The one-handed economist

§1. The form of wealth has changed as civilization has passed through “revolutions”, from personal ornaments among hunter gatherers, to land and hand tools during the Agricultural Revolution, to expensive machines for creating and moving goods in the Industrial Revolution. These days, wealth is embodied in algorithms, data and other “intangible” capital and intellectual property.

§2. Wealth is possible with savings, and savings (i.e., capital) help generate further wealth:

As civilization has progressed, man has always been developing new wants, and new and more expensive ways of gratifying them…And with the growth of openings for the investment of capital there is a constant increase in that surplus of production over the necessaries of life, which gives the power to save… . After a time civilization became possible in temperate and even in cold climates; the increase of material wealth was possible under conditions* which did not enervate the worker, and did not therefore destroy the foundations on which it rested. p 186

* Marshall’s footnote to “conditions” is fascinating:

For instance, improvements which have recently been made in some American cities indicate that by a sufficient outlay of capital each house could be supplied with what it does require, and relieved of what it does not, much more effectively than now, so as to enable a large part of the population to live in towns and yet be free from many of the present evils of town life. The first step is to make under all the streets large tunnels, in which many pipes and wires can be laid side by side, and repaired when they get out of order, without any interruption of the general traffic and without great expense. Motive power, and possibly even heat, might then be generated at great distances from the towns (in some cases in coal-mines), and laid on wherever wanted. Soft water and spring water, and perhaps even sea water and ozonized air, might be laid on in separate pipes to nearly every house; while steam-pipes might be used for giving warmth in winter, and compressed air for lowering the heat of summer; or the heat might be supplied by gas of great heating power laid on in special pipes, while light was derived from gas specially suited for the purpose or from electricity; and every house might be in electric communication with the rest of the town. All unwholesome vapours, including those given off by any domestic fires which were still used, might be carried away by strong draughts through long conduits, to be purified by passing through large furnaces and thence away through huge chimneys into the higher air… This conjecture as to the ultimate course of town improvement may be wide of the truth; but it serves to indicate one of very many ways in which the experience of the past foreshadows broad openings for investing present effort in providing the means of satisfying our wants in the future.

§3. Marshall points out that it’s important to balance between spending all earnings as a spendthrift and saving too much as a miser. He acknowledges how cultures (as well as classes within cultures) differ on that balance, with  this slightly offensive but insightful comment:

In India, and to a less extent in Ireland, we find people who do indeed abstain from immediate enjoyment and save up considerable sums with great self-sacrifice, but spend all their savings in lavish festivities at funerals and marriages. They make intermittent provision for the near future, but scarcely any permanent provision for the distant future: the great engineering works by which their productive resources have been so much increased, have been made chiefly with the capital of the much less self-denying race of Englishmen. p187

These differences would be attributed to discount rates (or time preferences), with savers/lenders possessing lower discount rates and spenders/borrowers higher rates. The poor tend to have high discount rates due to a combination of “live for today” (YOLO), pessimism over life expectancy, and powerlessness (spend it now before it’s stolen) — all problems that the British inflicted on the Indians and Irish. So Marshall’s condescension is perhaps misplaced.

§4. Indeed, he sees the issue (my emphasis):

The thriftlessness of early times was in a great measure due to the want of security that those who made provision for the future would enjoy it: only those who were already wealthy were strong enough to hold what they had saved; the laborious and self-denying peasant who had heaped up a little store of wealth only to see it taken from him by a stronger hand, was a constant warning to his neighbours to enjoy their pleasure and their rest when they could…Insecurity of this kind also is being diminished: the growth of enlightened views as to the duties of the State and of private persons towards the poor, is tending to make it every day more true that those who have helped themselves and endeavoured to provide for their own future will be cared for by society better than the idle and the thoughtless.

§5. New financial and market instruments have made it easier to turn wages into wealth. One can rent housing instead of buying it, buy beer instead of making it, etc. These developments bring greater satisfaction and security from the same base income.

§6. Although some save out of competitive instincts, most save to leave wealth to their families. Some are tempted to consume extravagantly, while those with poor backgrounds are the most thrifty. Those who grew up in the Depression (the Silent Generation) fell into this category, as do many Gen-Zers experiencing both the Great Recession and Covid-shocks.

§7. The rich use their savings to invest in further capital. The working and middle classes invest in their children’s physical and intellectual capital, respectively. Given this, Marshall says it’s perhaps better to tax the rich and use their money to help the lower classes accrue more “human capital” (my words), since the ROI to society is much greater.

§8. Marshall spends a few pages discussing the pros and cons of spending less now (saving) so as to have more later, assuming that the savings can be safely and productively set aside.

§9. Savings rates depend on the rate of interest. Lower interest means more years of work to save more. In 2020, with interest rates near zero, people face the depressing reality of having to work longer and consume far less in their quest to save “enough” for retirement. This situation can be blamed on central banks that are printing so much money — and buying so much debt — that savers (qua investors) faced with miserable returns. And thus do we see the rich get richer as their assets rise in value while the poor (or middle classes) see their savings in a coma 🙁

§10. In summary (p 196):

The accumulation of wealth is governed by a great variety of causes: by custom, by habits of self-control and realizing the future, and above all by the power of family affection. Security is a necessary condition for it, and the progress of knowledge and intelligence furthers it in many ways.

A rise in the rate of interest offered for capital, i.e., in the demand price for saving, tends to increase the volume of saving. For in spite of the fact that a few people who have determined to secure an income of a certain fixed amount for themselves or their family will save less with a high rate of interest than with a low rate, it is a nearly universal rule that a rise in the rate increases the desire to save; and it often increases the power to save, or rather it is often an indication of an increased efficiency of our productive resources: but the older economists went too far in suggesting that a rise of interest (or of profits) at the expense of wages always increased the power of saving: they forgot that from the national point of view the investment of wealth in the child of the working man is as productive as its investment in horses or machinery.

§11. In his “Note on the Statistics of the Growth of Wealth,” Marshall compares the UK to the US and France. He explains that land, houses and livestock constitute wealth, and that the value of land depends on population density. Thus, France is “worth” double the UK or US, but the value of US land will skyrocket as its population increases. That seems to be true, with the exception of prices in pre-Brexit London ;).

§1. Marshall worries that the “vigorous races” are not perhaps taking advantage of scientific and technological advancements because they are indulging tastes for luxury over hard work, lack the training needed to understand and advance science (a problem that is even worse today!), and delayed by the lag between an innovation’s arrival and the development of an ecosystem to maximize its value. He also laments the lack of respect for the modern factory worker over the (far less productive) craftsmen of past eras.

§2. Marshall takes another jab at the “very backward races” that cannot be taught productivity (see prior chapter) but then argues that basic education and good work habits allow the “unskilled worker” to work in a broader range of jobs (e.g., from making shoes to refining oil) than they could in the past. Advances in machines and production processes make it easier to “add labor” to any sort of production.

§3. Mothers, then fathers, then servants (if any) affect childhood development. Mothers tend to convey morals; servants can drag a child’s perspective downwards, with their “self-indulgent habits.” School is useful when “a truly liberal general education adapts the mind to use its best faculties in business and to use business itself as a means of increasing culture.”

§4. Technical education is pulled towards specialization by sophisticated manufacturers and away from the “general apprentice system” that gave broad knowledge in the many processes related to a specific product. The Continentals have more thorough education, but their deeper knowledge may not help them compete with benefit-cost driven English or Americans. Marshall suggests spending half the year in school and the other half working as a means of balancing academic and practical skills. Although the English lead the world in inventing and innovating, “the excellence of the common schools of the Americans, the variety of their lives, the interchange of ideas between different races among them, and the peculiar conditions of their agriculture have developed a restless spirit of inquiry; while technical education is now being pushed on with great vigour.” The Germans benefits from traveling to learn, unlike the English, who are “great travellers; but partly perhaps on account of their ignorance of other languages they seem hardly to set enough store on the technical education that can be gained by the wise use of travel” [p 175].

§5. Although the share of geniuses among the working classes is lower than the share in the upper classes (remember Marshall’s Social Darwinist sympathies), the sheer number of working class children means that much potential is going to waste without access to education and training. He thus calls for educating most workers as a means of promoting growth but also improving their quality of life.

§6. Education in art is not as useful as technical education, and it is under threat by the mechanization of so many elements of life.

§7. Positive externalities!

We may then conclude that the wisdom of expending public and private funds on education is not to be measured by its direct fruits alone. It will be profitable as a mere investment, to give the masses of the people much greater opportunities than they can generally avail themselves of… And the economic value of one great industrial genius is sufficient to cover the expenses of the education of a whole town… All that is spent during many years in opening the means of higher education to the masses would be well paid for if it called out one more Newton or Darwin, Shakespeare or Beethoven. p 178

§8. Rising wages in any given “grade” of work (e.g., “responsible manual labor vs automatic brain workers”) can attract more workers, thereby breaking the historic norm of children following in their parents’ footsteps, as if bound by caste. Marshall thus broaches social mobility, a topic he promises to address later.

§1. This chapter is coincidentally “timely” in these days of coronavirus. Marshall begins by noting that physical, mental and moral strength is what leads to wealth but also that the same wealth “if wisely used” contributes to strength. I think it’s pretty clear that some countries are using their wealth wisely… and some not.

§2. Marshall then opines that population depends on vigour, which depends on climate and race, where he veers onto dangerous ground — and backs off again:

In warm countries we find early marriages and high birth-rates, and in consequence a low respect for human life: this has probably been the cause of a great part of the high mortality that is generally attributed to the insalubrity of the climate. [Footnote: A warm climate impairs vigour. It is not altogether hostile to high intellectual and artistic work: but it prevents people from being able to endure very hard exertion of any kind for a long time.] Vigour depends partly on race qualities: but these, so far as they can be explained at all, seem to be chiefly due to climate. [Footnote: Race history is a fascinating but disappointing study for the economist: for conquering races generally incorporated the women of the conquered; they often carried with them many slaves of both sexes during their migrations, and slaves were less likely than freemen to be killed in battle or to adopt a monastic life. In consequence nearly every race had much servile, that is mixed blood in it: and as the share of servile blood was largest in the industrial classes, a race history of industrial habits seems impossible.] p162

§3. Marshall sometimes sounds wiser than he was (p164):

• The great mortality of infants among the poor is largely due to the want of care and judgment in preparing their food; and those who do not entirely succumb to this want of motherly care often grow up with enfeebled constitutions. This statement is wrong not complete, since infant mortality was also linked to dirty water and milk.
• Badly-built houses with imperfect drainage cause diseases which even in their slighter forms weaken vitality in a wonderful way; and overcrowding leads to moral evils which diminish the numbers and lower the character of the people. Although the first part of this statement seems to make sense, it’s not the construction of the buildings that causes diseases, but the manner in which poor drainage pollutes drinking water drawn from communal wells. The second part on overcrowding and “moral evils” leaves much to the imagination.
• Overwork of every form lowers vitality; while anxiety, worry, and excessive mental strain have a fatal influence in undermining the constitution, in impairing fecundity and diminishing the vigour of the race. This is still true!

§4. In another comment that deserves prominence these days, Marshall says (p 164):

Next come three closely allied conditions of vigour, namely, hopefulness, freedom, and change. All history is full of the record of inefficiency caused in varying degrees by slavery, serfdom, and other forms of civil and political oppression and repression.[Footnote: Security of person and property are two conditions of this hopefulness and freedom; but security always involves restraints on freedom, and it is one of the most difficult problems of civilization to discover how to obtain the security which is a condition of freedom without too great a sacrifice of freedom itself.] In all ages colonies have been apt to outstrip their mother countries in vigour and energy… the most important cause of all is to be found in the hope, the freedom and the changefulness of their lives. [Footnote: …a shifting of places enables the more powerful and original minds to find full scope for their energies and to rise to important positions: whereas those who stay at home are often over much kept in their places. Few men are prophets in their own land; neighbours and relations are generally the last to pardon the faults and to recognize the merits of those who are less docile and more enterprising than those around them. It is doubtless chiefly for this reason that in almost every part of England a disproportionately large share of the best energy and enterprise is to be found among those who were born elsewhere.]“

Take that, Brexiteers!

§5. Another section that deserves to be quoted (p165):

Bodily and mental health and strength are much influenced by occupation. At the beginning of this century the conditions of factory work were needlessly unhealthy and oppressive for all, and especially for young children. But Factory and Education Acts have removed the worst of these evils from factories; though many of them still linger about domestic industries and the smaller workshops.

The higher wages, the greater intelligence, and the better medical facilities of townspeople should cause infant mortality to be much lower among them than in the country. But it is generally higher, especially where there are many mothers who neglect their family duties in order to earn money wages.

§6. The young, best and the brightest migrate to towns to seek opportunity. Some move to the suburbs, for clean air and water (“supply and drainage”, so Marshall did understand clean water), better schools &c. Going further, “there is no better use for public and private money than in providing public parks and playgrounds in large cities, in contracting with railways to increase the number of the workmen’s trains run by them…”

§7. Marshall ventures into Social Darwinism with fears that the upper classes — due to their “selfish” desire to gain social standing for their children — are being displaced by the faster-breeding working classes, that the weak are kept alive by medical advances, and that progress slows when the “conquoring races” have fewer babies. [Footnote: “Again, on the Pacific Slope, there were at one time just grounds for fearing that all but highly skilled work would be left to the Chinese; and that the white men would live in an artificial way in which a family became a great expense. In this case Chinese lives would have been substituted for American, and the average quality of the human race would have been lowered” p 167]. So, yeah, Marshall was sympathetic to Social Darwinist racist ideas when he was not confronted by data (see §2, above).

§8. Marshall ends the chapter by noting that children should have better physical and mental development than their parents, how progress and government health programs are prolonging lives, and how racial progress slows with too many children, too few children, or over-crowding towns. Overall, he is optimistic, with “the average duration of life for both men and women increasing steadily…” [p169].