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!