The one-handed economist

Book 5, Chapter 2

§1. People make various trades for benefit without worrying about equilibrium, or balancing aggregates of supply and demand, which occurs when many actors repeatedly trade (semi-)commodified goods.

§2. Marshall gives the example of a corn market — a “grain” market in the US — in which buyers (with willingness to pay) and sellers (with willingness to accept) converge on an equilibrium price of 36 pence/quarter at which quantity demanded equals quantity supplied. Fluctuations around 36d occur, but they do not persist, since buyers wait out “outrageous” offers and sellers ignore “lowball” bids.

§3. Prices in commodity markets do not deviate too far from equilibrium because traders can borrow (or lend) money to smooth bumps. Prices (wages) in labor markets can vary a lot because workers go hungry if they cannot eat whereas capitalists can eat while they wait for willing workers. The implication, which Marshall elaborates in Annex F (“Barter”), is that money allows commodity markets to clear “on the margin” while labor markets (which have a barter component when one considers that workers are offering heterogeneous units of labor) have a lot of inframarginal noise due to workers getting bad deals. Gender-wage gaps, for example, can be explained by men driving harder bargains than women when negotiating their starting salaries.

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Book 5, Chapter 1

Book 5 concerns “General relations of demand, supply and value.”

§1. Price balances supply and demand. Marshall defers discussion of other factors affecting supply, demand and prices — money, credit, foreign trade, labor, and so on — to a later volume, which he never wrote.

§2. In a “market,” buyers and sellers see the same price for the same good. Most markets are local (e.g., a street market) but they can be physically separated if information flows allow price comparison and thus convergence (subject to transport costs).

§3. Improved communications and transport have created “wide” markets for the same goods, with similar prices. Commodification and standardization makes it easier to have wider markets. Goods that are heavy relative to their value (Mashall uses bricks, but water also fits) will be traded in “narrow” markets where prices reflect local supply and demand.

§4. Markets for gold, silver and (heavily traded) stocks and bonds will tend to have one global price. Traders will ask small margins (bid-ask spreads) for these “liquid” assets, since they are sure to find counterparties. Illiquid assets have larger bid-ask spreads and more price noise.

§5. Custom-made goods (e.g., tailored suits or portraits) and perishable or bulky goods will sell for a range of prices, especially if trade is infrequent. Prices from wide liquid markets (e.g., London) will influence prices in narrow illiquid markets if some traders can switch between markets to get better deals. This arbitrage converges prices.

§6. Besides space, time influences supply and demand. Here Marshall makes some insightful comments (which are often buried/forgotten by vague references to elasticity), i.e.:

We shall find that if the [time] period is short, the supply is limited to the stores which happen to be at hand [Qs is fixed and vertical; D goes up/down to determine P]: if the period is longer, the supply will be influenced, more or less, by the cost of producing the commodity in question [S slopes up; D goes up and down more gradually to determine P]; and if the period is very long, this cost will in its turn be influenced, more or less, by the cost of producing the labour and the material things required for producing the commodity [S shifts in or out]. These three classes of course merge into one another by imperceptible degrees. p 275

The next chapters explore these dynamics.

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Book 4, Chapter 13

§1. A clever entrepreneur can grow a business with good management, talented workers, economies of scale in purchasing materials and using machines, etc. This firm might grow to dominate the industry but its success will be limited by the founder’s capacities and threats from smaller competitors.

§2. Pulling back to look at the entire industry, it’s useful to consider the “representative firm” when thinking of productivity, profits, etc. This firm is average in many senses, but it’s not a random pick. Older and younger firms with developed or under-developed processes, for example, are not “average”.

Good management brings increasing economies of scale (or organization) that can offset decreasing economies from exploiting Nature or other limited resources. These forces might balance out — or not.

§3. A growing population can enjoy growing prosperity for all if raw materials are not constrained and everyone has access to adequate space, clean air and water. Thus, Marshall sees benefits from population growth during the Industrial Revolution while also warning that wealth per capita will not increase forever. These observations sit neatly in the middle of the optimism of Julian Simons and the pessimism of Paul Ehrlich.

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Book 4, Chapter 12:

§1. The first step in expanding a business is hiring managers to handle logistics, thereby leaving “specialists” to focus on producing goods and services. Teachers, for example, have administrative staff to arrange classrooms, collect fees from students, etc.

§2. These managers (qua entrepreneurs) bear risk, provide capital and earn profits in proportion to their skill at matching producers with customers, or supply and demand.

§3. Marshall suggests, for example, the building contractor as a middleman who adds more value than a homeowner by reducing waste and confusion. A real estate developer, likewise, adds even more value by operating at a larger scale.

§4. Larger scales are not always better. In producing clothing or shoes, it may be better to concentrate production in a large factory or outsource to small home producers. Workers, likewise, can be better or worse off relative to home producers, depending on wage guarantees, competition over piece-rates, etc.

§5. Managers must understand things as well as employees. Differing mixes of these skills lead to different paths to success or failure.

§6. Although the sons of businessmen (Marshall writes in an age when women did not lead firms) learn business at the dinner table, they might prefer social or academic careers or living off their father’s work. Thus, it may be better to replace a founding father with professional managers.

§7. Manager-owners often find good replacements among their staff. In some cases, a qualified assistant can become a partner by marrying the owner’s daughter (Marshall comments approvingly on the hopes this path gives to many talented but underprivileged youth). Businesses run by equal partners with different skills can also be productive.

§8. Joint stock companies allow for a division of labor among passive investors, active managers and directors who oversee managers on behalf of shareholders.

§9. The managers of joint stock companies might not work as hard as they should for shareholders, a Principal-Agent dilemma (the term dates from the 1970s) that also arises when politicians put themselves before citizens.

§10. In co-operatives, employees share ownership, profits and decisions. This “perfect middle” will not work if employees do not trust each other, shirk in their duties or disagree on the value of each contribution.

§11. Business growth is not usually held back by a lack of capital (banks are eager lenders) but a dearth of talented, experienced and wise founders with the right combination of Geld, Geduld, Genie und Glück (gold, patience, genius and luck). Successful managers sometimes start on the shop floor, sometimes in the owner’s nursery.

§12. Good managers will accrue capital, market share and profits at the expense of bad managers over time.

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.