FEW WOULD DISAGREE that Adam Smith's invisible-hand theorem is the heart of the economist's Weltanschauung. Ask whether trade barriers should be lowered, the spread of multinational corporations restrained, oil prices deregulated, cartels dissolved, or more fundamentally whether a market-based capitalist system is economically superior to a state-run socialist system, and economists almost certainly will begin to answer the question by trying to apply the theorem. Every student knows that the theorem depends on the assumption of atomistic competition, which in turn assumes that the system is decentralized and that no competitor is large relatively to others. There is another crucial assumption, however, that is often ignored and usually underemphasized, namely that all competition is price competition. In reality one of the most distinctive features of capitalism-one that is most often raised in lay discussions of its merits and demerits-is the prevalence of other forms of competition, such as competition in research, development, and advertising; competition to obtain and hold monopoly; and competition for corporate growth. These various forms of competition, we shall aim to show, are not clearly analogous with the theory of price competition: more non-price competition, rather than less, is not necessarily Pareto optimal. Self-evidently, the production side of a market economy is decentralized only to a limited degree, i.e., to the level of a decision-making unit composed of more than one human. Such a unit-playing Neuron to the Invisible Hand-is typically called a firm. It is in fact a team. Rather than remaining small, firms are in practice composed of any number of individuals from a handful on to half a million. Some

In nursing this essay through several drafts, I have benefited greatly from suggestions by Edward Denison, Robert Evenson, Zvi Griliches, Richard Levin, John Kendrick, Edwin Mansfield, and Richard Murnane. Moses Abramovitz has been a source ofencouragement and good, substantive editorial advice, for which I am most grateful. The heterodox views are my own, although I share many of them with Sidney Winter.

I have benefited from comments and criticisms of an earlier draft by Irma Adelman, Peter Balacs, Ronald Dore, Edgar Edwards, Unni Eradi, Michael Faber, Anne Gordon, Keith Griffin, Jill Rubery, Seev Hirsch, Ernest Stern, Frances Stewart, Hugh Stretton, B. R. Virmani, Gordon Winston and Howard Wriggins. To these, and to a research seminar at Queen Elizabeth House, I am very grateful. I am also grateful to the Economic Development Institute of the World Bank and its Director, Mr. Andrew Kamarck, for having provided the facilities and stimulating atmosphere for the early stages of a considerably larger paper, commissioned by Mr. Ernest Stern, of which this paper forms a part. I am grateful to Mr. Stern and the World Bank for permitting me to use the material here.

JHE CLIOMETRIC revolution in ecoknomic history wedded neoclassical economics and quantitative methods in order to describe and explain the performance of economies in the past.' Economic history gained in rigor and scientific pretension, but at the expense of exploring a much more fundamental set of questions about the evolving structure of economies that underlies performance.2 Cliometricians have turned their backs on a long tradition stretching back from Joseph Schumpeter to Karl Marx to Adam Smith. These scholars regarded economic history as essential because it added a dimension to economics. Its purpose was to analyze the parameters held constant by the economist. If economics is a theory of choice subject to specified constraints, a task of economic history was to theorize about those evolving constraints. The failure of economic historians to provide their colleagues with a historical dimension to their perspective has reduced the effectiveness of economists in dealing with contemporary problems. Failure of economists to appreciate the transitory character of the assumed constraints and to understand the source and direction of these changing constraints is a fundamental handicap to further development of economic theory. The challenge to the economic historian which has equally compelling implications for the economic theorist is to explain the transformation of the structure of the American Economy in the past century.3 In the rest of this essay I shall explore this issue in order to specify some of the dimensions of the economic historian's task.