The one-handed economist

Chapter 1 begins with (p 1):

Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.

Note two things. Marshall defines economics as political economy and then says economics examines “individual and social action.” This broader definition has been narrowed by individual action (methodological individualism) while leaving social/political actions to political scientists. I regret this division when most topics mix economic, social and political dynamics.

Marshall then says that our actions reflect our work habits and religious beliefs, which is why economics  studies both wealth and humanity. He then  prioritizes the study of helping the poor gain wealth over helping the comfortable get rich because poverty is much worse. This observation is often (rightly) used to justify taxing the rich to help the poor, since the poor gain much more from $1 than the rich lose by paying it. (Economists frown on “interpersonal comparisons of utility” class comparisons are easier to justify due to falling marginal utility of income.)

Marshall explains that such progress is new, relative to those (beginning with Aristotle?) who accepted poverty and slavery as “natural.” Marshall thinks that the Industrial Revolution (a term that does not appear in the book) has reduced “poverty and ignorance” among the British working classes (p 3):

This progress has done more than anything else to give practical interest to the question whether it is really impossible that all should start in the world with a fair chance of leading a cultured life, free from the pains of poverty and the stagnating influences of excessive mechanical toil; and this question is being pressed to the front by the growing earnestness of the age.

Marshall says the recent need for studying economics (“concerned with the wellbeing of mankind”) arises from the Industrial Revolution (p 4):

…the emancipation from custom, and the growth of free activity, of constant forethought and restless enterprise, have given a new precision and a new prominence to the causes that govern the relative values of different things and different kinds of labour.

Thus, it is the increase in free choices, whether selfish or unselfish, that has changed the nature of competition and created a paradox in which people are less generous with neighbors but more trusting with strangers who occupy a larger share of their economic lives. Such changes in relations upset fans of small-scale, self-reliant communities (e.g., Gandhi), but not those who see the advantages of using prices and markets to maximize the benefits from a given basket of resources.

Marshall points out that this trend is more humanitarian than critics might assume, since “the backwards races” have no shortage of sharp dealing. (Money lenders in poor villages are still quite dodgy.) Marshall defends the new norm of competitive trade among strangers because it leads to better deals but also because it rewards truth and honesty. (He also implies that wealth encourages generosity, e.g., taxpayers agreeing to pay millions of pounds to slave owners for their slaves, who were then freed.)

Marshall then explains how it would be nice to have selfless cooperation displace competition, but that “…the history of socialistic ventures, shows that ordinary men are seldom capable of pure ideal altruism for any considerable time together” [p 7]. And that’s why the nice things we have are the result of more “competition,” i.e., “more self-reliant habits, more forethought, more deliberate and free choice,” which Marshall calls “economic freedom” [p 8].

When did economic freedom become so important? Only after the Industrial Revolution blew apart (“like a wayward monster”) social and economic traditions. In the early years, these changes were terrible for many people, but they saved the British from Napoleon and helped a growing share of the working classes achieve greater economic, political and social freedom.

Marshall then notes how “economic science” needs to increase “that knowledge, which enables us to understand the influences exerted on the quality and tone of man’s life by the manner in which he earns his livelihood, and by the character of that livelihood” [p 11].

…and that’s how the chapter ends: with a promise to explain and magnify the economic freedom that has disrupted and (more than) improved the lives of so many people.

This is the second (and last) “easy” post in our series, as Chapter 1 is coming up next week!

Prefaces allow authors to put their work into context, so they provide some insights to the author’s thoughts on contemporary questions. Last week, I wrote some notes and comments on the 1890 Preface.

The 1920 Preface is for the eighth (and last) edition of Principles of Economics (PE) as Alfred Marshall (AM) died in 1924.

AM begins by admitting that his original plans for a second volume were over-ambitious in the context of changes driven by industrialization (and his own poor health). His Industry and Trade (1919) gave him 900+ pages to discuss new and different topics.

Marshall claims, again, that economic evolution is gradual rather than abrupt. Not even innovations or surprises are abrupt when one can see them as the result of unrelated and untracked ideas that “snap” together after years of development. AM notes that most economics should deal with continuous evolution whereas spasmodic shocks are rare enough to leave for later study.

(This comment comes a decade before the Great Depression put “shock” in the middle of politics and economics. I am not sure if Marshall would have changed his opinion, but various editions of PE were published amidst other market crises, so perhaps he will explain their origins in longer-running trends.)

AM explains that competition and firmly established monopolies are “normal” enough for PE whereas efforts to overthrow market orders or change policies belong in a study of “superstructure” that PE ignores. I’d say those latter activities belong in a study of political-economy, i.e., when rules and institutions affecting markets are in flux.

AM then explains how economics should take its cues from biology rather than mechanical mechanisms, but that a book dealing with foundations (such as PE) must use many mechanical ideas to convey basic concepts. In this context AM says that ideas of “equilibrium” are convenient for discussion but oversimplified when it comes to understanding real (biological) market dynamics.

(Sadly, many current economics students spend too much time on finding  equilibria and too little on the dynamics that move equilibria.)

AM then introduces “partial equilibrium analysis” (one of his major contributions to economics), which means looking at a few interactions while “holding all else equal,” i.e., freezing the role of other factors to make it easier to understand just a few interactions. AM notes that this “device is a great deal older than science” [p xiii].

AM then explains how this simple model of the world can be expanded —  holding less and less equal — to give more insights into “change and progress… of living force and movement” [p xiii].

AM then jumps into the returns to land (agriculture) versus the returns to labor and capital (industry). He says that productivity resulting from industry and trade has “suspended” the diminishing returns problems that worried Malthus and Ricardo. AM says “suspended” because it is still possible that increases in population (“even at a quarter of its present rate”) would bring back diminishing returns.

(These statements fall into current discussions of sustainability, which is aided by technological advance but undermined by population and affluence.)

Extending further his thoughts on time and dynamics, AM explains how he uses “marginal analysis” (thinking of new actions in the context of prior actions and their results):

[T]his notion of a margin is not uniform and absolute: it varies with the conditions of the problem in hand, and in particular with the period of time to which reference is being made. The rules are universal that, (1) marginal costs do not govern price; (2) it is only at the margin that the action of those forces which do govern price can be made to stand out in clear light; and (3) the margin, which must be studied in reference to long periods and enduring results, differs in character as well as in extent from that which must be studied in reference to short periods and to passing fluctuations [p xiv].

Some of you may be shocked by (1), given that economists often say “price equals marginal cost in competitive markets,” but that statement is only true in the short run in which fixed costs are not relevant. In the long run of a few months or more, prices equal to marginal costs would not produce enough revenue to maintain capital, which means either bankruptcy or higher prices. It is thus that “the notion of margin is not uniform,” and AM’s focus on time finds its proper context.

AM then predicts that those bringing differential calculus (the mathematics of small changes) from physics to economics will have a greater role in “that limited but important field of economic inquiry to which it is appropriate” [p xv]. It is a pity that AM does not define “appropriate” since some economists use calculus everywhere.

Marshall ends the Preface by thanking his wife and many colleagues. I was interested to learn that his wife also taught economics but was not allowed (as a woman) to graduate from Cambridge. Her husband’s opposition to women participating in economics shows that brilliance has limits.

Next week: Chapter 1.

Greetings and welcome to the first edition of the Marshall 2020 Project, i.e., spending 2020 reading and discussing chapters from Alfred Marshall’s Principles of Economics, which was first published in 1890 and finally in 1920. Since it’s 2020, I thought it would be fun to read a book last published 100 years ago, to think about and (re-)learn the economics that predated a mathematical revolution (devolution), reflected on empires and imperialism, and had not considered women’s suffrage and the arrival of many other freedoms… and evils. I’m looking forward to learning how different or similar life was, as portrayed in Principles, which was the most-popular perspective on economics in those days.

This project is informal by participation but not in structure. We will read one chapter per week, starting today, and discuss points raised (and missing) in each chapter. I’m going to begin by posting on one-handed-economist, but I will cross-post onto the Marshall2020 subreddit, where I think we might get more participation and discussion. Feel free to participate in either location.

To get started, I think it’s useful for me to write my real-time reflections while reading the chapter. In the future, I may just say “what do you think?” but I’m trying to break the ice.

Feel free to comment with your own thoughts or reply to mine.

(NB: Email me if you can’t get past the  anti-spam guards.)

Preface to the First Edition (1890)

[I’m writing comments as I read. I will try not to comment on every paragraph!]

The preface begins by claiming that economic thought does not jump by evolves gradually. The motto of the book (on the title page) is “Natura non facit saltum,” which I translate as “Nature — thus economies — do not jump.” This motto may come back to trouble us if it denies the existence of discontinuities (e.g., political upset or stock market panic).

The next paragraph swiftly defines economics as describing how things are rather than specifying ethics but ends with the claim (reasonable to me) that economics draws on common sense and thus provides a practical “guide in life.”

Wow. Now Marshall directly attacks the idea of a selfish “homo economicus” who cares only for themselves. He says that we all make altruistic gestures and that “continuity” requires economics to include altruism.

(This is a pretty heavy protest against what I thought was a much more recent ideal of homo economicus.)

Marshall then goes on to say that people will make the best decisions they can, whether they are “city men of ability” or “ordinary people who lack the will to conduct their affairs in a business-like way.” This sentiment denies the “rational calculator” stereotype that, along with self-interest (not altruism), was claimed of homo economicus.

(These words were written in 1890, but they could have been written as a counter-critique (not all deserved) to Milton and Rose Friedman’s Free to Choose [my review], published in 1980.)

Marshall then mentions that time also flows, rather than chopping, which means that our behavior in different times of our lives, or places, will deviate in a “continuous” manner from our other behaviors. This insight leaps to the continuous relation between renting and owning assets, which is mostly a question of time, since rents form the basis of income over time to property.

Marshall then offers an opaque (to me) rebuttal of Marx’s Labor Theory of Value, by saying that labor and effort are related to the value of objects, but that those values are not solely of labor (to be explained…)

Marshall then brings the continuity hammer down on those economists who would want to classify economic goods into discrete categories (public or private, normal or luxury), since their characteristics all flow into each other.

(I talk a lot about dividing the world into four types of goods, but I also know how they can change types but also fall into tricky edge cases.)

Marshal then alludes to the importance of biological, historical and mathematical perspectives on economic thinking, all of which are “continuous.” He then says:

“[I] attach great importance to the fact that our observations of nature, in the moral as in the physical world, relate not so much to aggregate quantities, as to increments of quantities, and that in particular the demand for a thing is a continuous function, of which the “marginal” increment is, in stable equilibrium, balanced against the corresponding increment of its cost of production.

In this, Marshall is evoking the “marginal revolution” that has just taken over much of economic thinking. He then says that the math used to explain these ideas is not necessary to understand them, although diagrams will be useful 🙂

The last delightful paragraph I leave for you to read.

Thoughts? Comments?

Next week: Preface to the Eighth Edition.