Monopolistic Competition Theory: Origins, Results and Implications

In the 1920s, when the world economy began to show signs of crisis, a number of leading economists questioned the ability of a free-market economy to ensure automatic stability. Economists such as Piero Sraffa, Joan Robinson and Edward Chamberlin turned instead to monopolistic competition theory in order to find explanations for the crisis as well as rationales for potential remedies such as cartelization and heightened state intervention. During the 1930s, monopolistic competition theory displaced orthodox theory and became the generally accepted foundation of microeconomic reasoning. Economist Jan Keppler traces the development of monopolistic competition theory within the context of the political, economic and historical development of its time. He argues that the emergence of the theory was linked to politically motivated criticisms of liberal capitalism. Whether in the form of corporatist critiques in Germany and Italy or social reform movements in Great Britain and New Deal America, it provided economic arguments for market intervention and income redistribution. Following a stormy debate brought on by the attacks from the Chicago School economists George Stigler and Milton Friedman, monopolistic competitions theory was abandoned in favour of perfect competition theory, which lacked the realism of monopolistic competition theory, yet was compatible with the new demands of mathematical tractability. Yet recently, Keppler points out, the theory has gained new credibility as an explanation for the workings of the economy.

Review :
"A thoughtful and stimulating work, very useful for tracing many strands in the fabric of microeconomic theory."--'Choice' "Every economist in general and every historian of economic thought in particular can benefit immensely from Keppler's spectacular summary of and valuable insights into this profound theory."--'Journal of Economic Literature'