Book 3, chapter 4: The elasticity of wants

§1. This chapter is famous, as Marshall is credited with popularizing the concept of “elasticity,” i.e., the measure of how fast (elastic) or slow (inelastic) your demand for a good changes in response to its price changing.

§2. He adds that income affects price elasticity, as a rich man is not as worried about a price change as a poor man. (This concept led to, or referred to, “income elasticity”.)

Marshall states that elasticities fall as prices head to zero, contrary to modern economic assumption that they rise (such that infinite quantity is demanded). The difference is explained in his reference to “satiation,” meaning that you would not want more, at any price. This concept is often set aside, via “non-satiation” assumptions, in modern economic theory, probably to allow for easier mathematical assumptions.

Marshall allows for such [unlimited] elasticities in the case of “display goods” but these are often NOT cheap. Hm.

§3. Marshall shows (figures and tables) how aggregate elasticity is composed from the elasticities of various classes: The poor have inelastic demand for basics; the middle class has elastic demand for status goods; the rich have elastic demand for goods that display “social distinction”.

§4. Marshall discusses how elasticity is weak in the short-run for some basic goods (wheat, fish), in the sense that lower/higher prices don’t really affect demand. Years ago, I wrote a paper on demand curves [pdf], and loved this quotation:

“There may be even more violent changes than this in the price of a thing which is not necessary, if it is perishable and the demand for it is inelastic: thus fish may be very dear one day, and sold for manure two or three days later” [p 90].

But wait! Marshall brings up water (my favorite topic 😉

“Water is one of the few things the consumption of which we are able to observe at all prices, from the very highest down to nothing at all. At moderate prices the demand for it is very elastic. But the uses to which it can be put are capable of being completely filled: and as its price sinks towards zero the demand for it loses its elasticity” [p90].

On the one hand (wait, can’t say that!). Right. So Marshall talks about the very real elasticity of demand for water. He’s also right about demand not rising too much when water is cheap or free in some circumstances. In an English house, that’s probably true, but it’s not true when people add lawns, irrigate crops where there’s no rain, or where water is scarce and thus rivers, aquifers, and lakes are drained for human uses, because the price of extraction is low or non-existent.

Ahhh… he’s onto me:

“Generally speaking those things have the most elastic demand, which are capable of being applied to many different uses. Water for instance is needed first as food, then for cooking, then for washing of various kinds and so on. When there is no special drought, but water is sold by the pailful, the price may be low enough to enable even the poorer classes to drink as much of it as they are inclined, while for cooking they sometimes use the same water twice over, and they apply it very scantily in washing. The middle classes will perhaps not use any of it twice for cooking; but they will make a pail of water go a good deal further for washing purposes than if they had an unlimited supply at command. When water is supplied by pipes, and charged at a very low rate by meter, many people use as much of it even for washing as they feel at all inclined to do; and when the water is supplied not by meter but at a fixed annual charge, and is laid on in every place where it is wanted, the use of it for every purpose is carried to the full satiety limit” [p91]

He even mentions drought, so he probably considered my “some circumstances” comment above!

§5. Marshall explains that time, income, prosperity, and so on impact elasticity. Economists often invoke ceteris paribus to ignore these factors.

§6. Marshall adds that demand fluctuates with fashion, substitutes, complements, and — often overlooked — familiarity and market development. He discusses how coal replaced wood/charcoal, and was likewise displaced by petroleum. These dynamics are driven by prices but those reflect the increasing range of uses for petroleum, which make it simultaneously more attractive and cheaper to gain utility from.

Elasticity also varies with a good’s replacement rate. A change in the price of shoes (replaced annually) will not have a big impact compared to a change in the price of meat (purchased daily). Toilet-paper hoarders will  learn these dynamics if they try to sell off their stockpiles!

§7. Marshall adds more caveats for the variety of buyers and sellers (more of each increases competition and information) and the difference between wholesale markets for traders and retail markets for consumption.

§8. Marshall ends the chapter with what seems an outdated discussion of how merchants have a much better notion of the separate components contributing to demand (weather, wealth, holidays) as well as the difficulties of explaining how different classes demand different “baskets” of goods. Both concerns are often overlooked by modern economists focussed on single aggregated numbers, which is a pity for those who want to understand what actual (not median) people are doing.

Book 3, Chapter 3: Gradations of consumers’ demand

Although Marshall’s book was published in 1920, I cannot find any mention of “Spanish Flu” or influenza attached to him. If you have better memory (or google-fu skills) — then please send me links!

Our current chapter begins with the statement that a manufacturer’s demand (willingness to pay) for an intermediate good depends on the final consumer’s demand for that good. And that consumer’s demand — in terms of purchases or actions — indirectly signal desire, which cannot be directly measured.

Hmmm. Marshall says “utility is correlative to desire” [p78], but I am not sure if he means that utility is equivalent to demand. He says desires drive activities and choices while utility represents the full/partial achievement of those desires.

“There is an endless variety of wants, but there is a limit to each separate want. This familiar and fundamental tendency of human nature may be stated in the law of satiable wants or of diminishing utility thus:—The
total utility of a thing to anyone (that is, the total pleasure or other benefit it yields him) increases with every increase in his stock of it, but not as fast as his stock increases… In other words, the additional benefit which a person derives from a given increase of his stock of a thing, diminishes with every increase in the stock that he already has.” [pp 78-79]

This is Marshall’s first elaboration of decreasing marginal utility (DMU) in consumption [he earlier refers to the marginal utility of income], a concept that revolutionized economic thinking around 1870. From here, Marshall explains how our purchases consider the marginal benefit of each additional item; links these concepts to older ideas on the marginal productivity of land; notes that decrease only begins once one has achieved a “critical mass” of initial consumption (thus, one must paint the entire wall before seeing a decreased benefit from additional painting); and describes how utility need not be consistent with the passing of time:

It is therefore no exception to the law [of DMU] that the more good music a man hears, the stronger is his taste for it likely to become; that avarice and ambition are often insatiable; or that the virtue of cleanliness and the vice of drunkenness alike grow on what they feed upon. For in such cases our observations range over some period of time; and the man is not the same at the beginning as at the end of it. If we take a man as he is, without allowing time for any change in his character, the marginal utility of a thing to him diminishes steadily with every increase in his supply of it 

He ends this section referring the reader to the Mathematical Appendix. There, we can see the calculus underlying his exposition. There, we also see how he preferred reasoned prose over mathematical assertion in his economics.

§2. Marshall then explains how DMU relates to prices, and the difference between “demand price” that varies with quantity already consumed and the “marginal demand price” that eventually limits quantity demanded to where the utility of the last unit consumed equals (or just barely exceeds) the market price of the good.

This calculus, he continues, means that the ratios of marginal utilities of different products will match the ratios of their prices, a concept that is simultaneously obvious and mind-blowing.

§3. The marginal utility of money also declines as one gets more of it, since “every increase in his resources increases the price which he is willing to pay for any given benefit.” Put differently, you’re willing to spend more to get the same utility (benefit) when you have more to spend (and thus less worry about foregoing consumption of other goods).

§4. Marshall sets out a demand schedule (of prices and quantities) which leads to a demand curve with quantity on the horizontal axis and price on the vertical axis. Although this “inverse demand curve” is one of the most well known figures in economics, it is Marshall, I think, who first introduces its use, here. (See my paper [pdf], which asks “is inverse demand perverse?”)

Marshall then gives an elegant description of why economists use “smooth” demand curves in a world in which our demand (for wedding cakes, for example) is anything but smooth:

In large markets, then—where rich and poor, old and young, men and women, persons of all varieties of tastes, temperaments and occupations are mingled together,—the peculiarities in the wants of individuals will compensate one another in a comparatively regular gradation of total demand. [p83]

In sum, there is “a general law of demand:—The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or, in other words, the amount demanded increases with a fall in price, and diminishes with a rise in price” [p 84].

§6. Marshall ends the chapter* with the caveat — and foreshadowing of future discussions — that the demand schedule is only valid for a given set of conditions, meaning that it could shift in or out, steepen or flatten if those (ceteris paribus) circumstances change. (He mentions how prices of complementary or substitute goods matter; how spectators can manipulate prices by sending false signals; and how a local panic can change general demand for a product — toilet paper in a corona-crisis, for example.)

* His last footnote (p85) is remarkable: Marshall says that the marginalists of the 1870s, who used the differentials of calculus to explain how a small change in price led to a small change in demand (“direct demand curve”) were preceded by others using the same ideas and techniques over 30 years earlier. #nothingnewunderthesun.

Book 3, Chapter 2: Wants in relation to activities

§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.

Book 3, Chapter 1: Introductory

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.

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.