Fritz Machlup, “The Theory of Competitive Price. George J. Stigler” (1943)

Fritz Machlup’s scholarly book review assesses George J. Stigler’s The Theory of Competitive Price as a promising advanced textbook whose analytical economy is exceptional, but whose organization and technical presentation require scrutiny. Reviewing the 1942 preliminary edition, Machlup distinguishes its achievement from the fuller textbook still promised. The published installment covers methodology and perfect competition; imperfect competition, capital theory, and other subjects await a sequel. His central judgment is strongly favorable: Stigler supplies a modern, systematic teaching instrument that existing alternatives do not quite provide. Yet the review makes that endorsement conditional upon corrections and supplementary instruction, especially where technical exposition obscures economic significance.

Machlup first reconstructs the book’s architecture. Its introductory part comprises four chapters on methodology, basic concepts, the functions of the economic system, and analytical tools. The second part proceeds through two chapters on demand and two on costs and returns before treating product prices and the prices of productive services. This sequence gives students the conceptual equipment needed for competitive price analysis. The principal organizational question, however, is whether competition should be taught separately from alternative market structures.

The organization of the book is sound, though it has, of course, its shortcomings.

That qualified approval frames a substantive disagreement about pedagogy. Stigler defends beginning with competition because it is a relatively useful and realistic single assumption, permits piecemeal solutions, prepares more realistic analysis, and supplies a standard of economic efficiency. Machlup instead emphasizes what students need in order to understand an assumption’s purpose. Without comparison with monopoly and imperfect competition, they may fail to grasp what pure and perfect competition exclude, or reject the analysis as unrealistically abstract. Teaching the alternatives together can make the usefulness of competitive assumptions more apparent.

The disagreement also concerns the order in which general and special cases should be introduced. Beginning with competition requires teaching the firm’s equilibrium through equality between marginal cost and selling price, then returning to it through marginal cost and marginal revenue. Machlup prefers the latter formulation first because it includes the competitive condition as a special case. Nevertheless, he refuses to elevate that preference into a decisive objection: neither teaching strategy has overwhelming advantages. The review thus treats textbook organization as a reasoned pedagogical choice rather than a test of doctrinal correctness.

Its longest section supplies corrections for instructors who may use the preliminary edition before revision. Machlup identifies inconsistencies in terminology, graphical notation, definitions, and the explanation of analytical relationships. Statics and stationariness are confused; symbols shift between points and quantities; the presentation of arc elasticity is inadequate. In consumer theory, he questions the explanation of the marginal rate of substitution, inconsistent meanings of the flatness of indifference curves, and the attempted derivation of demand elasticity from those curves. Other criticisms concern income elasticity, the distinction between actual selling opportunities and sellers’ conjectures, and a definition of markets that excludes imperfect markets with discriminatory prices.

These objections extend beyond editorial tidiness. In production theory, Machlup distinguishes marginal from average returns and rejects treating the spreading of overhead as increasing returns. He finds the production function insufficiently explained and some opportunity-cost reasoning too difficult for undergraduates in its existing formulation. Missing data in exercises, inconsistent graph conventions, and misleading accounts of adjustment further threaten the student’s ability to follow an argument. Throughout, his concern is whether definitions and illustrations preserve the distinctions on which the analysis depends.

I must add one general defect of the book: engrossed in the explanation of various technical points, the author often fails to make clear what their significance for actual problems might be. The instructor will have to add his comments in this respect if the student is not to lose perspective.

This criticism gathers the detailed corrections into a broader teaching principle. Technical mastery should not detach students from the problems that make economic analysis worthwhile. Stigler’s compression therefore imposes responsibilities on instructors: they must supply context as well as correct slips. Machlup’s endorsement is of a textbook used intelligently, not of exposition that can replace teaching.

This list of defects is long, but a list of special commendations, if such were prepared, would be much longer.

The review’s praise is deliberately emphatic after its extended corrective section. Machlup values Stigler’s ability to avoid unnecessary words and express essentials with unusual force. Concision and clarity make theory easier to learn without making it easy. That distinction leads into the closing discussion of Joseph Schumpeter’s suggestion that the book belongs at an elementary introductory level, since its intellectual demands fall below those placed on comparable physics students. Machlup answers by shifting attention from subject difficulty to admission and preparation: physics students are selected through mathematical prerequisites, whereas economics commonly admits students without equivalent requirements. Under those conditions, Stigler’s text remains advanced.

Advanced economic theory must definitely become a required course in the undergraduate curriculum in economics.

The conclusion turns a dispute about textbook classification into a curricular argument. Advanced status does not justify reserving the material for graduate students. Machlup specifically insists that economics graduates should master Stigler’s chapter on fundamental quantitative relationships. The review’s lasting relevance lies in this conjunction of analytical precision, pedagogical context, and undergraduate ambition: demanding theory should be taught broadly, but with careful definitions, intelligible assumptions, and an explicit connection to economic problems.