chapter  3
19 Pages


In seeking to explain how economic activities are co-ordinated, it is upon the role of market transactions that economists have overwhelming concentrated. Their functioning was described famously by Adam Smith in terms of an 'invisible hand ', and modern general equilibrium theory is seen, by some, as the culmination of his line of thinking. I do not myself see it that way. Smith took account of the pervasive existence of increasing returns to scale, and envisaged free competition as increasing the wealth of nations by engendering continuous structural change. His theory of the working of markets is also therefore a theory of endogenous economic growth.2 All this was largely lost sight of in the development of the more formalised models that now hold the stage. And this may account for the neglect of the process of continuous morphological change which I shall later discuss in this article. 3 It seems to me significant that both Smith and Marshall are concerned to explain the advantages of a regime of economic freedom, rather than of competition narrowly conceived; freedom enables businesses to cooperate as well as to compete, to merge or to separate, to take on activities or to give them up. Smith and Marshall allowed, in other words, for the continuous reshaping of industry, the process of constant mutation and selection that takes place under capitalism.