Book 2, Chapter 4: Income & Capital

This chapter begins by defining income as the product of capital, which comes primarily in the form of money (unlike in more primitive times).

§2. When defining income, it’s not only necessary to include monetary income but also the implicit income that one enjoys by performing services for oneself (cooking, cleaning) that could be contracted out to others for payment. Marshall’s definition here predates and contradicts that given to GDP/GNI, which only include monetary measures. He then adds that the non-financial benefits of work should be included in the total of “net advantages” of work — net referring to the deduction of disadvantages as well as the fact that a non-enslaved person will only work for net advantages. As a related point, people seek work with the best net advantage — not just money income and considering disadvantages (e.g., commuting).

Marshall then gives the classical definition of business profit: The return on capital in excess of that which could be earned by investing the same amount of capital in the markets (aka, riskless rate of return). These excesses are the “returns on management” (aka, entrepreneurial profits).

Marshall then specifies that “rent” should refer only to “income derived from the free gifts of Nature” (p62), rather than the price of using someone’s capital (renting a flat or piano), which he prefers to call “quasi-rent.”

§3. Some quibbles about the definitions of “capital.”

§4. Marshall shifts to discussing “social production,” within which  business production is included, but the gifts of Nature (aka ecosystem services) are not. Marshall thus focuses human production while avoiding the extra work to track down every bit of value, since values that arrive  without effort or notice are hard to measure.

§5. Society derives income from three productive “agents” of land, labor and capital, but the division of that national income to those agents may not match originating causes. Marshall includes the “free gifts of nature” such as mines and fisheries in land. He excludes the income (benefits) derived from private capital, such as furniture and clothes, since that income does not pass through social exchange.

§6. Marshall worries about double counting in calculating national income.

§7. Marshall argues that income (net of depreciation), not wealth, is a better measure of a nation’s prosperity. We measure GDP but have little idea of national — let alone natural — wealth.

§8. Capital is an agent of production, wealth is the result of that production.

… and that’s the end of Book 2!

 

 

Book 2, Chapter 3

This chapter (“Production, consumption, labour, necessaries”) begins aggressively with “Man cannot create material things… he really only produces utilities” [p 53]. Marshall uses this device to point out that the value added by a carpenter (converting wood into a table) is similar to that provided by a furniture dealer: “the furniture-dealer moves and rearranges matter so as to make it more serviceable than it was before, and the carpenter does nothing more.”

§2. Marshall defines “labour” as the effort required to increase the value goods. He explicitly excludes a worker’s pleasure from this definition, a nuance (?) that later economists lost in their definition of labor as a bad and leisure as a good, both of which compete for one’s limited time. Marshall’s definition (borrowed from Jevons) allows one to do work (“labor”) and enjoy it (“pleasure”), although Marshall suggests that he would prefer to allow for pleasure in his definition of labor, i.e., that which adds utility.

Marshall then argues against a popular definition of “productive” as action that creates something of future utility — a definition that excludes enjoying one’s work as well as immediate consumption. I prefer his argument (why are domestic servants “unproductive” but not whisky distillers? Because their products are consumed years later?), especially when one allows for anticipated future consumption (you being able to read this post) as a meaningful result of current labor productivity. When he further elaborates how Merchantilists and Physiocrats only consider precious metals and the output of farmers, respectively, as “wealth,” I just shake my head at the decades that these early thinkers were splitting hairs. As Marshall observes:

The attempt to draw a hard and fast line of distinction where there is no real discontinuity in nature has often done more mischief, but has perhaps never led to more quaint results, than in the rigid definitions which have been sometimes given of this term Productive.

§3. Turning to “necessaries,” Marshall calls attention to the thin (or missing) lines separating “necessaries, comforts and luxuries.” In arguing that necessaries are what “support” working man and his family, Marshall adds the caveat that support might vary with place and culture. As an example, he explains laborers in Southern England are less efficient (and thus poorer)  than laborers in the North (where Manchester and Birmingham were booming), with the result that “the strongest labourers in the South have constantly migrated to the North; and that the energies of those in the North have been raised by their larger share of economic freedom and of the hope of rising to a higher position” [p 57]. This observation not only highlights how London’s status has overtaken the once-industrial North (now called the Midlands), but also how labor also migrated back then.

Marshall then adds that a worker’s income comes in a first part that keeps the worker alive and a second part that contributes to their efficiency. The third step of income (or “consumption”) buys comforts and luxury that “can be minimized without loss of productive efficiency.” These nuances  reflect the norms of the time but also matter today. Back in 1920 (or 1890, when the book was first published), there was probably a debate on how much the Industrial Revolution depended on workers as a raw input (and complement to capital) versus workers as productive assets. Today countries face tradeoffs between protecting workers (and citizens) from Covid19 and pushing them to work (and consume) as a means of keeping the economic bicycle rolling forward. In the US, the situation is stark: Stay home, self-quarantine and/or see the doctor versus hide symptoms and work, because you need the wages to survive and don’t have health insurance.

Marshall then describes necessaries for productive labor (p58):

They may be said to consist of a well-drained dwelling with several rooms, warm clothing, with some changes of underclothing, pure water, a plentiful supply of cereal food, with a moderate allowance of meat and milk, and a little tea, etc., some education and some recreation, and lastly, sufficient freedom for his wife from other work to enable her to perform properly her maternal and her household duties. If in any district unskilled labour is deprived of any of these things, its efficiency will suffer in the same way as that of a horse that is not properly tended, or a steam-engine that has an inadequate supply of coals. All consumption up to this limit is strictly productive consumption: any stinting of this consumption is not economical, but wasteful.

Tend your horses!

Marshal ends the chapter with a note on class differences [p59]:

…the strict necessaries for an average agricultural family are covered by fifteen or eighteen shillings a week, the conventional necessaries by about five shillings more. For the unskilled labourer in the town a few shillings must be added to the strict necessaries… For a man whose brain has to undergo great continuous strain the strict necessaries are perhaps two hundred or two hundred and fifty pounds a year if he is a bachelor: but more than twice as much if he has an expensive family to educate.

GDP 500 per year is about 200 shillings per week, or 8 times what an agricultural family would require for its necessaries. I wonder if that gap holds between white collar and agricultural families these days in richer countries? I think it’s narrowed.

Book 2, Chapter 2 — Wealth

This chapter begins with the definition of wealth as part of the set of desirable things, which Marshall labels as goods, which are divided into material (wealth) and non-material, which include internal goods such as professional skills, and external goods such a relations with others. (Today, these are called human capital and social capital, respectively.)

Goods can be transferable, and most non-material goods (Marshall mentioned advantages of climate or rights of citizenship here) are not. Marshall then discusses how some goods are free but not always, e.g., some Brazilian trees but not all. Here, Marshall is working with the idea of excludable (private goods) versus non-excludable (common pool goods) without using those distinctions. Importantly, he distinguishes between the fish that are free to catch from the commons, and how those fish are converted into private goods as the application of labor displaces them from the commons into one’s private boat.

§2. Marshall defines wealth as consisting of material and non-material goods (e.g., business connection) that have money value or can be used to acquire money. Moving along, he describes economic goods as those that are held by one person (a private good) and valued in terms of money. These criteria exclude not only club goods (jointly held) but non-excludable public and common-pooled goods — goods that I consider “economic” in the sense of their value as well as the need to manage their scarcity. Marshall’s definition might explain some economists’ myopia with respect to those other important goods.

On a related note, Marshall requires the goods have money values. This criterion perhaps explains economists’ ignorance of valuable “goods” such as the environment. The entire study of “ecosystem services” and attempts to quantify their value is, at its root, an attempt to integrate those goods into the narrow “economic sciences” that Marshall espoused.

§3. Marshall notes how internal goods such as skills that are part of personal wealth can confuse discussions (or measurement) of wealth.

§4. Marshall then defines and declares the value of collective goods:

…the benefits which he derives from living in a certain place at a certain time, and being a member of a certain state or community; they include civil and military security, and the right and opportunity to make use of public property and institutions of all kinds, such as roads, gaslight, etc., and rights to justice or to a free education… one person has more real wealth in its broadest sense than another, if the place in which the former lives has a better climate, better roads, better water, more wholesome drainage; and again better newspapers, books, and places of amusement and instruction.

§5. Aware of those non-private goods, Marshall then notes how a nation’s wealth consists of more than the sum of individual wealth. He then adds that some national wealth must be counted as global wealth, as ideas (for example) cannot be kept within boundaries.

[In Footnote 1 on page 50, Marshall notes that monopolies resulting from legal protections or missing information are not a source of wealth as much as a transfer from others; national wealth probably increases when monopolies fail.]

§6. Marshall quotes Adam Smith declaring that an object’s value can derive from its utility but also its price in monetary exchange. Marshall prefers to focus on exchange values, which are quantified in monetary prices that are equivalent to purchasing power.

Marshall ends with “if inventions have increased man’s power over nature very much, then the real value of money is better measured for some purposes in labour than in commodities.” This parting thought seems to echo Marx’s Labor Theory of Value, but only with the assumption that inventions have lowered the cost of commodities (effectively) to zero, leaving labor as the scarce input that must be purchased with scarce money. Interesting.

Book 2, Chapter 1

This introductory chapter to the second book (“Some fundamental notions”) is short. It begins with Marshall’s plan to study “wants” (demand) in Book 3 and “efforts” (supply) in Book 4. Since these two are brought into equilibrium via money, or wealth, then Book 2 focuses on wealth.

§2. Marshall quotes Mill and Darwin to justify caution when considering the meaning of words and use of new words for old ideas (e.g., “interest” replacing “usury”). He says that older words might be more common but that newer words express recent ideas that are having a greater impact on society, since they are used to discuss important changes.

§3. The challenge, then, is to use common words in ways that the average person can understand, i.e., avoiding jargon. This pledge runs into trouble when one considers the many possible interpretations of a single word (“utility” springs to mind!)

§4. Thus it is important to use words that convey, rather than obscure, the results of analysis. I find this caveat to be wise and perhaps forgotten by too many modern economists who use “demand” when they mean “quantity demanded” or “elasticity” when they mean “price elasticity” — and that’s before even getting into our narrow definition of “elasticity,” which defies the normal use of the word!

Book 1, Chapter 4

This chapter on “the order and aims of economic studies” begins with:

We have seen that the economist must be greedy of facts; but that facts by themselves teach nothing. History tells of sequences and coincidences; but reason alone can interpret and draw lessons from them. The work to be done is so various that much of it must be left to be dealt with by trained common sense, which is the ultimate arbiter in every practical problem. Economic science is but the working of common sense aided by appliances of organized analysis and general reasoning, which facilitate the task of collecting, arranging, and drawing inferences from particular facts. Though its scope is always limited, though its work without the aid of common sense is vain, yet it enables common sense to go further in difficult problems than would otherwise be possible.

This paragraph is interesting for its emphasis on common sense — much against the popular interpretation of Friedman’s 1953 positivist argument that assumptions do not matter if predictions are accurate.

Marshall goes on to qualify economics as a science in terms of how it can predict actions in response to “measurable motives” such as the motive of money. Marshall thus limits the predictive power of economics in areas where motives are not clear or reflect different institutions, i.e., in places lacking “free enterprise, of general education, of true democracy, of steam, of the cheap press and the telegraph” [p 33]. These caveats were lost in the decades after Principles was published, as economists sought to generalize their theories to all times, places and peoples, an imperialism that has often overreached.

§2. Marshall then cautions against assembling facts in the quest for a “silver bullet” explanation, as such practice prevents one from understanding the situation as it is. He therefore recommends assembling all related “facts and reasonings” to see how they interact and thus reveal “nature’s laws.” To me, this passage emphasizes inductive reasoning.

§§3-4. Marshall then gives a veritable laundry list of questions worthy of economists’ attention. For example:

  • “Subject to what limitations is the price of anything a measure of its desirability?
  • Taking it for granted that a more equal distribution of wealth is to be desired, how far would this justify changes in the institutions of property, or limitations of free enterprise even when they would be likely to diminish the aggregate of wealth?
  • Is it necessary that large numbers of the people should be exclusively occupied with work that has no elevating character?
  • Have we carried as far as we should the plan of collective ownership and use of open spaces, of works of art, of the means of instruction and amusement, as well as of those material requisites of a civilized life, the supply of which requires united action, such as gas and water, and railways?
  • What scope is there for the moral pressure of social opinion in constraining and directing individual action in those economic relations in which the rigidity and violence of government interference would be likely to do more harm than good?” [pp 33-35]

Marshall ends §4 calling for an emphasis on the study of man’s social life,  and turn from studying politics. Thus, economics `shuns many political issues, which the practical man cannot ignore: and it is therefore a science, pure and applied, rather than a science and an art. And it is better described by the broad term “Economics” than by the narrower term “Political Economy”‘ [p36]. Wow. This “narrow-broad” characterization flips my use of “political economy,” so I am a bit confused here. At the moment, my interpretation is that Marshall sees politics (“the art of the possible”) as a limited sphere in negotiation and strategy, whereas economics is concerned with the larger realm of how humans interact in markets, social settings, etc.

§5. Marshall then calls for economists to use their perception, imagination and reason to study the underlying influences on actions and the interactions that affect society. This perspective contradicts assertions of cause-effect via lazy shallow assumptions that are worse than making no assumptions at all. To understand these deeper relations, “economic studies call for and develop the faculty of sympathy, and especially that rare sympathy which enables people to put themselves in the place, not only of their comrades, but also of other classes” [p 38]. It is clear (from other examples in this chapter) that Marshall is concerned with the working classes that have been roiled and displaced by the Industrial Revolution.

§6. Marshall ends the chapter with some perspective on “recent” developments of the 19th century, i.e., that economic freedom has been helpful for the majority of mankind while the complex impacts of the “industrial organism” are still surfacing.

He then condemns “economists” pushing narrow (upper) class interests:

And even in our own time, that title [“economist”] has been assumed by opponents of generous expenditure on the education of the masses of the people, in spite of the fact that living economists with one consent maintain that such expenditure is a true economy, and that to refuse it is both wrong and bad business from a national point of view… The fact is that nearly all the founders of modern economics were men of gentle and sympathetic temper, touched with the enthusiasm of humanity. They cared little for wealth for themselves; they cared much for its wide diffusion among the masses of the people. They opposed antisocial monopolies however powerful. In their several generations they supported the movement against the class legislation which denied to trade unions privileges that were open to associations of employers; or they worked for a remedy against the poison which the old Poor Law was instilling into the hearts and homes of the agricultural and other labourers; or they supported the factory acts, in spite of the strenuous opposition of some politicians and employers who claimed to speak in their name. They were without exception devoted to the doctrine that the wellbeing of the whole people should be the ultimate goal of all private effort and all public policy. But they were strong in courage and caution; they appeared cold, because they would not assume the responsibility of advocating rapid advances on untried paths, for the safety of which the only guarantees offered were the confident hopes of men whose imaginations were eager, but not steadied by knowledge nor disciplined by hard thought.

This passage, even if self-serving, rings true, as “good” economists are indeed more interested in the wealth of nations and advance of society over the wealth of the elites and their grip on power. We oppose abuse of market power, and thus support unions as a countervailing force. We support education, and thus oppose the exploitation of ignorance or limits on the spread of knowledge. We (if I may) see our role as one of furthering our collective advance and prosperity.

Marshall ends the chapter with a note of “new hope” based on the biological sciences, i.e., the idea that the evolution of species (Darwin published in 1859 and was influenced by Adam Smith source1 source2) meant that man was not “doomed by his circumstances” (nurture) but also influenced by the evolutionary results of prior generations (nature). From this claim he pivots to saying that the “rights of property” do not deserve automatic priority, except as they contribute to progress — for all.

Book 1, Chapter 3

Marshall begins Chapter 3 (economic generalizations or laws) with the basic steps of science, i.e., collecting data, exploring interdependencies, and using both deductive and inductive methods to “discover the relations between cause and effect” [p 24]. His reference to inductive (looking for patterns in real data) caught my eye, since mathematical economists use deductive methods (deriving relations and testable hypotheses from basic axioms), and referees dislike my inductive methods. (We gave up on that paper rather then going out a third time for data.) Marshall then says different methods complement each other, just as new facts complement ongoing analysis of existing facts.

§2. Marshall explains that “science” in economics is not due to precision but an ongoing effort to test hypotheses, reject those that fail, and classify those that persist and predict as “laws” that anyone can use.

§3. Marshall contrasts exact laws (e.g., gravitation) with probabilistic laws (e.g., tides) to put economic laws in context [pp 26-27]:

The laws of economics are to be compared with the laws of the tides, rather than with the simple and exact law of gravitation. For the actions of men are so various and uncertain, that the best statement of tendencies, which we can make in a science of human conduct, must needs be inexact and faulty. This might be urged as a reason against making any statements at all on the subject; but that would be almost to abandon life. Life is human conduct, and the thoughts and emotions that grow up around it… And since we must form to ourselves some notions of the tendencies of human action, our choice is between forming those notions carelessly and forming them carefully.

I agree that we want to understand regularities in human behavior without dismissing or undervaluing the lessons of exceptions.

§4. Putting laws on an “exactness” continuum, Marshall compares social laws (“a certain course of action may be expected under certain conditions from the members of a social group”) to a narrower set of economic laws (“conduct in which the strength of the motives chiefly concerned can be measured by a money price”). Marshall says they are not always easy to separate but that prices can mean economic laws are more precise [p 27].

Marshall clarifies his use of “law” in the sense of regularity rather than legal exactness, adding that these regularities are called “norms” in terms of frequency rather than morality. Thus, it might be “normal” for an egg to cost one penny for most of the year but 3p (“thruppence“) when hens are tired. Likewise, “normal” may include competition, cooperation, or some mix of the two. The goal is a decent set of predictions — not rules for the good life nor a rationalization for “normal” suffering.

§5. Economic laws depend on simplifying assumptions (e.g., “holding all else equal” or “for the average man”). Abstract laws have more assumptions whereas applied cases depend on specifics to be more exact.

I recommend the ideas in this chapter to anyone introducing economic ideas to lay people. Economic insights can be useful, but they are not always  right.

Book 1, Chapter 2

§1. The chapter begins with one of Marshall’s better known observations: “Economics is a study of men as they live and move and think in the ordinary business of life.” Marshal notes that our behavior in the business world is often motivated by money but adds the caveat that “the best energies of the ablest inventors and organizers” are also (or separately) stimulated by noble goals. Marshall then explains (or claims) that economics is the most exact of the social sciences because it uses monetary values to explain human behavior (but not human motivations) while not nearly as exact as the physical sciences due to “the every changing and subtle forces of human nature” [p 12].

This opening captures the relation of economics to other disciplines without forgetting a weakness (“ever changing”) that too many modern economists overlook.

Marshall then explains how marginal behavior (an extra hour of work or an extra expense for tobacco or tea) reveals the tensions within individual choices without needing to know their desires or intentions. Such “revealed preferences” (in opposition to “stated preferences”) underlie much economic analysis.

We act, he continues,  based on the interaction of incentives (benefits and costs) with our higher (selfless) or lower (selfish) natures. Economists cannot observe the internal thought processes that lead to these actions but “it is important to know whether the desires which prevail are such as will help to build up a strong and righteous character, [consider] the ultimate aims of man, and take account of differences in real value between gratifications that… have therefore equal economic measures” [p 14].  Marshall differentiates between individual “gratifications with equal economic measures” and the additional costs or benefits reflected in the “real value” of those actions to society. Such positive or negative  “externalities” are hard to calculate (e.g., the social cost of carbon).

In a footnote, Marshall dismisses the pain and pleasure calculus central to Utilitarian thinking (“the greatest good for the greatest number”) by suggesting “satisfaction” as a better expression of “the effect that true happiness is not to be had without self-respect, and that self-respect is to be had only on the condition of endeavouring so to live as to promote the progress of the human race.” Marshall, thus, dismisses those who claim economists assume man acts only in selfish ways. That homo economicus assumption helped mathematical economists get “results” but not results that reflect actual human behavior.

§2. Marshall then cautions against using money values to measure the desires or satisfaction of an individual, as they are better suited to comparing groups. Thus, it would be error to assume a poor man gets the same benefit from 20 pence as a rich man but not that two similar communities will benefit (or suffer) equally from the addition (or loss) of £5 per household.

§3. These behaviors, Marshall asserts, are usually but not always deliberate since our choices reflect a mix of base and noble desires and are subject to different pressures in the “ordinary business of life.” This statement contradicts the assumption of “perfect information and rational calculation” that is sometimes used by (or attributed to) mathematical economists. About 15 years ago, I asked Gary Becker if his models assumed that humans were “infinite calculating machines” (as his critics claimed). “Of course not,” he replied.

In a footnote on this page (17), Marshall explains that is it “specially true” that humans do not make calculations related to the “pleasures of the chase” such as games and past-times (it’s ironic that game theory depends on exact calculations). He ends the footnote with the caveat that choices made “without reflection” might contain the results of prior consideration. Returning to the text, Marshall says that repeated choices with noticeable benefits and costs (to the individual and others) will tend to evolve along a path of choices and re-calculations to reach the individual’s goals.

Marshall ends the section with [p 18]…

The unwillingness to postpone enjoyment, and thus to save for future use, is measured by the interest on accumulated wealth which just affords a sufficient incentive to save for the future. This measurement presents however some special difficulties, the study of which must be postponed. 

…so it seems we will not get his opinion on discount rates 🙁

§4. The purpose of money, Marshall claims, is not for its own sake but its  “general purchasing power.” Critics who claim economists espouse a “selfish desire for wealth” [p 19] are missing the point: Money is a means to an end, and measures of monetary values and flows are designed to understand human actions and motives rather than humanity’s worth. Exceptions exist: “We do indeed hear of people who pursue money for its own sake… wealth gives such people a feeling of power over their fellow-creatures, and insures them a sort of envious respect in which they find a bitter but strong pleasure” [p18]. He ends the section by noting that many people gain pleasure from their work or the thrill of competing with others. Money is only one means of satisfaction.

§5. But money can be useful as a means of quantifying and comparing these satisfactions. Someone who takes a dirtier job will demand demand more pay than they would ask for a cleaner job, since the job’s value reflects the many facets (or hedonic value) of the job. (This point also explains the method used to calculate the value of a statistical life.) Likewise, workers might work harder, or not, if they care about their reputation before peers — an example of identity value, a topic that Akerlof and Kranton  “discovered” 20 years ago.

Marshall was a pretty impressive thinker.

He concludes by remarking on our consistent altruism towards family, community and charity and the difficulty of measuring this altruism, which “cannot be classed, reduced to law and measured,” and thus lies beyond the analytical approaches of economics. This caveat is more or less still true, since economists spend far more time measuring market-derived values. Such biased focus results in omitted variable bias as well as mistaken respect for accurate but perverse measures like GDP.

§6.  Marshall restates man as a social animal, implicitly rejecting methodological individualism.

[E]conomists, like all other students of social science, are concerned with individuals chiefly as members of the social organism. As a cathedral is something more than the stones of which it is made, as a person is something more than a series of thoughts and feelings, so the life of society is something more than the sum of the lives of its individual members… economics has a great and an increasing concern in motives connected with the collective ownership of property, and the collective pursuit of important aims… ever widening the scope of collective action for the public good” [p 21].

§7. Marshall concludes the chapter by reaffirming the goal of studying individuals to understand aggregate, social roles and values, since it is so difficult to understand an individual’s “temper and character.” Some people forget this point when applying an economic insight too broadly. Not everyone will kill for money, some people give selflessly, voters do not always know their self-interest.

Economists use statistics and money to measure aggregate actions and make reasonable predictions of causes and effects but “the measurement of motive thus obtained is not indeed perfectly accurate; for if it were, economics would rank with the most advanced of the physical sciences; and not, as it actually does, with the least advanced” [p 21].

As it is, these measures can be quite useful in generalizing behavior of “man as he is: not with an abstract or “economic” man; but a man of flesh and blood” who may be proud, hard working, friendly and altruistic [p 22]. That said, some human activity (especially where money is involved) is so regular it can be predicted and those predictions tested, giving economics some claim to scientific methods, as well as a set of rules, laws or norms that might be used in multiple situations.

He ends by saying that economists must study what they can with their tools of measurement and analysis while leaving aside topics that are too hard to measure or normalize. Those topics, he concludes, must still be taken into account when relating the results of “exact economic knowledge” if we are to adhere to our ethical and common senses. Hear hear!

Book 1, Chapter 1

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.

Preface to the Eighth Edition (1920)

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.

Preface to the First Edition (1890)

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.