Month: February 2020

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.

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.

§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!