Marshall, Alfred

Marshall, Alfred 1842-1924

BIBLIOGRAPHY

The economist Alfred Marshall was born on July 26, 1842, in London, the second son of William Marshall, a clerk at the Bank of England, and Rebecca Marshall, née Oliver. He was educated at Merchant Taylors School (1852–1861) and took the mathematical tripos (1861–1865) at Saint John’s College Cambridge as “second wrangler,” that is, second in the first class honours list. This achievement gained him a fellowship at Saint John’s, where his interests shifted to the moral sciences, initially philosophy and mental science. Marshall became a college lecturer (1868) and from the early 1870s began concentrating on economics. In 1877 he married Mary Paley, forcing his resignation from his college positions as college statutes then in force prohibited fellows to marry. From 1877 to 1881 Marshall served as principal and professor of political economy at Bristol University College. In 1883 he became a lecturer in economics at Oxford. In 1884 Marshall succeeded Henry Fawcett (1833–1884) as professor of political economy at Cambridge, a post he retained until 1908.

During his professorship at Cambridge, Marshall published his most significant book: Principles of Economics (1890). He had earlier published The Economics of Industry (1879) with his wife and Pure Theory of Foreign Trade and of Domestic Value (1879). Marshall gave most of his evidence to official government inquiries, on monetary and financial topics, on the poor laws, on national income accounting, and on local government finance during the 1880s and 1890s; and served as a member of the Labour Commission (1891–1894), set up by the government to inquire into labor unrest and recommend solutions thereto accordingly.

Marshall greatly expanded opportunities for the study of economics at Cambridge, an effort that culminated in the establishment of an economics and politics tripos in 1903. The Cambridge School of Economics he created was consolidated by his student A. C. Pigou (1877–1959), who became Marshall’s successor as chair. Other prominent students included John Neville Keynes (1852–1949) in the 1880s, and John Maynard Keynes (1883–1946) in 1905–06. In addition, Marshall was instrumental in the formation in 1890 of the British Economic Association, which became known as the Royal Economic Society in 1902.

Marshall published two further books, Industry and Trade (1919) and Money, Credit, and Commerce (1923), before he died on July 13, 1924. He left his books and papers to create the Marshall Library at the Cambridge Faculty of Economics and Politics, which honored him in 1932 by establishing the Marshall Lectures. An undergraduate Marshall Society for discussing social questions was formed in 1927.

Marshall’s writings, especially Principles of Economics, made major contributions to economic theory. Marshall’s ideas were often succinctly presented in diagrammatic form, a method he pioneered. Facilitating the understanding of real economic problems was a key element in Marshall’s economics, reflecting his desire “to be read by businessmen” and explaining why the Principles remained in use as a text until the early 1950s. As a trained mathematician, Marshall also used algebra and the calculus in his economics, visible in the Mathematical Appendix included with all eight editions of the Principles. According to him, this was its proper place, since such reasoning could not add anything significant in formulating economic propositions. His frequent use of diagrams in the Principles invariably took place in the footnotes, and not in the text.

A major feature of Marshall’s economics was its partial equilibrium method, which enabled him to concentrate on the key variable that explained a particular concept, while holding other less important variables constant. For example, his exposition of demand theory is presented primarily as a function of price, other things being equal, including the purchasing power of money, money income, prices of related commodities (substitutes or complementary goods), the time element in the analysis, and tastes, habits, and fashions. This approach simplified functional relationships considerably. However, the complexity of what was impounded in “the pound of caeteris paribus” made the method difficult to use in practice, contrary to Marshall’s intentions. Furthermore, its use gave rise to potential logical conflicts; for example, when prices of all other commodities are held constant together with the purchasing power of money, the price of the commodity whose demand is being analyzed needs to vary.

Marshall’s economic analysis in the Principles is organized in terms of supply and demand. After two preliminary sections, the Principles discusses demand (dependent on price and utility), supply (founded on his theory of production), and their combination to explain value (commodity prices) and distribution (factor prices and factor incomes). Much of Marshall’s analysis is presented in diagrams featuring the Marshallian cross of a falling demand curve (reflecting generalized diminishing marginal utility) and a rising supply curve (reflecting generalized diminishing returns), with price the independent variable and quantity (supplied or demanded) the dependent variable, producing the stability, generally speaking, of the resulting equilibrium. Marshall departed from this simple presentation when circumstances demanded, as he did, for example, in his treatment of constant and increasing returns in terms of horizontal and falling supply curves (Marshall 1920, p. 464). However, since economic agents could also make decisions about quantities—for example, how much additional tea to consume, how much additional capacity to install in a factory, which invariably influenced prices—this technique was quite appropriate for Marshall, and following him, Keynes.

Marshall divided supply-and-demand analysis into specific time periods (market, short, and long) reflecting the degree of responsiveness of supply pertaining to them. During the market period, time is too short for supply to alter; supply is unresponsive to changes in price in the short period except from movements in stocks because the period is too short to increase stock by additional production. New output is confined to long-period situations when supply becomes fully flexible from changes in production induced by price changes. These time periods, although measured in clock time, do not reflect clock time per se. They depend on the technical production possibilities for the commodity being analyzed. Marshall also used time analysis for generalizing rent theory to incorporate quasi rent as the income of old capital investments. Like rent, quasi rent is price-determined, but only in the short run, defined as the time required before capital investments can be replaced.

The responsiveness in supply and demand of a commodity to changes in price was classified by Marshall in terms of their degrees of elasticity. Where responsiveness is proportionately equal to the price change, unitary elasticity applies. When responsiveness is less than the price change, the function exhibits inelasticity ; if greater, it is described as elastic. Elasticity was an important, novel, and enduring feature of Marshall’s price analysis.

Application of Marshall’s theory of value to welfare economics by means of consumer surplus was another enduring contribution. Marshall defined consumer surplus as “the excess of the price which a consumer would be willing to pay rather than go without a certain commodity over that which he actually does pay” (1920, p. 124). Consumer surplus provided a measure of the benefit gained by consumers from their environment when individual consumer surpluses could be added. Marshall also noted that “a pound’s worth of satisfaction” differed between people depending on their wealth and income levels, enhancing the difficulties in measuring consumers’ welfare.

Marshall’s theory of production carefully distinguished between the impact of scale and location on the cost of production. Size would generally elicit lower production costs over time. Marshall’s discussion embodied static and dynamic elements, as well as factors incompatible with perfect competition, such as marketing and advertising expenses (Stigler 1941, pp. 77–83). Moreover, by dwelling on the locational advantages for firms as parts of industrial districts—the geographical concentration of industry—Marshall linked scale advantages to the size and concentration of an industry, as well as to the individual firm.

Marshall developed the theory of the firm as an important entity in economic decision making. This was implicit in his treatment of economies and diseconomies of scale, in his treatment of locational advantages, and in his analysis of monopoly and competition as specific market situations where competition meant monopolistic (imperfect) competition rather than an artificial construct of perfect competition. The pupils of Marshall’s pupils, especially Dennis Robertson (1890–1963), Austin Robinson (1897–1993), and Joan Robinson (1903–1983), explicitly produced theories of the firm in their writings, including an innovative study of imperfect competition.

In Money, Credit, and Commerce, Marshall developed the Cambridge cash balance equation as his version of the quantity theory. This equation expressed the demand for money (the amount of income and wealth a person seeks to keep in the form of money) as follows: D(M) = kPY + k’PW, where k is the proportion of nominal income (PY) held in the form of money, and k’k’ the proportion of nominal wealth held in this way. These k ’s are the inverse of the respective velocities of circulation. Stating the quantity theory in this manner focused on individual demand for cash balances explicable in terms of transaction, precautionary, and speculative demands. Marshall’s manner of looking at monetary relationships was also more amenable to statistical analysis.

Marshall’s role in the history of economic thought is enormous. His Principles is the only nineteenth-century treatise still in wide use more than a hundred years later, even if, by modern standards, it is an unsatisfactory book (Blaug 1997, pp. 404–405). Marshall is the most important figure in economics from the formative decades of the 1890s to the 1920s, when marginalist economics became the dominant theory (Screpanti and Zamagni 1990, p. 177). Moreover, his theory accepts a general equilibrium framework but is presented in the more realistic and practical partial equilibrium form (Deane 1978, pp. 112–113). The centenary of Marshall’s Principles in 1990 sparked many international celebrations, not only in England at Cambridge and the Royal Economic Society, but in Italy, Germany, France, North America, and even China. Close to 250 articles on Marshall’s economics are collected in the eight volumes of John Wood’s Alfred Marshall: Critical Assessments (1982, 1996). Marshall’s writings clearly continue to be of use to students of economics.

SEE ALSO Partial Equilibrium

BIBLIOGRAPHY

Blaug, Mark. 1997. Economic Theory in Retrospect. 5th ed. Cambridge, U.K.: Cambridge University Press.

Deane, Phyllis. 1978. The Evolution of Economic Ideas. Cambridge, U.K.: Cambridge University Press.

Groenewegen, Peter. 1995. A Soaring Eagle: Alfred Marshall, 1842–1924. Cheltenham, U.K.: Edward Elgar.

Marshall, Alfred. [1890] 1920. Principles of Economics. 8th ed. London: Macmillan.

Marshall, Alfred. 1982. Alfred Marshall: Critical Assessments. 4 vols. Ed. John Cunningham Wood. London: Croom Helm.

Marshall, Alfred. 1996. Alfred Marshall: Critical Assessments. 2nd series. 4 vols. Ed. John Cunningham Wood. London: Routledge.

Screpanti, Ernesto, and Stefano Zamagni. 1990. An Outline of the History of Economic Thought. Trans. David Field. Oxford: Clarendon.

Stigler, George. 1941. Production and Distribution Theories: The Formative Period. New York: Macmillan.

Peter Groenewegen