The Economics of Alfred Marshall (Routledge Revivals)

David Reisman

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136703362
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

First published in 1986, The Economics of Alfred Marshall is concerned with the theories of demand, supply, market structure and income distribution which the celebrated author of the Principles of Economics developed while standing on the shoulders of giants. It is thus concerned with hidden assumptions, institutional constraints, tentative conclusions and blurred distinctions; for these are an integral part of the contribution of an economist who warned against spurious over-simplification of that which is inherently complex.

The economics of Alfred Marshall appears easy when in fact it is fraught with difficulties. The Economics of Alfred Marshall seeks to explain Marshall's theories in detail and to evaluate them in depth. The book attempts in that way to help the reader to gain a deeper understanding of an influential thinker whose insights, however difficult, continue to shed a great deal of light on the nature and workings of the economic system.

1Introduction

 

The economics of Alfred Marshall is about the monetary measure of motivation as man goes about the ‘ordinary business in life’.¹ It is about demanding and supplying, consuming and producing, marketing and sharing out. It is about the exchanging of inputs and outputs by means of voluntary contracts agreed upon within the overall framework of the market economy. It is about inertia and equilibrium but also about time, search, ignorance, uncertainty, evolution and change. It is about individual choice but also about interdependent preference patterns, want-creation, status symbols, fashion, custom and convention. It is about isolated action and the homogeneous commodity but also about collusion, product-differentiation, size, power, collective bargaining and struggle. It is about selfishness and self-interest but also about activity, generosity and empathy such as transcend the rational quid pro quo. It is in short the economics of a man who thought big and thought deep, a man of vision and imagination who, like the poet-architect-adventurer so vividly described by Shackle, saw before him ‘a landscape inexhaustibly rich in suggestions and materials’² — and who, while not neglecting the minutiae of economic problem solving, was also capable of ranging widely and of seeing much.

Few things are more interesting than the spectacle of the scholarly ascetic in hot pursuit of the whole intellectual system (a forest far greater than the sum of the trees) which he sincerely hopes will answer his questions and unravel the mysteries which trouble his rest. Few things are more confusing, however, than the spectacle of even the greatest mind trying to make sense of the human condition and seeking to situate the single atom in the context of the broader picture; and that is why Marshallian economics has had to omit the caveats, the contradictions, the qualifications and the dicta which may or may not be all that obiter, in order to retell the story in a manner which is consistent, rigorous and logical. Because this book is not about Marshallian economics but about the economics of Alfred Marshall, we feel no similar need to play down the vagueness and play up the precision. Of course the box of tools is there, but, even more important than the instruments and the techniques, so too are the sensitivity and the alertness without which the economist can never progress beyond the lowly status of the hewer of numbers and the drawer of lines. As Shackle puts it:

Computers only do what they are told, however surprising the answers they sometimes produce. Problem solving is the bread and butter of life, and we shall starve without those who can do it. But besides those who can see ahead of them the one right answer we need those who can see around them a million possibilities. We need the radial, as well as the axial, type of mind.³

If the economics of Alfred Marshall is at times tentative and impressionistic, it is because Marshall was in every respect the genuinely radial thinker, at all times conscious of a million possibilities — and of the essential complexity of human action.

2Demand

One night in the early 1870s the world went to sleep classical and awoke modern. The new ideas had been around for some time, and Condillac, Say, Whateley, Longfield and Gossen would, one fears, quickly have found a common language if asked to encapsulate in a word their reaction to the work of Jevons, Menger and Walras; but the fact is that the new ideas caught on in the 1870s whereas earlier they had fallen on barren ground.

One morning in the early 1870s the world woke up and proceeded to learn the neo-classical economics. It learned that the allocation problem is central to economics for the simple reason that economics is about economising behaviour in conditions of perceived scarcity of means. It learned that market exchanges aimed at optimality in want-satisfaction are made, atomistically and individualistically, by households (which seek to maximise happiness or utility subject to a resources constraint) and by firms (which seek to maximise profits on the inputs at their disposal, in the same way as you and I are obsessed with maximising the juice which we derive from a given lemon); and it acquired a healthy respect for the equilibrium prices which appear automatically to be ground out by market processes inspired by nothing more elevated than rationality and self-interest. The world learned, finally, that the ranking of alternatives grasped not in total so much as at the margin could usefully be set down mathematically in the terse language of the differential calculus; that deductive logic has a certain pre-eminence over the less abstract and more mundane concerns of the inductivists, historical and statistical; and that good axioms and assumptions do indeed matter if good results and predictions are ultimately to be obtained. The new economics had arrived and many in England saw Jevons as its Ricardo.

Jevons presented himself on that glorious morning as an iconoclast bent on putting the cost-of-productionists and the fact-gatherers to flight: ‘In the republic of sciences sedition and even anarchy are beneficial in the long run to the greatest happiness of the greatest number.’¹ A certain degree of bitterness is what one would expect from an outsider whose innovative paper of 1862 to the British Association had met with a somewhat less rapturous reception than its author felt it deserved. Marshall, however, unlike Jevons, was an academic patrician and a success. As a Cambridge professor whose life had been easy, he could afford to be conciliatory; and it is interesting that his Principles of Economics — as much the allencompassing statement, the unified system, the comprehensive textbook of the neo-classical approach as John Stuart Mill's or a fortiori David Ricardo's Principles of Political Economy had been to the school which preceded it — is characterised by a tendency to emphasise continuity and to play down the extent to which the 1870s had witnessed a genuine paradigm-switch. If Jevons' Theory is a work of dispute and demolition, then Marshall's Principles is a work of bridge-building and dialogue between alternative approaches at a time of acrimony and division between them — and this despite Marshall's own repeated rejection of ‘the suggestion that I try to “compromise between” or “reconcile” divergent schools of thought. Such work seems to me trumpery. Truth is the only thing worth having: not peace. I have never compromised on any doctrine of any kind.’²

Jevons' Theory appeared in 1871, Marshall's Principles in 1890. Marshall arrived late but started early and had apparently developed (even if he had not published) his system before he had read Jevons: ‘My main position as to the theory of value and distribution was practically completed in the years 1867 to 1870.’³ Marshall, only seven years Jevons' junior, delayed publication as long as he decently could; but was apparently a genuine innovator nonetheless.

2.1RICARDO, JEVONS AND MARSHALL

David Ricardo, in his Principles of Political Economy (of which the third and final edition appeared in 1821), stressed that the exchange value of any reproducible commodity is determined by the amount of labour embodied in its production: The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour.’¹ The exchange value of any reproducible commodity, he argued further, is not determined by the amount of satisfaction it is expected to yield at the stage of consumption: ‘Utility … is not the measure of exchangeable value, although it is absolutely essential to it.’²

William Stanley Jevons, in his Theory of Political Economy (of which the first of a total of four editions appeared in 1871), stood Ricardo on his head, reintroduced the subjective perceptions of discrete individuals into the theory of exchange, and stated quite unambiguously that ‘value depends entirely upon utility’.³ Insofar as cost of production is relevant at all, he said, it is relevant only indirectly: ‘Cost of production determines supply; Supply determines final degree of utility; Final degree of utility determines value.’⁴

Jevons did more than present an alternative hypothesis to that of his classical predecessors. He also launched a campaign of personal polemic which reached its peak in the concluding section of the Preface to the second edition (1879) of his Theory: ‘When at length a true system of economics comes to be established, it will be seen that that able but wrong-headed man, David Ricardo, shunted the car of economic science on to a wrong line.’⁵ And it was at least in part as a historian of ideas anxious to see truth told that Marshall took issue with Jevons, for no fair-minded Englishman likes to see an author he much admires inaccurately and unfairly described as ‘wrongheaded’: ‘There are few thinkers whose claims on our gratitude are as high and as various as those of Jevons: but that must not lead us to accept hastily his criticisms on his great predecessors.’⁶ All in all, Marshall said, speaking of value, ‘the foundations of the theory as they were left by Ricardo remain intact’.⁷

Ricardo was not ‘wrong-headed’, but it cannot be denied that he was less than perfect as an expositor of his own ideas: ‘he made short cuts’,⁸ ‘he made a mistake in not stating explicitly what he was doing’,⁹ ‘he delighted in short phrases’,¹⁰ he did not trouble to include the necessary ‘interpretation clauses’,¹¹ he made ‘no pretence to be systematic’,¹² he was guilty of ‘reticence', clearly ‘an error of judgement’¹³ since it led directly to the ‘unfair dialectical triumphs’¹⁴ of critics such as Jevons. Those triumphs were based on a misconception of what Ricardo actually thought about demand alongside supply, but the fault remains Ricardo's in underestimating the extent and needs of the potential readership of his Principles:

He was with difficulty induced to publish it; and if in writing it he had in view any readers at all, they were chiefly those statesmen and business men with whom he associated. So he purposely omitted many things which were necessary for the logical completeness of his argument, but which they would regard as obvious … His exposition is as confused as his thought is profound.¹⁵

Ricardo's problem, as Marshall sees it, is one of marketing and salesmanship rather than one of production and quality-control. Excellence of thought when accompanied by imperfection of expression is bound to mean that new boys will one day rediscover something that is already known, and such is precisely the case with Jevons and the theory of utility: ‘He did excellent work in insisting on a fact which is none the less important, because his predecessors, and even Cournot, thought it too obvious to be explicitly mentioned.’¹⁶ If the subject of demand-theory has until recent times been ‘somewhat neglected’¹⁷ by economists, Marshall argues, the reason is in large measure that economists ‘really had not much to say that was not the common property of all sensible people’.¹⁸ Because economists such as Ricardo ‘regarded the natural laws of variation of utility as too obvious to require detailed explanation’,¹⁹ they left to common sense that which belonged to common sense; and this alone accounts for their ‘habit of laying disproportionate stress on the side of cost of production, when analysing the causes that determine exchange value’.²⁰ Inevitably, their failure to ‘express their meaning with sufficient clearness’ has meant that they have been ‘misunderstood by all but the most careful readers’;²¹ but facts are facts even when they are ideas, and Ricardo and his followers ‘were aware that the conditions of demand played as important a part as those of supply in determining value’.²² So while it may be true that ‘there are few writers of modern times who have approached as near to the brilliant originality of Ricardo as Jevons has done’,²³ such a compliment is also a criticism: the contribution of Jevons, Marshall is saying, is to have corrected a mistake Ricardo never made. As Marshall puts it so eloquently in his 1872 review of Jevons' Theory, ‘we continually meet with old friends in new dresses’.²⁴

Ricardo was aware that utility and scarcity as well as cost of production influenc...