Month: March 2020

§1. The uncivilized man may only want basic goods but the civilized man desires an increasing variety of more and better (“change for the sake of change”), to the point where the richer man spends more on food, not for his own wants but those of hospitality.

§2. Moving to dress, variety is again valued but responsive to social norms. Thus, some cultures might dictate dress for occupations or castes, and the lower classes will emulate the refinements of their betters. The English upper classes tend to dress modestly compared to Europeans or Asians, with the women being stylish and costly thoughtful while the men dress simply… and thus set the standard for English lower classes.

§3. One’s home should provide shelter, but small “house room… stunts the facilities and limits higher activities” [p 75] — that’s without considering social activities.

§4. When it comes to activities, people [Marshall observes] are increasingly inclined to pursue athletic games and travel over the “mere stagnation” of leisure. (Marshall notes rising tea consumption and stagnating alcohol consumption.)

Turning to work and professions, Marshall says men are increasingly interested in producing (and consuming) clever inventions and finely crafted products. He claims craftsmen’s “activities” result in works that precede the wants for those works, rather than wants leading to works. This perspective echo’s Say’s Law of “supply creates its own demand,” but it rings true: I am attracted to the products artisans produce far more often than I am asked by artisans for ideas of what to make next! 😉

[Marshall then makes a comment of how the “West Indian negro… and English working classes” have little interest in developing their skills. I don’t get his point here.]

Marshall thus states that the driver of progress is not “wants” (demand) but “activities” (supply). He ends the chapter with some long footnotes on how other writers have (de)emphasized, classified and argued over the types, ranking and development of wants. Those nuances are not very interesting at a 100-year distance.

Marshall’s third “book” in his book volume on Principles of Economics is “on wants and their satisfaction.” This chapter contextualizes that topic (demand/consumption), thereby setting up Book 4 (production) and Book 5 (“a general theory of demand and supply”). These topics (and their order) will be familiar to a modern reader, but Marshall is innovating here by discussing demand and supply ahead of the traditional focus of economics (“the production, distribution, exchange and consumption of wealth“), which is pushed into Books 5 and 6 (distribution and exchange of value).

§2. Economists have neglected demand and consumption because they result from the decisions of individuals, which implied — since the logic of such dynamics was “the common property of all sensible people”– there was “nothing” for economists to explain [p71].

Marshall is challenging that norm because of (1) a prejudice to studying  production and supply, (2) new mathematical techniques uncovering ignorance of demand,* (3) new statistical measures of demand, and (4) a social pivot from creating wealth to using wealth to improve individual and collective well-being. This last, significant point remains underemphasized in a world that focuses too much on GDP and too little on well-being. Yes, wealth contributes to well-being, but so do many non-wealth factors (friendship, beautiful surroundings, or collective institutions to protect individuals from coronavirus).

[How convenient! In April, I am teaching an (online, closed) course on growth and development, synonyms for production and well-being , respectively.]

* Marshall’s colorful language is worth reproducing:

It is indeed doubtful whether much has been gained by the use of complex mathematical formulæ. But the application of mathematical habits of thought has been of great service; for it has led people to refuse to consider a problem until they are quite sure what the problem is… [p71]

Thus, the book will begin by looking into human wants (demand) as a complement to our efforts and activities (supply), which has received too much attention (in Marshall’s eyes) due to Ricardo and followers asserting that wants are animal and instinctual whereas efforts and activities are the main output of humanity.

Although I (as Marshall) see their point — we talk much more about firms, markets and products than the happiness of consumers — I agree with Marshall that demand needed needs more study. I say this because even today we do not really understand or promote human happiness (safety, friendship, respect, meaningful work, and so on) relative to human activities (production), which has left us blind to non-production policy and life-style paths. The results of our myopia are unsustainability, inequality, misery, and other problems that economists could really address — if they reprioritized.

A promising beginning.

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!

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.