cambridge (UK) in 1934, and Lorie Tarshis. On the Keynesian revolution at Harvard, see Galbraith (1965, 1981), Samuelson (1988), Tobin (1988), Colander and Landreth (1999), Backhouse (2017). 4 Tirole (1988, 1-4) 5 See Arena (1991), Phillips and Stevenson (1974), Grether (1970). 6 Phillips and Stevenson (1974), Rutherford (2011). 7 Backhouse (2015, 121). 2 In fact, the aforementioned papers often convey a vision in terms of “spontaneous generation” of IO at Harvard; in this respect we consider them as unsatisfactory8. It consists in a posteriori agglomeration of actors from the similarities of their research thematic, but without giving any institutional and historical reality on the way these actors have interacted. This paper aims at providing the missing story of the birth of Industrial Organization at Harvard and the diverse paths of its development thank to the identification of a research community in and around Harvard. The task is not as easy as suggested by Backhouse. During the 1930s, the Harvard Department of Economics is a reflection of the interwar pluralism in American economics9. Far from being monolithic, it enters into an important renewal stage of its members. Three former Ph.D students successfully defended their Ph.D thesis – Seymour Harris (1923), Edward Mason (1923) and Edward Chamberlin (1927). Recognized American economists – as John D. Black (1927) in the field of agricultural economics, Sumner Slichter (1930) in labor economics, Alvin Hansen (1937) in business cycle - and prominent European immigrants - such as Leontief (1931), Schumpeter (1932) and Haberler (1936) - also join the department. In the mid-1930s, Alan Sweezy and John Kenneth Galbraith came as instructors and many economists are passing their Ph.D grades: Joe Bain (1940), John Cassels (1934), Gardiner Means (1933), Richard Musgrave (1937), Paul Samuelson (1940), Paul Sweezy (1937), Robert Triffin (1938), Donald Wallace (1931), to mention just a few. These names testify the diversity of epistemological approaches and topical interests among the members of the Department. One may still wonder who then participate to the so-called Harvard Tradition in Industrial Organization (HTIO). Labels school or tradition seem inappropriate since Mason and Bain are the only two figures systematically evoked in the HTIO. Moreover, it does not enable us to grasp the specific role played by the Harvard Department of Economics. This latter can be considered as a research community in itself. Its members share courses, attend seminars, collaborate on research projects, meet up on administrative issues, edit academic review and supervise students’ researches. Still those links do not make a tradition. Therefore, without an emphasis on a unifying criterion, it is impossible to understand the reality behind the label of a HTIO. Here, we defend the thesis that the identification of a specific theoretical notion enables us to delimit a group of actors who participate to its establishment from the 1930s to the 1950s. This unifying concept is the possibility of tacit collusion in oligopoly. 8 See also, for instance, Stephen Martin book Industrial Organization in context (2010, 16) 9 Morgan and Rutherford (1998). 3 The original protagonist of our narrative is the “rising star” of Harvard, Edward Hastings Chamberlin10. The publication of his Ph.D dissertation (1927), The Theory of Monopolistic Competition (1933), provides the first economic analysis of oligopoly11. This concept is revolutionary in two respects. First, it allows economist to think in terms of a continuum of competitive situations between the two ideal cases of pure competition and pure monopoly. Second, Chamberlin analyzes the behavior of firms in oligopolistic market by making new assumptions regarding their strategic interactions. The notion of tacit collusion in oligopoly hinges on the assumption that firms have a “recognition of their mutual independence” (Chamberlin 1933, 46-47). Thus, competition not only refers to market structure but also to strategic behaviors of the competitors. One immediately understands why this concept is directly linked to the birth of Industrial Organization. It has been used to build the first
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