Joint Supply and the Development of Economic Theory: A Historical Perspective

The history of traditional demand theory has been thoroughly, if not exhaustively, investigated (Smith 1951; Ekelund, Furubotn, and Gramm 1972). However, one critical and increasingly important and unsettled aspect of demand theory has received scant attention, especially from a historical-institutional perspective. The classic case of joint supply—wherein multiple products such as beef and hides or wool and mutton result from a single production process—is the foundation for a number of theoretical adaptations of important cases of real-world supply and demand. It is, moreover, only one specie of a much larger genus of important cases of demand interdependence and noncompeting consumption. In the original Smith-Mill-Marshall construction, and in others over the course of more than two centuries, demands for the separate products are noncompeting. The vertical addition of demands for different products stands in contrast to the traditional horizontal summation of demands for the same good or service. The nature of the resulting nondiscriminatory prices is unquestioned in the classic case of joint supply/noncompeting consumption, but has been in much debate as the theory has been incorporated into the corpus of economic analysis over time. In particular, joint supply has often been confused with price discrimination, traditionally defined, which creates (in contrast to joint supply pricing) economic inefficiency and welfare reductions.

Our purposes in the present article are both historical and conceptual. Specifically we have the following aims:

1. To provide an account, unique to the best of our knowledge, of the essential history and development of joint supply/noncompeting consumption theory, along with some commentary on the earliest development of the theory at the hands of Adam Smith, John Stuart Mill, and Alfred Marshall.

2. To add, less uniquely at this point in time, to the refutation of the “pure internalist” view of the development of economic analysis by illustrating how institutional and technological change affected this branch of economic theory.

3. To demonstrate that uncritical applications of the received theory of joint supply created a good deal of confusion, especially in the areas of monopoly, price discrimination, and the meaning of competitive and intertemporal pricing. Furthermore, we hope to shed light on some of these contemporary issues (in section 4).

4. To show how the theory of joint supply/noncompeting consumption, like the theory of price discrimination with which it is often confused, exposes the strengths and, most especially, the limitations of traditional static neoclassical analysis.

In order to accomplish these diverse ends, we focus on the evolution of the idea of joint consumption in some of its major manifestations, on the contrasts between the alternative formulations of the concept and on the still-unresolved issues related to this important aspect of value theory and the theory of demand.¹

An initial section sets out the origins of the theory of noncompeting consumption. The fundamental theory is then shown to have (importantly) originated in the writings of Adam Smith, John Stuart Mill, and, later, in Marshall's Principles. Variations of the theory regarding cases of so-called time-of-day pricing or time jointness are examined at their origins in the railway and public utilities literature, and, in further sections, the controversial application of joint supply to public goods pricing is developed. Modern-day cases, such as the joint supply application to externality theory and still-extant problems related to this important branch of microeconomics, are briefly discussed, and a conclusion is reached in a final section.

1. Origins of Joint Supply/Noncompeting Consumption in Classical Literature

Many present-day theories of noncompeting consumption are built upon an age-old foundation: the theory of joint supply. The origins of this idea date back at least to Adam Smith and his Wealth of Nations (1776), and possibly even further,² although John Stuart Mill is commonly given credit for mastering joint supply theory in...