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.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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