Marshall2020 – Page 2 – The one-handed economist

The scope and method of economics

§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.

The growth of economic science

Appendix B

§1. In the eighteenth century, political-economy (“economics” for short) emerged to study new ideas such as economic freedom and a prioritization of ends (happiness) over means (wealth).

It is true that modern economics had its origin in common with other sciences at the time when the study of classic writers was reviving. But an industrial system which was based on slavery, and a philosophy which regarded manufacture and commerce with contempt, had little that was congenial to the hardy burghers who were as proud of their handicrafts and their trade as they were of their share in governing the State (page 624).

§2. The (French) Physiocrats established the foundation of modern economics not so much for their interest in agriculture and physical goods but in their advocacy of “laisser faire, laisser passer”, i.e., allowing people to do what they want (free trade) and go where they want (free movement).

§3. Adam Smith is rightly credited as the founder of “modern” economics for his defence and advocacy of free trade, his discussion of the balance between individual freedom of action and government regulation, his exposition of the interaction between supply (cost) and demand (value), and his expositions — not always correct but “working his way towards the truth” — that others built on.

§4. Of those who followed Smith, Jeremy Bentham played an important role by advocating, with relentless logic, individual freedom and innovation over collective conservation, a perspective that fit Britain’s dominant economic and political role in the early eighteenth century.

§5. Economists improved and corrected on Smith’s ideas using inductive (from life) and deductive (from logic) methods for explaining choices and behaviors. They paid attention (and collected data) on the plight of the working classes. Marshall admires Ricardo’s work and perspective but finds his “Semitic genius for abstraction” difficult to follow at some times.

§6. But these economists tended to ignore or misunderstand the differences among countries and individuals. They assumed “economic man” to be like themselves: well-to-do, intellectual “city men”, which blinded them to the perspectives and values of the working classes. (Indeed, they blamed the poor for their poverty when it resulted from lack of education and other constraints that were loosened by unionisation, education, public health, and so on.) Marx [not mentioned by Marshall] was not so blind.

§7. During the nineteenth century, economic thought became less rigid, uniform and logical as it integrated more human complexity into understanding choices. (Economics influenced Darwin as his Origin of Species influenced economists.)

§8. Marshall then gives “shout outs” to the French, Americans and especially the Germans, who had less faith in individual freedom and trade and a greater respect for national differences and competition. He ends the chapter by cautioning that the biological view of human interactions requires ever-greater analytical effort rather than a lazy appeal to imponderable differences.

The growth of free industry and enterprise

Appendix A

In this Appendix, Marshall sets out a brief history of the world that is “coloured” by his English, colonial (and sometimes racist) perspective.

§1. Civilization began in warmer places where easy food and transport enabled abstract thinking and organizational complexity, but warmth also leads to laziness (the scourge of colonial administrators in Imperial India), which is why savages in warm places were conquered by invaders from cooler places.

§2. People in smaller settlements needed to cooperate within their interdependency, which led to customs of sharing and non-exploitation but also a reluctance to innovate in ways that give advantages to individuals.

§3. The Greeks added freedom and innovation to the Semitic foundations of knowledge and commerce while [waving hands around] their slaves kept them fed and clothed. But even cooling sea winds could not keep the Greeks from settling into comfort and indifference.

§4. The Romans were more disciplined than the Greeks in war, conquest and organisation, even if they were indifferent to business (except with respect to money). They brought Stoic ideas of law and rights into circulation.

§5. The Teutons (Germans) were strong but limited by their customs and ignorance. The Saracens (Arabs) learned from those they conquered but their “sensual religion” (Islam) led to moral decay.

§6. Representative democracy worked better in towns and cities than in countries, due to the difficulty of communicating with all citizens. Easier transport and communication combined with literacy to facilitate self-governance.

§7. Cities in the Middle Ages were full of progress, innovation, self-rule and enlightenment, but they were conquered by larger, stronger neighbours, so their progress was sometimes diverted or lost.

§8. Feudal lords practiced chivalry with each other while dominating the lower classes. The Church was more meritocratic about advancing the best without regard to caste but facilitated feudal oppression. Revolution overturned this stable but stifling regime:

Within a very short period came the invention of printing, the Revival of Learning, the Reformation, and the discovery of the ocean routes to the New World and to India. Any one of these events alone would have been sufficient to make an epoch in history; but coming together as they did, and working all in the same direction, they effected a complete revolution.

Thought became comparatively free, and knowledge ceased to be altogether inaccessible to the people. The free temper of the Greeks revived; the strong self-determining spirits gained new strength, and were able to extend their influence over others. And a new continent suggested new problems to the thoughtful, at the same time that it offered a new scope to the enterprise of bold adventurers. pp612-3

§9. Spain and Portugal took, then lost, an early lead to the Dutch, whose industry and innovation allowed them to escape Spanish domination before they were conquered by the English and French. France fell apart with Revolution, leaving the English as the most powerful nation.

§10. The English were not as good at trading as the Armenians, Greeks, Italians and Jews. Nor were they as sophisticated as the Latin nations. But a good location and internal communcations enabled many farmers and artisans to work and prosper.

§11. England benefitted from the cultures of “strong Northern” settlers, just as it benefitted from the assertive and varied beliefs of many religious believers.

§12. England’s openness to migrants and challenging climate encouraged hard work, diversification and innovation in the lower classes (even as the upper classes played frivolous games).

§13. England’s economy grew as workers specialised in trades, regions in products and “undertakers” (entrepreneurs) in management. Good ideas were copied, transformed and implemented widely.

§14. As labor was freed of parish borders, workers were able to find better jobs, but ruthless competition also brought social ills. The 19th century was good and bad for workers and society, in a two-steps forward, one-back sense of progress.

§15. Workers were caught between the old system of limits and comforts and a new system of freedom and exploitation. A new class of undertakers were as ruthless as they were successful. Children worked “in Satan’s mills” and labor went hungry as the rich and powerful protected their interests. Life was hard but it would have been worse under French rule (Napoleon as a modern Roman emperor).

§16. It has been left for our own generation to perceive all the evils which arose from the suddenness of this increase of economic freedom. Now first are we getting to understand the extent to which the capitalist employer, untrained to his new duties, was tempted to subordinate the wellbeing of his workpeople to his own desire for gain; now first are we learning the importance of insisting that the rich have duties as well as rights in their individual and in their collective capacity; now first is the economic problem of the new age showing itself to us as it really is. This is partly due to a wider knowledge and a growing earnestness. But however wise and virtuous our grandfathers had been, they could not have seen things as we do; for they were hurried along by urgent necessities and terrible disasters.

[snip] …increased prosperity has made us rich and strong enough to impose new restraints on free enterprise; some temporary material loss being submitted to for the sake of a higher and ultimate greater gain. But these new restraints are different from the old. They are imposed not as a means of class domination; but with the purpose of defending the weak, and especially children and the mothers of children, in matters in which they are not able to use the forces of competition in their own defence.

[snip] Thus gradually we may attain to an order of social life, in which the common good overrules individual caprice, even more than it did in the early ages before the sway of individualism had begun. But unselfishness then will be the offspring of deliberate will; and, though aided by instinct, individual freedom will then develop itself in collective freedom:—a happy contrast to the old order of life, in which individual slavery to custom caused collective slavery and stagnation, broken only by the caprice of despotism or the caprice of revolution.

§17. England is not alone. America has advantages of scale and will probably lead the world. Australia and Canada have the advantage of racial homogeneity. Germany is learning from England’s mistakes as it industrialises…

And Germany contains a larger number than any other country of the most cultivated members of that wonderful race who have been leaders of the world in intensity of religious feeling and in keenness of business speculation. In every country, but especially in Germany, much of what is most brilliant and suggestive in economic practice and in economic thought is of Jewish origin. And in particular to German Jews we owe many daring speculations as to the conflict of interests between the individual and society, and as to their ultimate economic causes and their possible socialistic remedies. (page 623).

Progress in relation to standards of life

Book 6, Chapter 13

This is the last chapter of the book!

§1. So what’s the point of it all?

The term the standard of life is here taken to mean the standard of activities adjusted to wants. Thus a rise in the standard of life implies an increase of intelligence and energy and self-respect; leading to more care and judgment in expenditure, and to an avoidance of food and drink that gratify the appetite but afford no strength, and of ways of living that are unwholesome physically and morally. A rise in the standard of life for the whole population will much increase the national dividend, and the share of it which accrues to each grade and to each trade. A rise in the standard of life for any one trade or grade will raise their efficiency and therefore their own real wages: it will increase the national dividend a little; and it will enable others to obtain their assistance at a cost somewhat less in proportion to its efficiency.

§2. Some short-term methods of raising one’s standard of living exist (e.g., abusing market power or buying cheaper imported goods), but higher productivity is the only long-term method of doing so.

§3. Although tired workers should work fewer hours when they are losing productivity, lower hours increases the cost of labor vis-a-vis capital, which can mean lower wages. (Marshall assumes free markets. Union-supporters would say that they can keep wages high while reducing hours, but that claim relies on them being able to protect jobs from cheaper labor, capital and imports!)

§4. Marshall adds that less but more expensive labor means less output for the rest of society, which can lower the social standard of living (fewer but more costly goods) or productivity (industry cannot correct the labor/capital balance).

§5. Higher wages and lower capital earnings encourages capital, entrepreneurs and companies to leave in search of better living standards and profitable opportunities. Such brain drains don’t just hit “statist” countries like the USSR, Cuba, China and Venezuela. They also hit corrupt countries like Argentina, Italy, Greece, Mexico, India and others. The US and most EU countries are not as bad, but too much intervention (or redistribution to politically important groups) can kill the geese laying golden eggs!

§6. A short-run rise in wages might be justified by competitive, market conditions, but those conditions are not universal or eternal — limiting the value of ideas like “$15 minimum wage for all”.

§7. Unions raise the profile of workers and their pride in working together. Unions can also fight for wage increases, but those increases cannot undermine businesses.

§8. Productivity-based wages do not harm average workers, but they will displace less-productive workers.

§9. Unions that press for the same wages for all workers or wages based on older (less-efficient) practices are likely to harm their least-efficient members, who will not be employed for long if their wages exceed their productivity.

§10. If one branch of industry should lose its market, productivity and employment, then other branches will suffer loses of demand (for goods) and supply (for inputs), thereby creating an unhelpful feedback that can only be reversed by a (slow) return of confidence. These dynamics underlay much of the crippling impacts of the Great Depression that began a decade after Marshall’s book.

§11. Marshall cautions against large-scale or rapid alterations in labor-capital relations, perhaps in response to the Russian Revolution of 1917:

There is therefore strong primâ facie cause for fearing that the collective ownership of the means of production would deaden the energies of mankind, and arrest economic progress; unless before its introduction the whole people had acquired a power of unselfish devotion to the public good which is now relatively rare. And, though this matter cannot be entered upon here, it might probably destroy much that is most beautiful and joyful in the private and domestic relations of life. These are the main reasons which cause patient students of economics generally to anticipate little good and much evil from schemes for sudden and violent reorganization of the economic, social and political conditions of life. p 593

After saying this, Marshall advocates taxing the rich to reduce inequality as it’s better to allow (and then tax) productivity than redistribute the means of production to those less able to produce.

§12. Freedom helps productive, educated, healthy workers, but the “less prepared” might need “German-style” social programs. Marshall doesn’t mind those programs if they are also aimed at helping the children of poorer families escape poverty. (These ideas are still hotly debated, but it’s interesting to see Marshall departing from his earlier eugenic pronouncements (“Nature”) in favor of Nurture.)

§13. Marshall criticises speculators, calling for more “economic chivalry” in which the rich finance the advancement of other citizens (and their children). I am not sure if he favours the rich paying higher taxes or donating to help others. The former is about 50x more effective, in my opinion.

§14. The next generation will not learn much if their parents are struggling. Shorter hours and leisure are essential for rest, flourishing and innovation.

§15. Natura non facit saltum:

Now, as always, noble and eager schemers for the reorganization of society have painted beautiful pictures of life, as it might be under institutions which their imagination constructs easily. But it is an irresponsible imagination, in that it proceeds on the suppressed assumption that human nature will, under the new institutions, quickly undergo changes such as cannot reasonably be expected in the course of a century, even under favourable conditions. If human nature could be thus ideally transformed, economic chivalry would dominate life even under the existing institutions of private property. And private property, the necessity for which doubtless reaches no deeper than the qualities of human nature, would become harmless at the same time that it became unnecessary.

There is then need to guard against the temptation to overstate the economic evils of our own age, and to ignore the existence of similar and worse evils in earlier ages; even though some exaggeration may for the time stimulate others, as well as ourselves, to a more intense resolve that the present evils shall no longer be allowed to exist. But it is not less wrong, and generally it is much more foolish, to palter with truth for a good than for a selfish cause. And the pessimist descriptions of our own age, combined with romantic exaggerations of the happiness of past ages, must tend to the setting aside of methods of progress, the work of which if slow is yet solid; and to the hasty adoption of others of greater promise, but which resemble the potent medicines of a charlatan, and while quickly effecting a little good, sow the seeds of widespread and lasting decay.

…and that, my friends, is the end of the main book. There are still 13 appendices that I may read (or not). Update next week!

General influences of economic progress

Book 6, Chapter 12

§1. The chapter begins with:

The field of employment which any place offers for labour and capital depends, firstly, on its natural resources; secondly, on the power of turning them to good account, derived from its progress of knowledge and of social and industrial organization; and thirdly, on the access that it has to markets in which it can sell those things of which it has a superfluity. The importance of this last condition is often underrated; but it stands out prominently when we look at the history of new countries.

…and from here, Marshall looks at capital and wages in ex-colonies such as the US and Australia. These places have abundant resources but lack capital and market access. Wages there are high due to tough conditions, and they fall as development brings economies of scale (further increasing wages) and migration (reducing wages). High capital returns for Old World money in the New World also fall as markets develop.

§2. Eighteenth century England’s economy grew as industrialisation multiplied output and trade (often forced, via colonialism) opened new markets. Faster communication and shipping increased competition, thereby lowering prices.

§3. Increased productivity and high trade volumes lowered the cost of manufactured products to English workers, but expensive domestic food sources reduced that surplus. Growing trade in food (e.g., imported US wheat) displaced domestic production (allowing poor soils to be left for pasture) and lowered food prices. (The 1846 repeal of the Corn Laws also matters.)

§4. Profits fell as protectionism hindered trade and cheaper transport, energy, etc. spurred competition, thereby slowing the increase in English prosperity.

§5. Looking back from 1900/1920, Marshall observes that the costs of food, housing, and heating have been “stable” even as quality has increased and that technological innovation (coal, electricity, machines) have brought clean water, meat, heat, light and other “luxuries” to the working classes, opening the possibility of an entire country — rather than just a city (Venice, Athens) — of well-off people.

§6. Although increased trade and repeal of the Corn Laws pushed down the (rental) value of English land, rents rose as land use shifted to higher value crops or trade-advantaged production. Net net, rents doubled over the nineteenth century.

§7. Easy transport and expanding markets bring competition that lowers profits for expensive, long-lived machines. The value of rail, road and canal transit routes depends on trade methods and routes. Values fell as routes went elsewhere but rose as depots and hubs gained traffic.

§8. Marshall observes that people’s lengthening time horizons (falling discount rates) lead them to harder work now to enjoy greater savings later. He also comments that working hours are falling as over-work becomes a thing. (I guess they were way above 40 hours/week in 1920.) That said, he notes that some will work more if earning are high. For more on these topics, see my post on Keynes’s 1930 essay on productivity.

§9. Wages are rising for (the many) workers who bring more more education and skill to working with machines in agriculture and industry but falling for (the few) artisans who formerly did these jobs. For society, average wages and overall productivity (wealth) are rising, but some are losing out, relatively.

§10. The rising wages of women and children are good for them but bad for the “tradition” in which men earn the money, women tend the house, and children obey.

§11. Marshall identifies what is today called the “winner take all” economy (the return to average talents drops while returns to The Best skyrocket), which is driven by (a) great wealth and (b) communication that allows The Best to find clients everywhere. Indeed: “But so long as the number of persons who can be reached by a human voice is strictly limited, it is not very likely that any singer will make an advance on the £10,000…”

NB: “The first radio news program was broadcast August 31, 1920”

§12. Marshall notes a general increase in prosperity for the working and middle classes. He notes that this prosperity can be threatened by loss of work but says such a threat is over-rated compared to the “old days” of piecemeal and sporadic work. With a new normal of year-round employment in large enterprises, workers have better overall job security. The Great Depression tested that conclusion less than a decade later.

General view of distribution

Book 6, Chapter 11

§1. Marshall’s summary of the book just past is really interesting to read; I don’t think I can summarise it, except to say that his consideration of scale and time is as necessary and insightful as the typical (modern) textbook is superfluous and opaque. Consider this:

Again, since human beings grow up slowly and are slowly worn out, and parents in choosing an occupation for their children must as a rule look forward a whole generation, changes in demand take a longer time to work out their full effects on supply in the case of human agents than of most kinds of material appliances for production; and a specially long period is required in the case of labour to give full play to the economic forces which tend to bring about a normal adjustment between demand and supply. Thus on the whole the money cost of any kind of labour to the employer corresponds in the long run fairly well to the real cost of producing that labour [p 550].

§2. Another interesting summary (worth a read) includes this:

A chief function of business enterprise is to facilitate the free action of this great principle of substitution. Generally to the public benefit, but sometimes in opposition to it, business men are constantly comparing the services of machinery, and of labour, and again of unskilled and skilled labour, and of extra foremen and managers; they are constantly devising and experimenting with new arrangements which involve the use of different factors of production, and selecting those most profitable for themselves [p 551].

§3. Managers and management have their role:

On the whole the work of business management is done cheaply—not indeed as cheaply as it may be in the future when men’s collective instincts, their sense of duty and their public spirit are more fully developed; when society exerts itself more to develop the latent faculties of those who are born in a humble station of life, and to diminish the secrecy of business; and when the more wasteful forms of speculation and of competition are held in check. But yet it is done so cheaply as to contribute to production more than the equivalent of its pay. For the business undertaker, like the skilled artisan, renders services which society needs, and which it would probably have to get done at a higher cost if he were not there to do them [p 552].

Marshall was no promoter of laissez faire. He often writes of abilities and effort rather than station or class. The excerpt above, followed by reminders of the risks capitalists take and the general rule that talent is rewarded, are meritocratic in the broadest sense (“society exerts…” translates easily as anti-discrimination).

§4 & §5. Capital(s) and labor(s), within and between, are competing and complementing, with each productivity gain “freeing” one input to find its use in other fields, thereby opening opportunities. People — as workers, managers and capitalists — will earn in direct proportion to their contribution to production and national wealth, with some random variations. Marshall’s optimistic vision here is unlikely to hold if/when transactions costs (delay) are high, market power inhibits entry and exit, and/or inputs do not have adequate buffers to absorb risks. Nevertheless, this feasible vision offers a benchmark for market promoters and regulators.

Land tenure

Book 6, Chapter 10

§1. Nobody really owns land 100%. There are “sleeping partners” such as the landlord and ruler/state/community that will restrict rights of use and/or collect taxes on land. The “managing partner” (who works the land) pays the sleeping partner, but this “money rent” is not the same “real rent” as defined by economists (see B5C10).

§2. Indeed, there is quite some confusion on defining money rents, which can deviate wildly from real rents.

§3. Landlords can (and do) find ways to extract more from tenants, perhaps by requiring work on the landlord’s estate or a share of crops. In most cases, the tenant loses out over time. In an extensive footnote, Marshall discusses how Indian tenants are subject to a range of changes from which they can often recover quickly, but he misses the fact that many Indians starved under British control (“recovery by death”?)

§4. A tenant paying cash rent will work harder to produce crops than a tenant paying a share of the crop yield, since sharecroppers give a percentage of all crops while a renting tenant keeps 100% of the yield (rental costs are “sunk). Sharecropping also requires more landlord oversight, if they landlord wants maximal yields.

§5. Land ownership brings pride and independence, but it can also trap those who work too hard to gain too little (compared to working elsewhere). Their children, likewise, may wait for an inheritance rather than go get work. Opportunity costs matter!

§6. The “English system” of renting for cash (not shares) means that landlords can focus on choosing good tenants and then staying out of the way. This system, Marshall claims (correctly, I think) leads to output “as good as in the Netherlands”.

§7. Innovation in agriculture is slower than in manufacturing, since (a) bright people tend to leave the land for towns, (b) it’s hard to adopt successful ideas from one farm to another (often, quite different) farm, and (c) bad manufacturers are driven out of business faster than bad farmers.

§8. Clever farmers cannot thrive with smaller farms because they lack the scale that will reward planning, management and capital (machine) investments. Smaller farms then just “blunder along”.

§9. Small-scale farms should pay higher rents per acre, to compensate landlords for their attention, but smaller farms should also be encouraged (required? subsidised?) to maintain a local “balance”. Co-operatives can help smaller farms with productivity and profitability, by sharing capital goods, marketing expenses, etc.

§10. Landlords should not pursue rents at all costs. Sometimes, it is better to leave a less productive tenant in place, for the good of the community, or to share the costs of disaster or risk, for the sake of future cooperation. In towns, likewise, it is good to set aside some open lands for all to enjoy, rather than building everywhere and leaving no open spaces (“parks”).

Rent of land

Book 6, Chapter 9

§1. The returns to land ownership depend on some fixed elements (e.g., sunshine or rain) as well as variable elements (e.g., effort to improve output). Taxes on the former will not affect effort as much (at all?) compared to taxes on the latter.

§2. Land use improvements will continue as long as marginal gains outpace marginal costs. They will ignore existing (sunk) gains and costs, but they can vary by crop, skill, etc.

§3. A rise in the value of the produce of land vis-a-vis labor (wages are falling) might reflect overpopulation (labor losing purchasing power) whereas a general rise (a stable relationship) due to, say, technical progress, can result in higher wages.

§4. The value of land (its producer surplus) is not due to Nature’s bounty, but land’s limited supply. An increase in production (due to, say, technology) will lower surplus by increasing supply of produce in the face of level demand. Land value also depends on distance to (or difficulty in reaching) markets. Rich land without road, rail or canal access to markets is worth less than poor but convenient land. Some land value reflects past improvements but some of those “improvements” might be subtracting value today.

§5. The “English system” of charging rents in proportion to average surplus benefits renters who are more productive (they keep more profit) and encourages less-productive renters to leave before they lose more money. This system of free enterprise encourages efficient land use, for the benefit of all English.

Profits of capital and business power, continued

Book 6, Chapter 8

§1. Profits in small and large businesses need to be calculated on a like-for-like basis. Small business owners often forget to deduct their “implied wages” from profits, which may actually be lower. Profits are smaller when it’s easy for competing firms to enter the market and larger when it is harder (e.g., lots of capital investment or expertise needed).

§2. The profits accruing to management will be greater if the labor/capital ratio is high (= more “management”), risk is high (= needs to be managed), or the manager is more skilled than average (= payment for “excess” returns). Profits are lower in high-capital, low-risk, commodified businesses.

§3. Average profits per annum will be similar across different industries. High turnover, low-profit/transaction industries can make the same annual returns as low turnover, high-profit/transaction industries.

§4. Some industries have “traditional” rates of profit, but these figures usually apply to profits on turnover (high or low), not annual profits.

§5. (A lack of) skill and/or (bad) luck can result in deviations from “normal” profits.

§6. Profits vary by more than prices or wages, since they are residual to income and expenses. A small price increase can heavily boost profits, just as a small price decrease can lead to big losses.

§7. Average profits in trade will hide the gains from those few who succeed and often miss the losses from those who fail (survivor bias).

§8. Profits from heavy (prior) capital investments are not the same as profits of (current) labor or (ongoing) natural talent.

§9. Higher profits to one participant in a static industry means lower profits to another participant. Profits can only rise for all if the industry is expanding in scope, scale or efficiency.

§10. The shares of profits between owners and workers (capital and labor) will depend on their relative bargaining powers.

Profits of capital and business power

Book 6, Chapter 7

§1. “Business power” relies on capital (prior chapter), managerial talent, and an organization that combines inputs into outputs. In cases of “beating the trodden path,” the returns to talent will be proportional to their social value but not so for innovators, as they will rarely be able to capture the entire value of good ideas that diffuse to competitors nor share the risks of failures. Economists to this day are interested in this problem of public goods and/or positive externalities (Paul Romer won the 2018 Nobel for his work on “endogenous innovation”).

§2. The ratio of supervisors to “floor” employees will depend on their wages as well as their contribution to overall productivity. A supervisor who boosts employee productivity should be paid in proportion to that gain. One who does not should perhaps be replaced by workers.

§3. The owner’s role depends on their ability to manage, since they need to create enough value to pay the cost of supervising others rather than being directly productive. If they lack such skills, then they should not grow the firm, because that’s not profitable.

§4. Larger firms might have access to cheaper inputs and capital but smaller firms have fewer managers to pay.

§5. New entrepreneurs are often willing to work harder, for lower rewards, than incumbents. In fast-moving industries, these newcomers can succeed, but they will have a hard time when turnover is slow, much capital is needed, and incumbents with cheaper capital prefer the profits of work over the price they’d receive by selling out.

§6. Joint-stock [publicly traded] companies have elaborate (costly) relations among managers, shareholders and directors but they can dominate in businesses where professional management, heavy capital requirements and slow change are more useful than nimbleness.

§7. There is no “correct” mix of large and small companies, old or new, since success can flow from different mixes of inputs. The business “ecosystem” (not Marshall’s term) will therefore be evolving and complex like a natural ecosystem, as profits and opportunities are revealed, exploited and lost. For most participants, it’s hard to see the whole, let alone understand their relative position, besides ongoing existence.