Fritz Machlup

One of Machlup’s most famous articles in industrial organization is his 1946 defense of the economist’s standard assumption that firms maximize profits. Economist Richard Lester had argued that businessmen do not know enough about their demand and cost conditions to maximize profits. Machlup agreed but maintained that the purpose of assuming profit maximization is not to predict everything a firm does, but instead to predict how it will react to changes in demand or in costs. For this purpose, argued Machlup, the assumption is appropriate. Machlup expanded on this argument in two later books, The Economics of Sellers’ Competition and The Political Economy of Monopoly.

Machlup’s 1949 book, The Basing-Point System, is said to have influenced President Harry S Truman’s decision to veto a bill that would have forced cement producers to charge the same price irrespective of their buyers’ locations. Machlup also wrote at length about the economics of the patent system.

Machlup studied economics at the University of Vienna in the 1920s under Ludwig von Mises and Friedrich Hayek. He wrote his doctoral dissertation under Mises on the gold-exchange standard. From 1922 to 1932 he worked in his family’s cardboard-manufacturing business, and his interest in and insights into the economics of industry are often attributed to his experience there. Machlup taught at the University of Buffalo from 1935 to 1947, moved to Johns Hopkins in 1947, and moved to Princeton in 1960. After retiring in 1971 he joined the faculty of New York University, where he was active until his death. Machlup was president of the American Economic Association in 1966.