The one-handed economist

Appendix J

§1. This appendix covers a strange (and now forgotten?) debate over capital and labor. Although capital complements labor, some economists seemed to think that the “wages fund” (money available for wages) is limited by the amount of capital. This makes no sense to me in aggregate but it can matter in particular circumstances.

§2. In aggregate, wages depend on the balance of supply and demand (e.g., population versus economic activity), always mediated by relative market power.

§3. There is a connection between the markets for commodities and the markets for the capital and labor inputs to those commodities, but those connections are weaker or stronger depending on a number of factors (time, trade, substitutes, etc.). Many economists have wasted their time trying to identify the connection (e.g., Marx with labor theory of value).

§4. When is comes to divvying up the “national surplus” among various factors of production, relations are neither simple nor stable. There are many elements to consider.

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This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Appendix I

§1. Ricardo didn’t spell out all his assumptions, connect his theories with the real world, or bring logical vigor to his 1820 Principles of Political-Economy, which has led to — according to Marshall — unfair critiques that focussed on his inconsistencies rather than his larger ideas.

§2. Marshall gives many examples of where Ricardo’s partial or over-simplified statements led to confusion. The most significant misunderstanding was where Marx, using Ricardo’s own words, concluded that Ricardo thought that value arose only through labor inputs whereas Ricardo considered other inputs’ influences in other parts of his work.

§3. Marshall spends a few pages documenting arguments about the relations between production cost (supply), utility value (demand) and price, which reconciles the two in the same way as each blade of scissors (Marshall’s analogy) jointly produce a cut.

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This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Appendix H

§1. Production with increasing returns to scale (or marginal returns) creates a problem with the supply curve (sloping down?) and implies (natural) monopoly power.

§2. Marshall says it would be hard to find equilibrium if demand and supply are both sloping down. Later economists “fixed” this problem, I think, by holding scale constant in the short run (via fixed costs) and then allowing for flat or rising marginal costs. It seems that Marshall was looking at the long run, i.e., where there are no rigidities from fixed costs.

§3. Whoops! Marshall didn’t make that mistake. He discusses how rigidities are likely to affect production (scale) and thus allow for equilibrium (rising supply costs). That said, he does note that some industries with rapidly falling supply costs can result in “plunging” market prices as supply runs ahead of demand. This can happen with new technologies (e.g., cheap airlines) or trade (cheap good from China), for example.

§4. Marshall ends by arguing that declining marginal costs are unlikely in the long run for an entire industry, since demand would never exceed supply. That said, some firms in the industry might have cost advantages, and thus the opportunity to earn quasi-rents in the short run compared to firms on the margin, assuming all receive a market price.

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This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Appendix G

§1. By “rates”, Marshall means local [property] taxes. He begins by noting that taxes that cost more than they give are “onerous” whereas those that give back more than they cost (easy when they are focussed on collective goods rather than private subsidies) are “beneficial”. Since rates are local, they will attract/repel workers and citizens based on that benefit/cost calculation.

§2. A building on land will be more/less profitable over the long term (think net present value) if it fits/misses the neighbourhood’s character, and this character changes over time.

§3. Onerous rates can reduce the value of a building to those who may rent it; even beneficial rates can be bad if they deliver value far later than they are collected.

§4. It’s a good idea to have the same national tax on building values (close to my idea), whereas local rates (on building and/or land value) may need to vary with local conditions. Hopefully they are beneficial!

§5. The incidence (burden) of rates will balance out over time, but it can be onerous (or beneficial) in the short run, which will tend to affect decisions on where to live/work/build.

§6. Speculation occurs at the border between town and outlying areas (e.g., farms), i.e., where the gap between current (use) value and future (converted) value is greatest.

§7. Landlords and farmers tend to share the burdens of rates over the long term, due to lower turn over of occupation.

§8. Rates on residential property should be higher than those on commercial property because turnover is lower in the former (benefits and costs can sync over time) and competition for location is higher in the “commercial” sectors (where rent is an important part of costs/profits).

…while taxes, and especially graduated taxes on expenditure in general [e.g., VAT], present great technical difficulties to the tax collector; and further cost much more to the consumer directly and indirectly than they bring into the revenue; taxes on houses are technically simple, cheap in collection, not liable to evasion, and easy of graduation (p 661).

§9. Marshall says, again, that the costs and benefits of rates need to be balanced over the long run, to make sure that those who pay also receive the benefits from their contributions.

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This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Appendix F

In this very short appendix, Marshall explains how the exchange rate in a barter economy (e.g., apples for nuts) will be somewhat arbitrary compared to prices in an economy using money.

In a barter economy, each side has a willingness to trade based on the marginal utilities (MU), since (assuming one has nuts to trade for apples) MU is rising as their stock of nuts is falling, and MU is falling as their stick of apples is rising. In a monetary economy, prices are more stable because (it is assumed) the stocks of both apples and nuts are “unlimited” because apple traders can use cash to buy anything, not just nuts.

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This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.