Alfred Marshall (1842-1924) is one of the great names in the development of contemporary economic thought, and the book by which he is most widely known—Principles of Economics—is one of the high points in the literature of social science. His influence was enormous; so much so that the first 25 years of twentieth-century economics may be described as the “age of Marshall” and subsequent developments as extensions of and counter-movements to his influence. Moreover, even when due allowance is made for the natural progress of economic science since Marshall’s time, it is remarkable how much of the Marshallian framework remains. These well-known points require restatement because the positive effects of the Marshallian influence are questioned today as perhaps never before. One could agree with criticisms if they were merely objections to the view sometimes expressed that “it’s all in Marshall,” meaning that little or no progress has been made in economics since he wrote. It would indeed be deplorable if scientific ideas worked out almost one hundred years ago were still the last word. (An analogy with the positions of Marx and Freud is appropriate here.) However, much of the contemporary criticism goes deeper than this; it argues that the Marshallian tradition checked the development of economics by diverting attention from real issues (by which is primarily meant macrotheory) much as Ricardo was alleged to have done in an earlier generation. The merit of these criticisms will be examined carefully later in this article.
Alfred Marshall was born in Clapham—then a leafy London suburb—in 1842. His father, John Marshall, held the respectable middle-class position of cashier in the Bank of England, and the family lived in modest comfort. Marshall’s father was of a rather severe, evangelical frame of mind, almost a textbook example of what is loosely called Victorianism, and closely supervised his son’s education. This paternal control and repression had a marked and lasting effect on Marshall; his pronounced tendency toward hypochondria, his unwillingness to commit himself unequivocally in print without massive documented qualification, his fear of indolence and idleness, and his ultimate rejection of “pure pleasure” activities (such as mathematics) have their roots in the experiences of his early years. His education was planned as basically a preparation for ordination in the Anglican church. He was expected to go up to Oxford with a classics scholarship, which would lead to a fellowship and a church living. However, he rejected this plan—rebelling not against orthodox theology but against further study of the classics—and with funds borrowed from an uncle proceeded to St. John’s, Cambridge, where he read mathematics. Marshall was one of the best mathematics students of his generation in England (in 1865 he was second wrangler in the tripos examination). This is an important point to bear in mind in evaluating his ambivalent attitude toward the use of mathematical methods in economics—in any event, his criticisms were not based on ignorance. Marshall came into economics with much more mathematics training than did Jevons or Walras.
After graduation Marshall was elected to a fellowship in mathematics and gradually came under the influence of a group of philosopher-dons who were increasingly concerned with the social problems of industrial England. Marshall’s interests centered initially on philosophy and ethics, which were then still at the frontier of social science, but worry about social conditions and the realization that poverty was at the root of many social evils led him into economics. Indeed, to Marshall the problem of poverty was not only central to the study of economics but its ultimate rationale. As he later wrote in the Principles, “the study of the causes of poverty is the study of the causes of the degradation of a large part of mankind” ( 1961, vol. l, p. 3).
In 1877 he married Mary Paley, a former student of his and one of the first women to be educated at Cambridge. Upon his marriage he was forced to resign his fellowship. He was for a short while principal and professor of political economy at the then University College of Bristol, became a fellow at Balliol in 1883 (after the requirement of celibacy had been eliminated), and the following year returned to Cambridge, to the chair of political economy vacated by Henry Fawcett; there he reigned until his retirement in 1908, when he was succeeded by his star pupil, A. C. Pigou.
Marshall’s published output was not large, especially considering that he was active almost until the time of his death. Several books—The PureTheory of Foreign Trade and The Pure Theory of Domestic Values (1879a), Principles of Economics (1890), Industry and Trade (1919), Money, Credit & Commerce (1923), and The Economics of Industry (1879b), written jointly with Mary Marshall (which he tried to have withdrawn for complex personal reasons not bearing on its merit), a handful of articles, mainly reprinted in the Memorials of Alfred Marshall (1925), edited by Pigou; and a series of official memoranda and evidence before royal commissions (contained in Official Papers, a volume published in 1926) make up his total written contribution.
Marshall’s reluctance to commit himself to print—the Principles did not appear until he was 48—makes it difficult to assess his originality. Ideas first published in the 1890s, such as Marshall’s statement of the theory of marginal utility, had been worked out and presented orally by him in the late 1860s, i.e., before the publication of the theory in the works of Jevons, Walras, and Menger. As J. M. Keynes put it in his famous obituary of Marshall, “The task of expounding the development of Marshall’s economics is rendered difficult by the long intervals of time which generally sepa-rated the initial discovery and its oral communication to pupils from the final publication in a book to the world outside” (1924, p. 322).
Efforts to disentangle the various influences on Marshall’s thinking as an economist are made difficult by his modesty—his desire to emphasize the continuity of thought—and also by his rather confused accounts of these influences. Marshall’s first reading in economics was Ricardo and Mill; he described his early efforts as attempts to translate the ideas of these writers into differential equations. The most important single influence was surely Mill’s Principles of Political Economy (1848), and a good way to get perspective on Marshall’s contribution is to compare the two Principles. Also, what little mathematical economics then existed was open to Marshall, although it was not to most of his contemporaries. He clearly learned a lot from Cournot—especially about the use of continuous functions in economics. Thünen’s Der isolierte Staat (1826-1863), with its hints of marginal productivity analysis, was also influential. German (Hegelian) philosophy and the historical school of economists are commonly mentioned as influencing him (Mar-shall studied in Germany for a year). However, it is difficult to see concrete evidence of these systems of thought in his work. There is no dialectic and no historicism, although in his concern with empirical investigation he was closer to the historical school than to the English classical school. His emphasis on the continuity of growth and his perpetual references to biology suggest the influence of social Darwinism—acquired through Herbert Spencer.
Much of the discussion of Marshallian economics deals with his methods of analysis. These methods are not particular hypotheses or models proposed by Marshall but, rather, represent ways of setting up a problem or partitioning it so that it can be solved. The central Marshallian method is usually termed “partial analysis” or “partial equilibrium analysis” and is often loosely referred to as the ceteris paribus approach. The Marshallian partial equilibrium approach is frequently contrasted with the method of general equilibrium associated with Leon Walras, and the contrast is usually considered unfavorable to Marshall. Indeed, this approach is sometimes regarded as one of the major weaknesses Marshall bequeathed to economic science. Since the question of partial versus general equilibrium has loomed so large in the literature, some discussion of the central issues is imperative. As Marshall realized, the general equilibrium approach is not de facto a fruitful approach to such practical problems as measuring the effect of an import duty on the price of a commodity or the effect of a fall in the final product price on the demand for a particular grade of labor. It is not very helpful to be told that “everything depends on everything else” and that a change in one parameter will have effects throughout an economic system. Partial analysis is a method by which an economy is partitioned so that the main effects of a parameter shift in a particular micromarket can be highlighted without considering the spillover into other markets; hence, this method also ignores the feed-back effects from the spillover. There are, of course, obvious dangers inherent in this method, but the answer lies, not in the general equilibrium approach, but in better specification of the partial model. [SeeEconomicEquilibriumand the biography ofwalras.]
Let us take a specific example to illustrate the use of the ceteris paribus approach of partial equilibrium analysis and the related concept of comparative statics. We can draw up a demand schedule for a commodity and show the amount demanded per unit of time as a decreasing function of the price of the good. The relationship is ceteris paribus, i.e., it assumes that other factors influencing demand—such as the price of substitutes—are given, as are factors such as incomes, tastes, and expectations. In a free market, if an equilibrium exists it will be where supply equals demand. If one of the ceteris paribus conditions is relaxed, the demand curve shifts, and the new partial equilibrium solution is then considered. This leads to the comparison of the two sets of equilibrium values of the variables under discussion. The method of comparing equilibrium solutions is called comparative statics because it does not permit the tracing of the time paths (between the two points of equilibrium) of the variables involved. [SeeStatics and dynamics in economics.]
Marshall’s ultimate objective was to develop a full-fledged theory of dynamic change and growth. In the preface to his Principles he wrote, “The main concern of economics is ... with human beings who are impelled, for good and evil, to change and progress. Fragmentary statical hypotheses are used as temporary auxiliaries to dynamical—or rather biological—conceptions: but the central idea of economics, even when its Foundations alone are under discussion, must be that of living force and movement” ( 1961, vol. 1, p. xv). The immediate objective of Marshall’s formal analysis was more limited: namely, the comparison of static equilibrium positions. Yet, even within this restrictive framework he was able, by his use of the timeperiod concept, to approximate dynamic analysis. His approach was to divide the adjustment, say, of price to changing demand or supply conditions into a series of adjustment periods. These periods should be regarded as measured by operational, not clock, time—the market period for one sector or industry may be (in terms of clock time) a longer one than the market period for another industry. The important consideration is which ceteris paribus assumptions are relaxed in successive periods.
Marshall’s time division is as follows: the market period, the short period, and the long period. The market period takes the production of the commodity in question as fixed, so that supply can vary only if sellers have a reserve price for their own product. The condition for equilibrium (for all time periods) is that the market be cleared, i.e., that demand equal supply. Short-run equilibrium considers supply to be partially adaptable, in the sense that increased production can occur but capital equipment and certain other overhead items are held constant. In modern economics, analysis of this short period with partial adaptation is equivalent to an analysis of the law of variable proportions, although it is not certain that Marshall himself was precisely clear about the distinction between variable proportions and returns to scale. The Marshallian long period allows for optimal capital stock adjustment. The market is cleared within a framework in which supply can be considered to be fully adaptable because all factors (excluding entrepreneurship) have adjusted to the situation. It was by means of this differential adjustment of supply that Marshall restated, within the supply and demand framework, his theory of value. The classical emphasis on costs is now seen as a particular hypothesis: that in longrun adjustment there are constant returns to scale.
Figure 1 illustrates this. SS is the fixed-stock supply curve (on the assumption of zero reserve price); S’S’ the short-run supply curve and S“P the long-run supply curve. With demand at DD, the long-run price is OP. Now let demand rise to D’D’. Then long-run equilibrium price will again be OP, but price will pass through the stages OP” and OP’, and quantity will increase. [SeeDemand and supply.]
Marshall also hinted at the analysis of a fourth time period, in which factor supplies are allowed to adjust to changes in their underlying determinants. In the absence of innovation, in this period the economy reaches the full equilibrium solution for a stationary state.
Marshall was cautious and basically skeptical about the use of mathematics and theoretical statistics in economics; for better or worse, he did not foresee the mushrooming of mathematical economics and econometrics. The Marshallian attitude—which became embodied in the Cambridge tradition and especially in the work of Pigou and Keynes—is seen in the Principles, where the mathematical statements are in footnotes and in a mathematical appendix. The grounds for minimizing the formal use of mathematics in the final presentation (although not in preparation) were twofold: first, the need to communicate; and second—and much more important—the fear that sets of equations necessarily omit or distort many relevant influences and considerations. Marshall set out the matter squarely in a letter to A. L. Bowley dated February 27, 1906:
[A] good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules—(1) Use mathematics as a shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4 burn 3. This last I did often. ( 1956, p. 427)
Marshall had grave doubts as to the reasonableness of the assumptions underpinning the then existing techniques of theoretical statistics (which meant, basically, regression analysis) when applied to social science data. He had no doubts, however, about the need to be steeped in the empirical facts of any situation under analysis. He always emphasized deep statistical and historical knowledge of the area being investigated and referred again and again to the complexity of economic problems and the naivete of simple hypotheses. Like Adam Smith, Marshall had a profound knowledge of the workings of economic systems. When asked, for example, by the Gold and Silver Commission of 1887/1888, “Do you speak with knowledge . . . of the working classes?” he replied (somewhat pompously but with all honesty), “I speak from personal observation ranging over many years, and a study of almost everything of importance that has been written on the subject” (Official Papers, p. 99).
Marshall’s oft-quoted definition of economics—“the study of man in the ordinary business of life“—was not an attempt to demarcate the discipline precisely from other social sciences. Marshall’s basic view on the scope of economics is best expressed in the sentence “The less we trouble ourselves with scholastic inquiries as to whether a certain observation comes within the scope of economics, the better” ( 1961, vol. 1, p. 27). He used the term “ordinary business of life” to emphasize the point that economics is not the study of the workings of a fictional economy populated by abstract economic men: it is concerned with the real world around us.
Marshall’s central theoretical contribution was the working out of the rigorous economics of the stationary state. For Marshall this was not, of course, the ultimate end of economics—it was indeed but the preface. To point the way to the conclusion—the working out of a full-fledged growth model—Marshall interlarded his stationary-state framework with bits and pieces of the dynamic process. It is this mixture that makes Marshall’s Principles such difficult reading for some.
Theory of demand
Marshall developed utility theory for two reasons: first, to place restrictions on demand functions; and second, to create what he hoped would be powerful tools of welfare economics. The Marshallian demand curve relates the demand for a commodity per unit of time to its own price. The relationship is ceteris paribus; in particular, other prices and incomes are assumed constant. There are certain ambiguities in this statement of inclusions within ceteris paribus, but for the moment these are set aside. Marshall’s generalized “law of demand” states that the price of a good and the quantity demanded are inversely related. This restriction on demand functions is derived a priori from the form of the utility function that he postulated, which is laid out most clearly in the mathematical appendix to the Principles. He used an additive, cardinal utility function; this means that one may think of utility as being a measurable quantity (although in practice Marshall spoke of it as being only indirectly measurable, at the margin, by price) and also that the total utility that a consumer derives from his consumption of goods and services is the sum of the individual utilities derived from the consumption of each item in his budget. Symbolically, we have
where Ui is the utility derived from the consumption of the i th commodity and U is total utility.
The basic restriction given by the additive nature of the function is that interrelationships between goods are excluded (all cross-partial derivatives are zero). Further, the law of diminishing marginal utility operates with respect to each good; this means that extra units consumed of a given commodity will increase total utility at a decreasing rate. Thus, the addition to total utility induced by the nth unit of a commodity will be less than the increase in utility induced by the (n— l)st unit. In terms of the function above,
It is assumed that the consumer seeks to maximize utility, given incomes and prices. The principle of substitution comes into full play here. By substituting at the margin, a consumer reaches his maximum utility point. Maximizing the utility function, subject to the budget constraint (i.e., that the quantities of all goods and services purchased multiplied by their respective prices equals total income), yields the well-known Marshallian first-order conditions for a maximum. These can be stated in the following equivalent terms:
Here Pi represents the price of commodity i, and the constant term λ represents the marginal utility of income. A fall in the price of commodity i must lead to more of the commodity’s being bought; this must be so to keep the equalities listed in eqs. (1) to (3). That formulation (as Marshall realized) avoids the implications of the income effects of a price change—this is the purpose of assuming constant marginal utility of income. [SeeUtility.]
Rigorously applied, the Marshallian assumptions appear to restrict elasticities of demand to unity, but it is clear from the body of the Principles that Marshall did not contemplate this restriction.
Strictly speaking, a ceteris paribus demand curve requires that real income be held constant as price changes, so as to eliminate from the analysis the income effect of the price change. Holding money income constant is insufficient, since the real value of money income is its command over commodities and if commodity prices change, this changes also. Marshall solved this problem intuitively, by talking in terms of money income but postulating small changes in the prices of commodities that make up a small portion of the consumer’s budget, so that the error involved in using money income is “of the second order of small quantities” ( 1961, vol. 1, p. 132). Milton Friedman has since put the demand curve on a more satisfactory analytic footing.
But for Marshall the object of demand theory was not just to place testable restrictions on demand functions; he also regarded the demand curve and the allied concept of consumer surplus as powerful tools of welfare economics. We shall consider this aspect after we have looked at Marshall’s contribution to production theory and the theory of the firm.
Theory of production
Marshall spoke in terms of “real costs” when considering costs of production. By “real” he meant ultimately the disutility of both the labor and the waiting involved in producing and bringing a commodity to market. The emphasis on real cost seems to contrast with the Austrian notion of opportunity cost, but in fact it is easy to reconcile the two concepts. In any case, in spite of Marshall’s emphasis, he rather too easily assumed the equality of real and money costs and proceeded with his analysis in terms of the latter. Central to his theory of cost and production is the principle of substitution, which works here the same way it does in his consumer theory. The entrepreneur substitutes at the margin until the total cost of a given output is at a minimum or, what is the same thing, until the output from a given set of inputs is maximized. [SeeCost.]
Marshall was confused about the so-called laws of production and especially about the distinction between what has come to be called “variable proportions” and returns to scale; so, of course, was the whole profession until Viner’s classic article of 1931. Marshall tended to compare decreasing returns with increasing returns, as though they were similar. Although he postulated that diminishing returns were historically connected with agriculture and with a situation in which the labor-capital input had grown relative to (fixed) land, he did not see the logical connection between the principle of substitution and the law of variable proportions. Increasing returns, looked at in an analytic manner, occur where increase in output is proportionately greater than the simultaneous increase of all inputs. In the course of his discussion of increasing returns, Marshall made the crucial distinction between internal and external economies, from which the whole notion of externality started. Internal economies are “those dependent on the resources of the individual houses of business” in an industry, while external economies are “dependent on the general development of the industry.” Internal economies, where present, produce a falling long-run marginal cost curve for a firm, and hence threaten the stability of competition. Marshall realized this, and his “life cycle” theory of entrepreneurship was meant as a partial explanation of the survival of competition. External economies, on the other hand, are compatible with competition but raise serious welfare problems. [SeeExternal economies and diseconomies.]
Central to Marshall’s discussion of the theory of the firm is the concept of the representative firm—a notion which is not only tenuous and vague but apparently unnecessary for Marshall’s own purposes, as critics like Lionel Robbins were quick to point out. Marshall’s definition of the representative firm gets us nowhere; it is only by specifying the problem with which he was trying to cope that we see the purpose of the concept.
Two questions in particular worried Marshall. First, in the real world, firms clearly are capable of expanding at falling marginal cost, yet industries do not become monopolized. Marshall’s answer lies partially in the representative firm. The second, a closely related problem, concerns the estimate of the supply price of a product where industry output is taken as a given but the group of firms making up the industry are in a life cycle of birth, growth, decay, and death. According to Marshall’s theory, the entrepreneurial life cycle prevents the continuing expansion of any one firm—an idea more appropriate to the days of small business than to those of the large corporation, where management is not dynastic. But apart from Marshall’s exercise in social evolution, we still have the interesting problem, with disequilibrium at the firm level, of estimating supply price and, more generally, the industry supply curve. In contemporary economics the static solution to these problems, under perfect competition, is to sum the firms’ marginal cost curves to obtain the industry supply curve. This supply price is equal to any firm’s marginal cost; for Marshall, however, with his continual search for the dynamic solution, this answer was inadequate. A firm picked at random would not necessarily be typical in the sense that its costs would correctly reflect the sustainable degree of efficiency and level of economies for its aggregate output. It might be a firm about to disappear or one in the very early stages of growth. The answer, Marshall believed, was to identify a “typical” or representative firm. [SeeFirm, theory of the.]
What is the typical market structure in Marshall’s world? Nowhere in his work do we find the perfectly elastic demand curve of the current text-book version of perfect competition. It is clearly not monopoly (for Marshall reserves this case for special treatment), but it is doubtful whether, as has recently been suggested, the typical Marshallian market can be interpreted as monopolistically competitive in Chamberlin’s sense. In spite of Marshall’s remark that in the short run firms may have to lower price to increase sales, his basic view is that price is a parameter in the typical firm’s plans.
Theory of distribution
Marshall’s theory of distribution is outlined on two levels. On the assumption of fixed coefficients (such as Walras assumed in the first edition of the Elements), Marshall worked out his theory of joint demand. In this case there is no substitution within a given productive process; the principle of substitution is inoperative, and hence the marginal productivity theory is not applicable. To divide up the total product among the cooperating factors in the case of fixed proportions, Marshall used the law of derived demand: “The demand schedule for any factor of production of a commodity can be derived from that of the commodity by subtracting from the demand price of each separative amount of the commodity the sum of the supply prices for corresponding amounts of the other factors” ( 1961, vol. 1, p. 383). But at best this is a clumsy approach, and it did not represent Marshall’s basic position. More generally he worked out a complete marginal productivity theory, and although he expressly denied that it was a theory of distribution, we must take this as typical Marshallian caution. His objections to regarding marginal productivity as a theory of wages were twofold: first, supply conditions must be included in the analysis; and second, to the extent to which labor and capital are in fixed proportions, it is not possible to identify the marginal product.
The concept of quasi rent, which filled an important gap in classical analysis, is also important for Marshallian distribution theory. Rent theory explained the return to fixed land, but there was nothing in classical analysis to explain the return to capital equipment already in existence. Marshall used the term “quasi rent” to explain rewards to any factors in inelastic supply and specifically applied the analysis to capital equipment in the short run. [SeeRent.]
We have already discussed Marshall’s division of the problem of price determination into a series of different time-period equilibrium positions. The general rule is that the longer the period of adaptation allowed, the more responsive is supply to price changes. To the extent to which long-run supply is perfectly elastic, Marshall saw a correlation with the classical cost-of-production theory of value. We have still to consider Marshall’s conditions for market stability;
these appear to differ significantly from those laid down by Walras and Hicks, which are commonly studied in elementary dynamics. Marshall’s conditions for a micromarket to be stable are as follows: (a) for quantity smaller than equilibrium quantity,demand price must be greater than supply price; (b) for quantity larger than equilibrium quantity,demand price must be less than supply price.
If a market that has “normal” demand and supply relationships, i.e., a downward-sloping demand curve and an upward-sloping supply curve, is stable in the Walras-Hicks sense, it is also stable in Marshall’s sense. Divergences of interpretation occur, however, in other cases. Figure 2 shows a marketwhere both stability conditions are satisfied. At price P3, which is above equilibrium, excess demand is negative (the Hicksian condition) and quantity bought is less than equilibrium, with demand price, OP1 greater than supply price, OP2. The market shown in Figure 3 is stable in terms of Marshall’s conditions but unstable in terms of the Walras-Hicks conditions (e.g., for price above equilibrium it has excess demand).
Which specification is correct cannot be determined a priori but is a matter for empirical investigation. It is clear that the two solutions assume different behavioral reactions of buyers and sellers. More important, perhaps, the notion of a supply curve has to be specified much more carefully. [See Demand and Supply and Economic equilibrium.]
Marshall also attempted to formalize and explain Mill’s work on the conditions for equilibrium—and the suitability of equilibrium—in foreign trade. He did this by using the techniques of offer curves. His work in this field was not formally published until 1923, when parts of it were appended to his Money, Credit ＆ Commerce. However, it was circulated privately, through the efforts of Henry Sidgwick.
Welfare economics. Marshall’s contributions to welfare economics, while suggestive in terms of contemporary thought, contain some of his most doubtful analysis. Here Marshall relaxed his customary caution in the face of complex situations, in an effort to prcmote certain policy measures. In general his welfare economics supported the classical view that a regime of free markets maximizes welfare (utility). Marshall called this the doctrine of maximum satisfaction; his demonstration consisted of showing that for each micromarket the sum of surpluses is maximized. A monopolized market involves a suboptimal position because the sum of surpluses is lessened. The surpluses summed include both consumer and producer surpluses, or rents. In Figure 4 the free market price is P0 with quantity Q0. The sum of consumer surplus and producer surplus is CAB. Let the market be monopolized and price and output be P1 , Q1; total surplus is then reduced to BCDE. [See Consumer’s Surplus.]
However, Marshall stated two important exceptions to the doctrine of maximum satisfaction and free competition. First, he considered it to be an empirical fact that although utility is an increasing function of a person’s real income, the rate of increase diminishes. As Marshall put it bluntly in the mathematical appendix to the Principles, “Every increase in his means diminishes the marginal degree of utility of money to him” ( 1961, vol. 1, p. 838). Thus, it followed that, all other circumstances being the same, a redistribution of income from rich to poor would increase total satisfaction.
Much more important, perhaps, is Marshall’s second ground for modifying the doctrine of maximum
satisfaction. This is that satisfaction can be increased by taxing increasing-cost industries and subsidizing decreasing-cost industries. His analysis runs entirely in terms of consumer surplus, with all its weaknesses, and can easily be seen to depend on the slopes of the supply curves. However, the whole theory of externality and divergences between private and social benefits developed from Marshall’s discussion, especially his exposition of the decreasing-cost case.
Marshall is sometimes alleged to have neglected the monetary and, more generally, the aggregative framework within which his theory of value worked. This is a mistaken view. In his Principles Marshall is at pains to make clear that the core of that book presupposes a monetary framework, and he deals explicitly with this frame-work in other contributions. The two important sources for his views on money are Money, Credit & Commerce, written toward the end of his life, and, much more important, his Official Papers. This latter consists of a series of memoranda and evidence presented before royal commissions.
Official Papers contains the core of Marshall’s monetary theory. The most important elements of his contributions in this area are the following: the so-called Cambridge equation and his development of a credit cycle through disequilibrium between real and monetary interest rates. Marshall is often regarded as the founder of the Cambridge approach to monetary theory. In essence, this theory postulates a stable demand function for money, with real income (or wealth) as the prime argument in the function. Ceteris paribus, such an approach will give a proportionate relationship between changes in the supply of money and changes in the general level of prices. [SeeMoney, article on Quantity theory.] This approach was formalized by Pigou (1917) in a famous article [see the biography of PIGOU] and elaborated by Keynes in his Tract on Monetary Reform (1923). Marshall made it absolutely clear, however, that changes in the other factors—in the volume of activity and the demand for money—may well dominate the relationship, especially in periods of economic crisis. His other contribution to the field is the spelling out of a mechanism connecting real and money rates of interest, through which divergences between the two generate a credit cycle.
The view, mentioned at the beginning of this article, that Marshall diverted economics from a proper consideration of macroeconomics is largely a result of Keynes’s treatment of Marshall in The General Theory (1936). His treatment there contrasts widely with his assessment of Marshall’s monetary economics in his famous obituary of Marshall. The reasons for this dramatic volte-face are complex and cannot be discussed here; all that can be said is that in retrospect the “Keynesian revolution” appears to be more an extension of the Marshallian tradition than an attempt to reverse it.
[For the historical context of Marshall’s work, see the biographies of Cournot; Jevons; Menger; Mill; Ricardo; Thunen; for discussion of the subsequent development of his ideas, see the biographies of Keynes, john maynardm; Pigou; Robertson.]
(1879a) 1930 The Pure Theory of Foreign Trade and The Pure Theory of Domestic Values. Series of Reprints of Scarce Tracts in Economic and Political Science, No. 1. London School of Economics and Politcal Science. → Privately printed in 1879.
(1879b) 1889 Marshall, alfred; and Marshall, Mary P. Economics of Industry. London: Macmillan.
(1890) 1961 Principles of Economics. 9th ed. 2 vols. New York and London: Macmillan. → A variorum edition. The eighth edition is preferable for normal use.
1919 Industry and Trade: A Study of Industrial Technique and Business Organization, and of Their Influences on the Conditions of Various Classes and Nations. London: Macmillan.
(1923) 1960 Money, Credit & Commerce. New York: Kelley.
(1925) 1956 Memorials of Alfred Marshall. New York: Kelley. → Contains essays on Marshall by J. M. Keynes, F. Y. Edgeworth, C. R. Fay, E. A. Benians, and A. C. Pigou; selections from Marshall’s writings; and a bibliography of his works prepared by J. M. Keynes.
Official Papers. London: Macmillan. 1926. → Papers dated 1886-1903.
Keynes, John Maynard 1923 A Tract on Monetary Reform. London: Macmillan.
Keynes, John Maynard (1924) 1951 Alfred Marshall: 1842-1924. Pages 125-217 in John Maynard Keynes, Essays in Biography. New ed.
→ First published in Volume 34 of the Economic Journal. A paperback edition was published in 1963 by Norton.
Keynes, John Maynard 1936 The General Theory of Employment, Interest and Money. London: Macmillan. → A paperback edition was published in 1965 b Harcourt.
Mill, John Stuart (1848) 1961 Principles of Political Economy, With Some of Their Applications to Social Philosophy. 7th ed. Edited by W. J. Ashley. New York: Kelley.
Pigou, A. C. (1917) 1951 The Value of Money. Pages 162-183 in American Economic Association, Readings in Monetary Theory. Philadelphia: Blakiston.
Pigou, A. C. 1953 Alfred Marshall and Current Thought. London: Macmillan.
Schumpeter, Joseph a. (1941) 1965 Alfred Marshall, 1842-1924. Pages 91-109 in Joseph A. Schumpeter, Ten Great Economists From Marx to Keynes. New York: Oxford Univ. Press.
Scott, William R. 1925 Alfred Marshall, 1842-1924. British Academy, London, Proceedings 11:446-457.
Stigler, George j. 1941 Production and Distribution Theories: 1870 to 1895. New York: Macmillan. → See especially Chapter 4.
THΰNEN, J ohann h. von (1826-1863) 1930 Der isolierte Staat in Beziehung auf Landwirthschaft und Nationalokonomie. 3 vols. Jena (Germany): Fischer.
Viner, Jacob (1931) 1952 Cost Curves and Supply Curves. Pages 198-232 in American Economic Association, Readings in Price Theory. Chicago: Irwin. → First published in Volume 3 of the Zeitschrift fur Nationalokonomie.
Marshall, Alfred 1842-1924
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
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.  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.
The English economist Alfred Marshall (1842-1924) was the founder of the "new economics." He rejected the traditional definition of economics as the "science of wealth" to establish a discipline concerned with social welfare.
Alfred Marshall was born in London on July 26, 1842, the son of a cashier at the Bank of England. At Cambridge he abandoned plans to enter the Anglican clergy and graduated in mathematics. Elected to a Cambridge fellowship, Marshall planned then to pursue molecular physics. Instead, he was drawn first to metaphysics, particularly ethics, which he studied in Germany for a year, then to psychology, and finally to economics as a practical means for implementing ethics.
In 1868 Marshall's college, St. John's, established a special lectureship for him in moral science. In 1875 he returned from a study of trade protection in the United States to attempt to make political economy a serious subject at Cambridge. When, in 1877, he married Mary Paley, a former student then lecturing in economics at Newnham, the women's college at Cambridge, he became ineligible to continue his fellowship. University College, Bristol, had just been founded, and Marshall, a firm believer in extending adult educational opportunities, agreed to become first principal and professor of political economy. In 1883 Marshall became a fellow of Balliol and lecturer in political economy to students preparing for the Indian civil service. Two years later he took the chair in political economy at Cambridge. Until his retirement in 1908, Marshall dominated a singularly influential school of economics, with separate and tripos status after 1903. From 1890 until his death on July 13, 1924, Marshall was the patriarch of the new economics.
In 1890 Marshall's Principles of Economics was welcomed enthusiastically by economists and a popular audience as a revolutionary work in economics. His other major works were The Economics of Industry (1879), written with his wife; Elements of Economics of Industry (1892); and Industry and Trade (1919). Besides his writing and dedicated teaching, Marshall created the British Economics Association in 1890 (Royal Economics Society after 1902), and he directly influenced government policy on currency, prices, gold and silver, fiscal affairs, poor relief, local taxes, and international trade.
The content and method of Marshall's economics were largely original, but his basic assumptions were derived from the 19th-century belief that social reform depended initially upon the reform of character. He never doubted that every man sought his own, or at least his children's, best interest; that "work" purified human nature, stimulating personal and social progress; or that capitalism would be inherently progressive if it was made more efficient.
Marshall's economic analysis began with the quasistatic, evolutionary institutions of free enterprise and developed as a search for measurable regularities in economic phenomena. Since money could be measured regularly, Marshall studied prices. His most important technical contributions were in price and value analysis. The value of things, which he recognized as necessarily relative and subjective, was expressed as money prices, reached through an elastic play of forces behind demand and supply. "Utility," the power of goods and services to satisfy consumers' wants, and demand fluctuated in relation to price. Price, in turn, was determined both by the cost of production and by judgments about utility, the two inseparable blades of the economic scissors. Utility, being subjective, was not measurable, but it did reflect a psychological attitude critical in any economic activity. This was typical of the "marginal disutility of labor," that point at which the worker decided that he had nothing further to gain from additional work.
Nineteenth-century political economy ended and the new economics began with Marshall's pioneering use of econometrics; his creation of economics as a rigorous discipline with its own content and method; his attempt to unify competitive economic theories and practices; and his belief in the evolutionary nature of economic knowledge. Marshall's overweening influence led two generations of economists in Britain and America to spend their professional lives discussing, restating, developing, interpreting, altering, and questioning his doctrines and tools of analysis.
The Memorials of Alfred Marshall (1925), edited by A. C. Pigou, is an indispensable collection, including John Maynard Keynes's classic essay "Alfred Marshall, 1842-1924." Marshall's testimony before Parliamentary commissions was published for the Royal Economic Society as Official Papers (1926). Marshall's wife, Mary Paley Marshall, wrote What I Remember (1947). There is a great deal of interpretation and commentary on Marshall. Two of the most objective accounts, written within a proper historical context, are in Terence Wilmot Hutchison, A Review of Economic Doctrines, 1870-1929 (1953), and Robert Lekachman, A History of Economic Ideas (1959).
Coase, R. H. (Ronald Henry), Essays on economics and economists, Chicago: University of Chicago Press, 1994.
Groenewegen, Peter D., A soaring eagle: Alfred Marshall, 1842-1924, Aldershot; Brookfield, Vt.: E. Elgar, 1995. □
John R. Presley