Equilibrium of normal demand and supply

Book 5, Chapter 3

§1. What determines supply in the market? An individual trader considers a  host of factors (p 281):

Dealers take account of the areas sown with each kind of grain, of the forwardness and weight of the crops, of the supply of things which can be used as substitutes for grain, and of the things for which grain can be used as a substitute… If it is thought that the growers of any kind of grain in any part of the world have been losing money, and are likely to sow a less area for a future harvest; it is argued that prices are likely to rise as soon as that harvest comes into sight, and its shortness is manifest to all. Anticipations of that rise exercise an influence on present sales for future delivery, and that in its turn influences cash prices.

From this, we can see how the market price depends on the mix of opinions from dealers, buyers and sellers, and how price volatility reflects differences in these opinions.

§2. The cost of producing a good depends on a mix of labor and capital costs (money paid), as well as their opportunity cost at the margin (money not paid). This formulation disagrees with Marx’s Labor Theory of Value because it evaluates capital costs not in terms of the embedded labor it took to produce that capital but in the capital’s alternative uses.

§3. The price for a good will depend on the cost of inputs needed to bring it to customers. Thus, a tree is cheap when it’s bought from the logger, but furniture made from that tree reflects the costs of transportation, transformation, design, retail rents, etc.

All market participants will change the mix of inputs as relative costs shift, to maximize profits. Thus Marshall introduces the Principle of Substitution.

§4. Most market participants watch each other, making it possible to assume a “single price” for a given good that changes with time and circumstances. The price will move up (or down) as demand exceeds (or trails) supply. Better run firms will expand faster (or contract slower) than worse run firms.

§5. The price of goods usually increases as quantity sold increases, due to the need to attract increasing quantities of inputs. Economies of scale (spending more capital to shift to larger machines) can lower costs at higher volumes, but that’s discussed later.

§6. Marshall describes “equilibrium” in price and quantity, before explaining how that equilibrium is moving more randomly than “a disturbed stone on a string returning to rest,” i.e.,

In an age of rapid change such as this, the equilibrium of normal demand and supply does not thus correspond to any distinct relation of a certain aggregate of pleasures got from the consumption of the commodity and an aggregate of efforts and sacrifices involved in producing it… We cannot foresee the future perfectly. The unexpected may happen; and the existing tendencies may be modified before they have had time to accomplish what appears now to be their full and complete work. The fact that the general conditions of life are not stationary is the source of many of the difficulties that are met with in applying economic doctrines to practical problems.

§7. Marshall gives one of his enduring metaphors for the relative importance of demand (value) versus supply (cost) in determining market equilibrium (p290):

We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. It is true that when one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not strictly accurate, and is to be excused only so long as it claims to be merely a popular and not a strictly scientific account of what happens.

In the same way, when a thing already made has to be sold, the price which people will be willing to pay for it will be governed by their desire to have it, together with the amount they can afford to spend on it. Their desire to have it depends partly on the chance that, if they do not buy it, they will be able to get another thing like it at as low a price: this depends on the causes that govern the supply of it, and this again upon cost of production. But it may so happen that the stock to be sold is practically fixed. This, for instance, is the case with a fish market, in which the value of fish for the day is governed almost exclusively by the stock on the slabs in relation to the demand: and if a person chooses to take the stock for granted, and say that the price is governed by demand, his brevity may perhaps be excused so long as he does not claim strict accuracy.

…and with scissors and fish in hand, the chapter ends.


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 away from institutional induction and towards mathematical deduction.

Temporary equilibrium of demand and supply

Book 5, Chapter 2

§1. People make various trades for benefit without worrying about equilibrium, or balancing aggregates of supply and demand, which occurs when many actors repeatedly trade (semi-)commodified goods.

§2. Marshall gives the example of a corn market — a “grain” market in the US — in which buyers (with willingness to pay) and sellers (with willingness to accept) converge on an equilibrium price of 36 pence/quarter at which quantity demanded equals quantity supplied. Fluctuations around 36d occur, but they do not persist, since buyers wait out “outrageous” offers and sellers ignore “lowball” bids.

§3. Prices in commodity markets do not deviate too far from equilibrium because traders can borrow (or lend) money to smooth bumps. Prices (wages) in labor markets can vary a lot because workers go hungry if they cannot eat whereas capitalists can eat while they wait for willing workers. The implication, which Marshall elaborates in Annex F (“Barter”), is that money allows commodity markets to clear “on the margin” while labor markets (which have a barter component when one considers that workers are offering heterogeneous units of labor) have a lot of inframarginal noise due to workers getting bad deals. Gender-wage gaps, for example, can be explained by men driving harder bargains than women when negotiating their starting salaries.


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 away from institutional induction and towards mathematical deduction.

Introductory. On Markets

Book 5, Chapter 1

Book 5 concerns “General relations of demand, supply and value.”

§1. Price balances supply and demand. Marshall defers discussion of other factors affecting supply, demand and prices — money, credit, foreign trade, labor, and so on — to a later volume, which he never wrote.

§2. In a “market,” buyers and sellers see the same price for the same good. Most markets are local (e.g., a street market) but they can be physically separated if information flows allow price comparison and thus convergence (subject to transport costs).

§3. Improved communications and transport have created “wide” markets for the same goods, with similar prices. Commodification and standardization makes it easier to have wider markets. Goods that are heavy relative to their value (Mashall uses bricks, but water also fits) will be traded in “narrow” markets where prices reflect local supply and demand.

§4. Markets for gold, silver and (heavily traded) stocks and bonds will tend to have one global price. Traders will ask small margins (bid-ask spreads) for these “liquid” assets, since they are sure to find counterparties. Illiquid assets have larger bid-ask spreads and more price noise.

§5. Custom-made goods (e.g., tailored suits or portraits) and perishable or bulky goods will sell for a range of prices, especially if trade is infrequent. Prices from wide liquid markets (e.g., London) will influence prices in narrow illiquid markets if some traders can switch between markets to get better deals. This arbitrage converges prices.

§6. Besides space, time influences supply and demand. Here Marshall makes some insightful comments (which are often buried/forgotten by vague references to elasticity), i.e.:

We shall find that if the [time] period is short, the supply is limited to the stores which happen to be at hand [Qs is fixed and vertical; D goes up/down to determine P]: if the period is longer, the supply will be influenced, more or less, by the cost of producing the commodity in question [S slopes up; D goes up and down more gradually to determine P]; and if the period is very long, this cost will in its turn be influenced, more or less, by the cost of producing the labour and the material things required for producing the commodity [S shifts in or out]. These three classes of course merge into one another by imperceptible degrees. p 275

The next chapters explore these dynamics.


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 away from institutional induction and towards mathematical deduction.

Conclusion. Correlation of the tendencies to increasing and to diminishing return

Book 4, Chapter 13

§1. A clever entrepreneur can grow a business with good management, talented workers, economies of scale in purchasing materials and using machines, etc. This firm might grow to dominate the industry but its success will be limited by the founder’s capacities and threats from smaller competitors.

§2. Pulling back to look at the entire industry, it’s useful to consider the “representative firm” when thinking of productivity, profits, etc. This firm is average in many senses, but it’s not a random pick. Older and younger firms with developed or under-developed processes, for example, are not “average”.

Good management brings increasing economies of scale (or organization) that can offset decreasing economies from exploiting Nature or other limited resources. These forces might balance out — or not.

§3. A growing population can enjoy growing prosperity for all if raw materials are not constrained and everyone has access to adequate space, clean air and water. Thus, Marshall sees benefits from population growth during the Industrial Revolution while also warning that wealth per capita will not increase forever. These observations sit neatly in the middle of the optimism of Julian Simons and the pessimism of Paul Ehrlich.


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 away from institutional induction and towards mathematical deduction.

I/O, continued. Business management

Book 4, Chapter 12:

§1. The first step in expanding a business is hiring managers to handle logistics, thereby leaving “specialists” to focus on producing goods and services. Teachers, for example, have administrative staff to arrange classrooms, collect fees from students, etc.

§2. These managers (qua entrepreneurs) bear risk, provide capital and earn profits in proportion to their skill at matching producers with customers, or supply and demand.

§3. Marshall suggests, for example, the building contractor as a middleman who adds more value than a homeowner by reducing waste and confusion. A real estate developer, likewise, adds even more value by operating at a larger scale.

§4. Larger scales are not always better. In producing clothing or shoes, it may be better to concentrate production in a large factory or outsource to small home producers. Workers, likewise, can be better or worse off relative to home producers, depending on wage guarantees, competition over piece-rates, etc.

§5. Managers must understand things as well as employees. Differing mixes of these skills lead to different paths to success or failure.

§6. Although the sons of businessmen (Marshall writes in an age when women did not lead firms) learn business at the dinner table, they might prefer social or academic careers or living off their father’s work. Thus, it may be better to replace a founding father with professional managers.

§7. Manager-owners often find good replacements among their staff. In some cases, a qualified assistant can become a partner by marrying the owner’s daughter (Marshall comments approvingly on the hopes this path gives to many talented but underprivileged youth). Businesses run by equal partners with different skills can also be productive.

§8. Joint stock companies allow for a division of labor among passive investors, active managers and directors who oversee managers on behalf of shareholders.

§9. The managers of joint stock companies might not work as hard as they should for shareholders, a Principal-Agent dilemma (the term dates from the 1970s) that also arises when politicians put themselves before citizens.

§10. In co-operatives, employees share ownership, profits and decisions. This “perfect middle” will not work if employees do not trust each other, shirk in their duties or disagree on the value of each contribution.

§11. Business growth is not usually held back by a lack of capital (banks are eager lenders) but a dearth of talented, experienced and wise founders with the right combination of Geld, Geduld, Genie und Glück (gold, patience, genius and luck). Successful managers sometimes start on the shop floor, sometimes in the owner’s nursery.

§12. Good managers will accrue capital, market share and profits at the expense of bad managers over time.


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 away from institutional induction and towards mathematical deduction.

I/O, continued. Production on a large scale

Book 4, Chapter 11

§1. Manufacture is not location specific. Customers can be far away; the quality of land or water does not matter as much as it does for agriculture. Manufacturers are more efficient in terms of Economies of Skill and Machinery. (Marshall dismisses Economy of materials, which are — with the exception of “agriculture and domestic cooking” — often used very efficiently. US pork processors used to say they used “everything but the squeal.”)

§2. “Economies of machinery” refers to the cost advantage that a large manufacturer can gain by amortizing the cost of an expensive but efficient machine across many units manufactured. Thus are larger firms more cost competitive, with most machines as well as ordering parts and inputs in bulk, against smaller competitors. Such advantages, combined with protections via patents that smaller firms often cannot afford to file or license, means that industries tend to concentrate, as larger firms buy smaller ones. The Economist just discussed this problem!

§3. “Economies of skill” refer to the advantages in a division of labor. Larger manufacturers also have an advantage of a larger, more varied workforce, which increases access to special skills or genius.

§4. The entrepreneur can focus on big picture strategy in a larger firm by delegating other tasks; in a smaller firm, there are more distractions but also the opportunity to keep details — and quality control — in focus.

§5. Although the entrepreneur can often grow their business with hard work and (a touch of genius), the larger a business gets in market share, the harder it is to please customers seeking certain features, customization, or variety. Thus, is there a constant struggle between different sized firms in markets. (This analysis does not apply to network economies that help firms like Amazon or Facebook!)

§6. Standardization and economies of scale help larger manufacturers and retailers gain customers with lower prices, at a cost to smaller competitors.

§7. Industries where geography matters — farming, mining, transport — are less subject to economies of scale.


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 away from institutional induction and towards mathematical deduction.

I/O continued: The concentration of specialized industries in particular localities

Book 4, Chapter 10

§1. Most early trade was of high-value goods that were light enough to transport to willing buyers. Specialization began with these goods (and resources).

§2. Local specialization occurred when local resources (e.g., metals) were rare, when “demand” appeared (e.g., the royal court), or for a variety of reasons that may date back into forgotten history.

§3. Industry tends to persist, in clusters, once it gets going. That’s because skills and ideas transmit “in the air,” and capital can be used intensively. As local institutions grow and develop, industry gains even more productivity. Imbalances occur if the industry only employs one type of worker in the population (e.g., men in mines), so there’s an incentive to add complementary industries (e.g., textiles to employ women and children) so families can prosper. One-industry towns are thus bad for families, and — because they are not-diversified — vulnerable to downturns. Since trading adds value, they pay higher rents in city centers, while industrial areas occupy cheaper land outside of centers. For more on industrial evolution, read my review of The Economies of Cities (1969) by Jane Jacob.

§4. Cheaper communication, transportation and trade (via lower tariffs) increase trade and specialization, but also migration of skilled workers, which fosters industrial diversification elsewhere. These two trends are good for consumers, competition and innovation.

Recall that “globalization” was very strong before WWI and into the 1920s. In the Depression, it was reversed (making the depression worse), and the Cold War and communism slowed globalization until the 1990s put it back into high gear. With Trump, Brexit, and Covid, globalization has gone into reverse, which harms consumers and workers while benefitting businesses with stronger market power (due to less competition).

“Farmers” in the middle ages also made cloth, tools, buildings, etc., so they were not always “growing food.” Industrialization brought machines and power to agriculture, increasing productivity per worker, but the industrial workers who provide these machines are not counted as the workforce “growing food.” Data on workers or economic activity can therefore be misleading.

Workers do not leave farms to go to factories but into services. The share of workers in factories around 1900 was the same as in 1850 but their output has grown enormously. The growth in service jobs (education, housekeepers, bureaucracy, et al.) occurs because these areas are not amenable to automation. (What a contemporary comment! Read more on the Balassa–Samuelson effect.)

//end chapter 10


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 away from institutional induction and towards mathematical deduction.

I/O, continued. Division of labour. The influence of machinery.

Book 4, Chapter 9

§1. Marshall promises to look into labor, its division and relation to capital and management over several chapters. He begins by supporting “practice makes perfect,” i.e., that:

The mind of the merchant, the lawyer, the physician, and the man of science, becomes gradually equipped with a store of knowledge and a faculty of intuition, which can be obtained in no other way than by the continual application of the best efforts of a powerful thinker for many years together to one more or less narrow class of questions.

While I agree with this formulation, I call attention to the use of “intuition,” which most people define as something you’re born with, but Marshall defines as something acquired. Websters defines it as:

1a: the power or faculty of attaining to direct knowledge or cognition without evident rational thought and inference
2: quick and ready insight

…so Marshall (and many academics) misuse the word, to the detriment of students who seem to “lack intuition” towards non-obvious ideas — a topic I’ve written about [pdf].

§2. The division of labor allows a worker to become more productive, but an efficient worker’s methods of breaking down tasks into simple, repeated steps makes it easier to replace that skilled worker with a machine or “guided” unskilled worker.

§3. Workers are not replaced by machines due to the division of labor as much as the need to produce large volumes of identical parts at scale. It is thus the size of the market that drives mechanization. Put differently, a business will pay fixed costs (FC) if that’s less than the cost savings (Δc) times volume (q), i.e., FC ≤ Δcq.

Mechanization is also a learning process, so each generation of machines, unlike each generation of skilled workers, is likely to be even more efficient.

§4. Since machines are good at producing identical parts, they allow for interchangeable parts, which aid in repairs (no special modifications needed), lower costs, and make remaining workers (with better general skills) more productive.

Marshall gives the example of American watch-manufacturers using standard parts as a means of taking market share from the Swiss watchmakers selling more expensive, less-reliable watches. That’s one reason I was happy to buy this 1921 Hamilton:

§5. Marshall turns to printing, which has also gone through several technological revolutions (from hand-cut plates, to hand-placed letters, to hot-lead type, to digital layouts). These steps, he emphasizes, can be broken into smaller and more specialized niches (somewhat weakening the power of craft), but their output facilitates new trades requiring more skills (journalist, photographer, artist, et al).

§6. Marshall pushes back against claims that automation has left workers with nothing to think about, without craft. Instead, he emphasizes how a woman can run four weaving machines to produce far more cloth than she could make after a day’s drudgery at the hand-loom. The children of poor farmers, likewise, can earn more and use more education, than they could growing potatoes. Also interesting is his point on how machine labor saves a man’s muscles, so he can relax rather than collapse at the end of a working day. (The traditional critique of the Agricultural and Industrial Revolutions is that they resulted in more work — and less satisfaction? — than hunter-gatherer lifestyles, but those lifestyles are neither possible for nearly 8 billion people, nor attractive to most.)

§7. Marshall ends by clarifying how improvements within a factory or business are called “internal economies” (of efficiency) whereas “external economies” arise from what would today be called a “cluster” of related businesses, suppliers and buyers. External economies are next.


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 away from institutional induction and towards mathematical deduction.

Industrial organization

Book 4, Chapter 8

§1. Industrial organization (I/O) is the branch of economics concerned with the internal workings of organizations (e.g., Coase’s 1937 Theory of the Firm) as well as their interactions in (non-)market settings.

Marshall’s discuss predates these ideas. He begins with a discussion of how individual specialization (based on the division of labor popularized by Adam Smith) requires group cooperation. Marshall asserts that such inter-personal cooperation is the key to evolutionary success, a point elaborated in authoritative detail in Joseph Heinrich’s 2015 Secret of Our Success [my review]. Marshall cautions that success is not based on “build it, and they will come” skills but a market demand for one’s skills. He also points out (foreshadowing Heinrich) that “those races, whose members render services to one another without exacting direct recompense are not only the most likely to flourish for the time, but most likely to rear a large number of descendants who inherit their beneficial habits” [p 202]. This characteristic is quite important in this corona-era if you want to understand the differences between public health successes and failures (see image).

A side note on sustainability, a concept that grew popular after WWII but whose roots date back to Malthus (1798) but whose implications grew more prominent during the Industrial Revolution:

The law of “survival of the fittest” states that those organisms tend to survive which are best fitted to utilize the environment for their own purposes. Those that utilize the environment most, often turn out to be those that benefit those around them most; but sometimes they are injurious.

§2. Marshall elaborates on the the benefits of group loyalty:

[De]liberate, and therefore moral, self-sacrifice soon makes its appearance; it is fostered by the far-seeing guidance of prophets and priests and legislators, and is inculcated by parable and legend… [T]ribal affection, starting from a level hardly higher than that which prevails in a pack of wolves or a horde of banditti, gradually grows into a noble patriotism; and religious ideals are raised and purified. The races in which these qualities are the most highly developed are sure, other things being equal, to be stronger than others in war and in contests with famine and disease; and ultimately to prevail. Thus the struggle for existence causes in the long run those races of men to survive in which the individual is most willing to sacrifice himself for the benefit of those around him; and which are consequently the best adapted collectively to make use of their environment.

…before commenting on “parasitical races”:

For, though biology and social science alike show that parasites sometimes benefit in unexpected ways the race on which they thrive; yet in many cases they turn the peculiarities of that race to good account for their own purposes without giving any good return. The fact that there is an economic demand for the services of Jewish and Armenian money-dealers in Eastern Europe and Asia, or for Chinese labour in California, is not by itself a proof, nor even a very strong ground for believing, that such arrangements tend to raise the quality of human life as a whole

Marshall’s perspective here is not just racist; it contradicts the basic economics of gains from trade. Money lenders play an important role. Jews and Armenians did not take that role out of parasitical desires or genetics, but due to legal restrictions that prohibited them from other work while leaving money lending open to “infidels.” The case with Chinese — who were banned from entering the US by the 1882 Chinese Exclusion Act (only fully cancelled in 1965) — is likewise racist. The Chinese were not parasites but willing laborers hired by willing employers. For anyone following the nativist rants of Trump, Brexiteers (and other chauvinistic populists), Marshall’s attitude will be sickeningly familiar.

§3. Marshall speaks of the natural benefits to caste and class systems (systems the British reinforced and exploited, via “divide and conquor”, in colonial India), and how those systems have been swept aside by the social, political and economic mobilities that have taken over industrial nations. He then reflects (and worries) that these freedoms risk being lost by the rise of “new caste systems” represented by division of labor.

§4. Marshall laments those who ignore Smith’s caveats on the division of labor (satirized by Charlie Chaplin’s 1936 “Modern Times”) in their insistence that more division is always better.

§5. Marshall states that species are will flourish if their members possess habits instincts useful to the individual and group, but he does not assume that’s the same case with humans, who have more discretion — to drink excessively, for instance. With a quick dismissal of the potential for children to inherit their parents learned skills (Mendel’s work had recently been rediscovered; Lysenko’s errors were yet to come), Marshall makes an easier claim: that the children of healthy, well-adjusted parents were likely to grow up healthy and well-adjusted.

Marshall ends the chapter with a plea for slow, thoughtful and persistent advances to improve Mankind, with a special emphasis on rescuing the “lower grades” to improve their lot and on improving the distribution of wealth. How would he drive this process?

Progress may be hastened by thought and work; by the application of the principles of Eugenics to the replenishment of the race from its higher rather than its lower strains, and by the appropriate education of the faculties of either sex [p 207].

Eugenics again. Read the wikipedia article for more on its long history (from Plato to Lee Kwan Yew), but I agree with its opponents: Any eugenic program is likely to be abused (e.g., forced sterilizations in Australia, Canada, the US, et al.), and eugenics are far too slow and ineffective compared to improved public health and education.

When I think about the supporters of Trump, Hitler or other sociopaths, I don’t think “what we need here is some genetic winnowing.” What I think is that we need a population better educated on cause and effect and institutions for resolving conflict with something other than hate and violence.  One can hope.


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 away from institutional induction and towards mathematical deduction.

The growth of wealth

Book 4, Chapter 7

§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 ;).