Ricardo’s doctrine as to taxes and improvements in agriculture

Appendix L

§1. Ricardo claimed that expensive food harmed the nation far more than it benefitted the landlords profiting from higher food prices.  (This makes sense… read more about the Corn Laws and how their repeal in 1846 massively helped the poor.)

Ricardo then says that higher taxes on domestic grain (“corn”), in the special case of no imports and perfectly inelastic demand, will only result in higher prices to consumers. Relaxing these restrictions, higher taxes would result in producing shifting to other crops (“substitution”) and lower prices for producers (“incidence”), both of which illustrate the limits to the power of taxes as well as the dead weight losses (from changes in production) that taxes bring.

Finally, Ricardo claims that higher returns to capital will result in LESS investment in each area, as capital is removed for use elsewhere and local profits are maintained. This is slightly counter-intuitive, but not if you think of profit seeking being a more important goal than grain production.

Overall, Ricardo — Marshall claims — had deep and interesting insights into what would (today) be called general equilibrium theory.

/fin

This is where my year-and-a-half “review” of Marshall stops.  There’s one chapter left — the Mathematical Appendix — but I can’t be bothered to review, interpret (there are many novel symbols and expressions) and compare that Appendix to the current practice of (over) using mathematics in economics. I am sure that it has many interesting insights, but those are best left to others who are into the math.


This post is the last in part of a series for 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.

Certain kinds of surplus

Appendix K

§1. This chapter is not very interesting. Marshall merely notes that surplus from infra marginal activities (work, production and consumption) accrues to workers, capitalists and consumers, respectively, before falling to zero “at the margin.”

He warns against double-counting the surplus of a consumer from Product A against the surplus to that consumer (as worker on Service B) or to the capitalist in the process of producing A.


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.

The doctrine of the wages-fund

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.


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.

Ricardo’s theory of value

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.


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.

Limitations of the use of statical assumptions in regard to increasing return

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.


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.

The incidence of local rates, with some suggestions as to policy

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.


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.

Barter

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.


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.

Definitions of capital

Appendix E

§1. Definitions are not always clear or agreed upon. Capital goods (e.g., machines) are not the same as trade capital (e.g., funds used to buy inventory). Machines owned and used by a business are not the same as a hobbyist’s machines (or are they?)

§2. Capital contributes to production over time, as it’s not “used up” immediately. As such it represents “stored value” from prior work (this idea leads Marxists to claim that capital is merely “stored labor” but that ignores the many other components that go into making goods, such as managerial skill, innovation, market making, etc.)

§3. There are many definitions, but I can’t be bothered to split those hairs 😉


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.

Uses of abstract reasoning in economics

Appendix D

§1. This annex begins with the most concise definition of the relation between inductive and deductive reasoning that I’ve ever read:

Induction, aided by analysis and deduction, brings together appropriate classes of facts, arranges them, analyses them and infers from them general statements or laws. Then for a while deduction plays the chief rôle: it brings some of these generalizations into association with one another, works from them tentatively to new and broader generalizations or laws and then calls on induction again to do the main share of the work in collecting, sifting and arranging these facts so as to test and “verify” the new law (p 644)

Marshall then goes on to contextualise the value of mathematics:

It is obvious that there is no room in economics for long trains of deductive reasoning: no economist, not even Ricardo, attempted them. It may indeed appear at first sight that the contrary is suggested by the frequent use of mathematical formulæ in economic studies. But on investigation it will be found that this suggestion is illusory… as [the mathematician is] often unaware how inadequate the material is to bear the strains of his powerful machinery (p 644).

§2. Marshall’s comment on money as a measure of motive opens with a delight:

If we shut our eyes to realities we may construct an edifice of pure crystal by imaginations, that will throw side lights on real problems; and might conceivably be of interest to beings who had no economic problems at all like our own. Such playful excursions are often suggestive in unexpected ways: they afford good training to the mind: and seem to be productive only of good, so long as their purpose is clearly understood.

For instance, the statement that the dominant position which money holds in economics, results rather from its being a measure of motive than an aim of endeavour, may be illustrated by the reflection that the almost exclusive use of money as a measure of motive is, so to speak, an accident, and perhaps an accident that is not found in other worlds than ours. When we want to induce a man to do anything for us we generally offer him money. It is true that we might appeal to his generosity or sense of duty; but this would be calling into action latent motives that are already in existence, rather than supplying new motives…But political services are more frequently rewarded by such honours than in any other way: so we have got into the habit of measuring them not in money but in honours. 

[snip]

It is quite possible that there may be worlds in which no one ever heard of private property in material things, or wealth as it is generally understood; but public honours are meted out by graduated tables as rewards for every action that is done for others’ good. If these honours can be transferred from one to another without the intervention of any external authority they may serve to measure the strength of motives just as conveniently and exactly as money does with us. In such a world there may be a treatise on economic theory very similar to the present, even though there be little mention in it of material things, and no mention at all of money.

It may seem almost trivial to insist on this, but it is not so. For a misleading association has grown up in people’s minds between that measurement of motives which is prominent in economic science, and an exclusive regard for material wealth to the neglect of other and higher objects of desire. The only conditions required in a measure for economic purposes are that it should be something definite and transferable.

I find these observations interesting for two reasons: First, economists often need to remind “civilians” that we study choices and happiness, not [typically] money, which is used as an accounting unit. (Studies of money supply, velocity, inflation, and so on do focus on money, but they are a small share of all economic studies.) Second, people are not just motivated by money: In 2005, Akerlof and Kranton argued that identity can be used as motivation. They received a lot of attention for their “discovery”, but it seems — yet again — that they have only rediscovered something Marshall wrote down 85 years earlier. (They cite Pareto 1920 but not Marshall.)

§3. Marshall ends the appendix with some notes on how some outsiders (and economists) misperceive economics as only focussed on money when there are long traditions of studying other motives, history and institutions in addition to money.


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.

The scope and method of economics

Appendix C

§1. In this appendix, Marshall begins by discussing the tension between specialisation and generalisation (I think he’s going to argue for the former, given that economics split off from political science early in his career, a split that I’ve lamented).* He begins with a caution against narrow and deep:

Specialists who never look beyond their own domain are apt to see things out of true proportion; much of the knowledge they get together is of comparatively little use; they work away at the details of old problems which have lost most of their significance and have been supplanted by new questions rising out of new points of view; and they fail to gain that large illumination which the progress of every science throws by comparison and analogy on those around it. Comte did good service therefore by insisting that the solidarity of social phenomena must render the work of exclusive specialists even more futile in social than in physical science. Mill conceding this continues:—”A person is not likely to be a good economist who is nothing else. Social phenomena acting and reacting on one another, they cannot rightly be understood apart; but this by no means proves that the material and industrial phenomena of society are not themselves susceptible of useful generalizations, but only that these generalizations must necessarily be relative to a given form of civilization and a given stage of social advancement

I agree wholeheartedly with these concerns (read this from 2016 and an improved version from 2018) and wrote this in my January newsletter:

The humanities (language, history, philosophy) illustrate the diversity of human existence just as the sciences (biology, physics, etc.) illustrate our similarities. This explains how scientists can collaborate and agree on the “big picture” while failing to see the point of humanities studies that don’t seem to draw any conclusions (and sometimes seem locked in eternal battles over the “right” element drawn from a pile of subjective perspectives)

§2. Marshall admires the utility of deductive mechanical reasoning in economics but cautions against excessive reliance on models untested by experience and intuition. Further, he notes that the human subjects of economics — unlike the atoms of chemistry — are actively changing their forms, functions and reactions while “under the microscope”, which makes accurate conclusions less likely.

§3. Marshall advises using both deductive (logical) and inductive (historical) methods to understand (looking back) and predict (looking forward). Given the impossibility of living life in parallel universes, we need to be cautious in drawing conclusions but hopeful in seeking explanations for observed patterns.

§4. Given Man’s tendency to see patterns everywhere (including where there are none), Marshall cautions against aggressive claims to insight in assembling “pertinent causes” for observed effects. He explains how both strategy and tactics are important in naval warfare but difficult for analysts to later recreate. What decisions were not made; what information was used in making decisions, what information was unknown to the actors but known to later historians? He warns economists trying to explain individual decisions and their aggregates.

§5. Intuition (Marshall calls this “mother-wit”) and technique are complements: Wisdom draws from experience; technique pushes one to think about potential situations beyond that experience. (I often get interesting insights by looking at the “off-diagonals” of 2×2 figures.) The aggregation of knowledge over time allows each generation of academics look yet further, standing on the shoulders of giants.

§6. Economics can explain a lot but the accuracy and value of its explanatory power drops as its area of study expands.

* I was wrong, as he doesn’t come out in favor of either view, unlike later economists (see footnote below…)


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.