The Economics of Alfred Marshall: Revisiting Marshall's Legacy

Citation

Ahiakpor, J.C.W. (2004), "The Economics of Alfred Marshall: Revisiting Marshall's Legacy", International Journal of Social Economics, Vol. 31 No. 7, pp. 733-736. https://doi.org/10.1108/ijse.2004.31.7.733.2

Prominent in Alfred Marshall's influence upon mainstream economists has been the development of the comparative statics method for analyzing the adjustment of industries from one equilibrium to another over time, characterized by firms experiencing diminishing, constant, or increasing returns to scale. To draw attention to other important aspects of Marshall's work, Richard Arena and Michel Quéré organized and edited the proceedings of a December 2000 international conference on “Competition and Evolution: the Marshallian Conciliation Exercise.” They observe that “contemporary scholars are using Marshallian concepts or referring to a ‘Marshallian framework of analysis’ without looking at the general coherence of its entire work” (p. 9).

Besides the introductory chapter, the book contains 13 essays. The introductory chapter mentions Marshall's Money, Credit and Commerce (1923), but the essays are mainly about Marshall's views on the firm and industrial organization in The Principles of Economics (1890 through 1920), The Economics of Industry (1879, co‐authored with Mary Paley), and Industry and Trade (1919). The introductory chapter does not present a summary and an assessment of the subsequent chapters, as one would expect from an edited volume. Rather, it summarizes what the editors think are the major themes still to be fruitfully explored in Marshall's writings, namely: Marshall's perspective on the appropriate method of economic analysis; the reconciliation problem in Marshall's treatment of the representative firm and the evolution of industries through time; the role of internal and external economies in the evolution of firms and industries; the meaning of competition; and the connection between information, knowledge, and industrial organization.

There is considerable overlap among the chapters. On method, several contributors recall Marshall's caution against the excessive use of mathematics and note the sterility of the Walrasian mathematical approach to microeconomic analysis. Giacomo Becattini (chapter 2) quotes Marshall's view that “the growth of mankind in numbers, in health and strength, in knowledge, ability, and in richness of character is the end of all our studies” (p. 24) to urge going beyond the explanation of efficient allocation of existing resources – the primary focus of modern microeconomics. Roberto Marchionatti (chapter 3) provides support for this view.

On the so‐called reconciliation problem (the co‐existence of competition and increasing returns to scale), which Marshall attempted to resolve with the representative firm analysis, some of the contributors accept earlier judgments that Marshall's efforts were a failure. They include Marchionatti (chapter 3), Laurence Moss (chapter 5), and Michel Quéré (chapter 10). Others give more sympathetic accounts of Marshall's efforts, including focusing on his definition of competition as freedom of entry and exit. This perspective is more consistent with modern monopolistic competition than perfect competition. In their view, Marshall's efforts may not have been completely satisfactory, as he himself acknowledged and de‐emphasized in Industry and Trade, but they have not been the complete failure as many critics suggest. They include Marco Dardi (chapter 6), Peter Groenewegen (chapter 7), John Whitaker (chapter 8), and Neil Hart (chapter 9). Hart also makes the important point that the misperception of Marshall as having been plagued with an unresolvable problem has to be blamed on A.C. Pigou. It was Pigou's “construction of the equilibrium firm [which] made it very easy for subsequent writers to substitute ‘each individual firm’ for ‘equilibrium firm’ in the setting of competitive markets”(p. 173). Piero Sraffa's celebrated criticism of the Marshallian method is thus irrelevant.

Brian Loasby (chapter 11) and Arena (chapter 12) discuss the importance of information and knowledge in Marshall's work. Marshall emphasized the significance of the capacity for processing information into useful knowledge – an approach Loasby contrasts favorably with the emptiness of the Arrow‐Debreu competitive equilibrium model. The latter presumes too much about the availability of information in the future and the ability of agents to use it. Marco Bellandi (chapter 13) revisits Marshall's explanation of the sources of external economies and claims “a central role” for the state in promoting industrial development (p. 249). Tiziano Raffaelli (chapter 14) offers an interesting conciliation between Darwinian and Specerian influences on Marshall's views on industrial districts.

Some of the contributors put forth claims that do not seem consistent with Marshall's own work or would not endear his work to modern economists. One is the extension of Marshall's definition of competition to include co‐operation or collaboration among firms (David Reisman, chapter 4, p. 57 and Brian Loasby, chapter 11, p. 213). The claim contradicts Marshall's own definition of competition as rivalry in the Principles: “The strict meaning of competition seems to be the racing of one person against another, with special reference to bidding for the sale or purchase of anything” (1990, p. 4). Rivalry may entail emulating an opponent's strategy, but that hardly is the same as collaboration.

Another of the unhelpful characterizations of Marshall's work is the attempt to deny his conception of an economic man as an optimizing or maximizing agent (Arena, chapter 12 and Rafaelli, chapter 14). Surely Marshall's argument that some individuals take “delight in doing noble and difficult things because they are noble and difficult” (quoted by Arena, p. 237) does not contradict a view of utility maximization. Marshall's “ordinary business of life” extends beyond market transactions. Also for Marshall, an individual is optimizing – “reckon[ing] up the advantages and disadvantages of any particular action before he enters on it” – even when he “does follow habit and custom, and proceeds for the moment without calculation, [because] the habits and customs themselves are most nearly sure to have arisen from a close and careful watching of the advantages and disadvantages of different courses of conduct” (1990, p. 17). This conflicts with Raffaelli's claim that “Marshall's model of the human mind” rules out “optimality” (p. 261).

Marshall had an inclination towards socialism, later fortified by the influence of J.S. Mill. Thus he argued that “the rich ought to be taxed more heavily than they are, in order to provide for their poorer brethren the material means for a healthy physical and mental development” (quoted by Reisman, p. 62), and also supported “active intervention [by the state] in many affairs” (p. 63). But given the failure of such schemes to promote economic development to benefit the poor since Marshall's time, it hardly serves the recommendation of his economic writings to bring up his socialistic inclinations without a careful defense. Reisman also incorrectly transforms Marshall's statement of the conditions under which trade unionism may be beneficial to society, including their not being controlled by “narrow‐minded men full of selfish notions as to their vested interests” (Marshall 1875, p. 351), into his unconditional endorsement of trade unions: “Trade unions … teach self‐restraint precisely because they teach the individual to look beyond himself” (p. 58).

In reconciling Darwinism and Specerism in Marshall's writings, Raffaelli also brings up arguments for state intervention in the evolutionary process of industry and society, including the possibility that successful developments may not “play any positive role,” may spoil “other organisms,” or hinder “the development of characters which are more useful” (p. 257). But neither Marshall nor Raffaelli addresses the knowledge problem that any intervener in the evolutionary process faces, the very basis upon which Adam Smith and F.A. Hayek cautioned against state intervention in directing investments.

In explaining Marshall's failure to popularize his Principles among business leaders, Moss claims that the effort was doomed from the start because business people are incapable of appreciating “economic reasoning.” He illustrates the claim with an alleged inability of the business leaders to understand the Ricardian inverse wage‐profit theorem or “a closed system of negative feedback effects” (78). But business leaders do appreciate that a rise of wages may depress their profits, which is why they resist demands for wage increases. Also, if business people looked positively on public policy to expand export sales, they are simply looking to take advantage of an expanded market to earn more profits. As Smith taught, larger markets facilitate greater production, employment, and well‐being than restricted markets. Perhaps the explanation should be that business people are rather interested in prescriptive economic analysis to guide their management strategies for profits (modern managerial economics) – an approach absent in Marshall's Principles.

It is regrettable that a volume on Marshall's legacy excludes his macroeconomic analysis in the Principles, The Economics of Industry, and Money, Credit, and Commerce. J.M. Keynes successfully distorted Marshall's restatements of classical macroeconomics, including the theories of money, savings, capital, interest, price level, inflation, investment, and the law of markets. Drawing attention to these theories in Marshall's work would greatly have helped his legacy as a complete theorist. But if the book motivates readers to re‐visit Marshall's definition of competition, his caution on the limits of mathematics in useful economic analysis, and promotes a refinement of his representative‐firm model to explain the evolution of industries, it comprises an important contribution to modern economics.