The one-handed economist

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.

§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.

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.