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Contents

Preface and Acknowledgements x

Foreword xiii

1 Introduction: Competing Assessments of Alfred Marshall’s Economics 1

1.1 Marshall’s eminence in the economics profession 3 1.2 Marshall’s place in the history of economic

analysis: the traditional ‘textbook’ perspective 5 1.3 The ‘new view’ of Marshall’s economics 7 1.4 Outline of the book 11

2 The Development of Marshall’s Thought 14 2.1 Marshall’s journey from ‘pure theory’ to the

‘land of dry facts’ 14 2.2 Philosophy, psychology and evolutionary thinking 17 2.3 Historical investigations and Hegel’s

Philosophy of History 24 2.4 Economic methodology 28 2.5 Marshall’s early economic writings 31 2.6 The delay in publication: unresolved

methodological concerns 35 2.7 Marshall’s inaugural lecture: the role and nature of

economic theory 39

3 Marshall’s ‘Economic Biology’ 43 3.1 The role of history 44 3.2 Economic biology 47 3.3 Industrial organisation 51 3.4 Increasing returns to scale 53 3.5 Business size and the life-cycle theory 58 3.6 Assessments of Marshall’s economic biology 63

4 Marshall’s Equilibrium Analysis and the ‘Reconciliation Problem’ 71

4.1 Marshall’s equilibrium analogy 71 4.2 Marshall’s equilibrium theory 74

vii

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4.3 Marshall’s time period analysis 79 4.4 The nature of competition 81 4.5 Marshall’s long-period analysis and the

representative firm 84 4.6 Marshall’s ‘reconciliation problem’: equilibrium

and evolution 87

5 Sraffa’s Critique and ‘Marshall’s Theory’ 96 5.1 Increasing returns and competition: the

Cunynghame–Edgeworth–Pigou approach 97 5.2 Marshall’s ‘objections’ to the Cunynghame–

Edgeworth–Pigou approach 102 5.3 Empty economic boxes and the rise to prominence

of ‘pure theory’ 105 5.4 Sraffa’s critique 108 5.5 Sraffa on Marshall’s ‘radical transformation’

of the laws of return 114 5.6 Sraffa’s constructive suggestions 118

6 Getting Marshall ‘Out of the Way’ 123 6.1 From the representative firm to the

equilibrium firm 123 6.2 The contributions of Dennis Robertson and

Gerald Shove and the ‘partial rehabilitation’ of Marshall’s economics? 129

6.3 Sraffa’s ‘destructive and negative’ conclusion to the 1930 Symposium 136

7 The Professionalisation of Economics and ‘Marshall’s Theory’ 141

7.1 Marshall’s role in the professionalisation process 142

7.2 The Cambridge chair succession issue 149 7.3 The nature of economic ‘orthodoxy’: 1885–1908 153 7.4 Marshall’s ‘loyal but faithless followers’ 161 7.5 The declining influence of biological thinking

on the social sciences 166

8 Increasing Returns and Economic Progress 169 8.1 Frank Knight on price theory and economic

methodology 170 8.2 Joseph Schumpeter on equilibrium and evolution 172

viii Contents

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Contents ix

8.3 Allyn Young on ‘increasing returns and economic progress’ 177

8.4 Concluding comments 180

9 Epilogue: Marshall, the Marshallians and Modern Economics 182

9.1 Marshall’s economics 182 9.2 The Marshallians 186 9.3 Marshall and modern economics 190

Notes 193

Bibliography 219

Index 237

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1Introduction: Competing Assessments of Alfred Marshall’s Economics

1

Although harsh, these are my well-considered judgements on the matter, and I mention them only because no one can understand the history of the subject if he does not realize that much of the work from 1920 to 1933 was merely the negative task of getting Marshall out of the way.

(Samuelson 1967: 111)

This book re-examines the theoretical debates and controversies that characterised the 1920s, which Paul Samuelson has highlighted as being decisive to the development of economic analysis in the decades that followed. In these debates, attention was focused on what is now often referred to as Alfred Marshall’s ‘reconciliation problem’, characterised as the attempt to construct supply schedules under conditions of pure competition in the presence of increasing returns to scale. A solution to this dilemma was thought necessary in order to legitimise the partial equilibrium analysis of markets founded on demand and supply func-tions. It was generally concluded that Marshall’s attempts to resolve the ‘reconciliation problem’ had not only been unsuccessful but had also, as Mark Blaug (1962: 399) summarised, ‘raised false problems that took the best efforts of a generation of economists to solve’.

Contrary to the judgements of influential commentators such as Samuelson and Blaug, the central argument developed in this book is that the nature of the difficulties that Marshall had attempted to resolve was fundamentally misunderstood and at times misrepresented by many of Marshall’s critics, supporters and subsequent contributors to the develop-ment of mainstream economics. This misunderstanding emerges largely

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2 Equilibrium and Evolution

from a misinterpretation of the intended role of Marshall’s representa-tive firm theory, which was at the centre of the cost controversies of the 1920s. In particular, it is essential to understand that Marshall’s difficul-ties were far removed from the contortions of the mind that character-ised the attempts at preserving a notion of competitive equilibrium when confronted with the damaging implications of increasing returns. It could indeed be argued that this was a ‘false problem’; however, Marshall did not concoct it.

The chief source of the difficulties that characterised the successive editions of the Principles of Economics (hereafter Principles) is revealed in statements Marshall presents in the Preface to the last four editions.1

The Mecca of the economist lies in economic biology rather than in economic dynamics. But biological conceptions are more complex than those of mechanics; a volume on Foundations must therefore give a relatively large place to mechanical analogies; and frequent use is made of the term “equilibrium” which suggests something of statical analogy ... This fact, combined with the predominant atten-tion paid in the present volume to the normal conditions of life in the modern age, has suggested the notion that its central idea is “stat-ical,” rather than “dynamical.” But in fact it is concerned through-out with the forces that cause movement: and its key-note is that of dynamics, rather than statics. (Principles: xiv)

The long list of qualifications and ambiguities found in the Principles arises in the main from Marshall’s endeavours to construct an equilib-rium concept that could be used to shed light on the outcomes of proc-esses that are recognised as being continuous and irreversible in time, and evolutionary (or ‘biological’) in nature. It was this unresolved strug-gle between mechanical notions of equilibrium and Marshall’s system of ‘economic biology’ that frustrated Marshall’s ambition to construct a logically coherent theory of value that was not divorced from explana-tions of economic growth and development that accentuated the evo-lutionary nature of economic change. These are not ‘false problems’; the issues left unresolved by Marshall continue to challenge the opera-tional legitimacy of modern versions of equilibrium analysis long after Marshall was ‘got out of the way’.

More than anything else, the consequential debates over increasing returns and Marshall’s representative firm theory indicated just how far the Marshallians had departed from their revered leader, both in terms of theoretical content and methodological principles. In this setting,


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Introduction 3

while Piero Sraffa’s (1925, 1926, 1930) well-known critique represented a damaging assault on the prevailing orthodoxy, it had very little to do with what Sraffa had erroneously referred to as ‘Marshall’s theory’. This finding does not amount to a defence of Marshall’s economics: rather it invites a reassessment of Marshall’s economics; a re-evaluation that has the potential to illuminate pathways leading to fertile territories for contemporary economic analysis to explore.

The remainder of this introductory chapter examines Marshall’s legacy and place in the history of economic thought, beginning with traditional interpretations and then moving on to the ‘new view’, a per-spective which has become more widely accepted by Marshall scholars over recent years. The parallels and points of departure between the ‘new view’ and the central conclusions reached in this book are also briefly noted. The content of the chapters which follow is outlined in the concluding section.

1.1 Marshall’s eminence in the economics profession

In terms of his contribution to economic analysis, Joseph Schumpeter (1954: 834) portrayed Marshall’s Principles as representing more per-fectly than any other the state of economics that emerged in England at the turn of the twentieth century. Marshall’s ‘favourite student’, John Maynard Keynes (1924: 47–8), described how with the passing of time the intellectual qualities of the Principles permeated economic thought ‘without noise or disturbance, to an extent which can easily be overlooked’. While finding Marshall’s Principles to be an ‘unsatisfac-tory book’ when judged by ‘present-day standards’, Mark Blaug (1962: 398–9) acknowledged Marshall’s major contribution as being one of the most ‘durable and viable’ books in the history of economics, describing Alfred Marshall as the most dominant figure in British economics from the 1890s right up to the 1930s.

The extent to which Marshall’s Principles permeated economic thought is documented in the detailed commentaries provided by George Stigler (1941) and Gerald Shove (1942), as well as in the remi-niscences by Francis Edgeworth, A.C. Pigou along with others assem-bled in Pigou (1925), and in later recollections by writers such as Joan Robinson (1978: ix).2 Equally important was Marshall’s role in the professionalisation of economics in Britain, as documented by writers such as John Maloney (1985), A.W. Coats (1967, 1968b), and depicted emphatically in Peter Groenewegen’s (1995, 2007) definitive biographi-cal accounts. Most notable was Marshall’s role in the formation of what


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became known as the Royal Economic Society and the establishment of the Cambridge Economics Tripos. The significance of these aspects of Marshall’s legacy was eloquently summed up in the following passage from Maynard Keynes’ memoir to Marshall:

Marshall was the first great economist pur sang that there ever was; the first who devoted his life to building up the subject as a separate science, standing on its own foundations, with as high standards of scientific accuracy as the physical or the biological sciences. It was Marshall who finally saw to it that “never again will a Mrs Trimmer, a Mrs Marcet, or a Miss Martineau earn a goodly reputation by throwing economic principles into the form of a catechism or of simple tales, by aid of which any intelligent governess might make clear to the children nestling around her where lies economic truth” [Marshall 1897: 296]. But – much more than this – after his time Economics could never be again one of a number of subjects which a Moral Philosopher would take in his stride, one Moral science out of several, as Mill, Jevons, and Sidgwick took it. (J.M. Keynes 1924: 56–7)

Marshall’s substantial participation in government inquiries on eco-nomic and financial matters, such as the 1891–94 Royal Commission on Labour, also served to reinforce the growing status of his chosen profession. Marshall not only played a pivotal role in establishing the structures upon which a distinct economics profession could be nur-tured, but he also succeeded in uniting around himself a group of fol-lowers who shared his professional ambitions. His continuing influence was spread well beyond Cambridge largely through the activities of his former pupils whose careers had flourished upon completing studies during Marshall’s tenure at Cambridge:

It is through his pupils, even more than his writings that Marshall is the father of economic science as it exists today [1924]. So long ago as 1880, Professor Foxwell was able to write: “Half the economic chairs in the United Kingdom are occupied by his pupils, and the share taken by them in general economic instruction in England is even larger than this” [Foxwell 1880: 92]. To-day through pupils and the pupils of pupils his domination is almost complete. (J.M. Keynes 1924: 59)

Marshall was, therefore, undoubtedly the foremost member of his pro-fession at a most critical stage of its development. The enduring nature


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Introduction 5

of Marshall’s esteem within the profession is clearly attested in Stigler’s centenary assessment of Marshall’s Principles:

At the time of Marshall’s death, Keynes wrote that “As a scientist he was, within his own field, the greatest in the world for a hundred years” (Keynes, 1924, p. 12). Viewing Marshall with the increased objectivity that comes from the passage of 65 years and the absence of filial obligations, I find this judgement as valid today as it was in 1924. (Stigler 1990: 12)

1.2 Marshall’s place in the history of economic analysis: the traditional ‘textbook’ perspective

Despite his eminence, Marshall remains somewhat of an enigmatic fig-ure in the development of economic analysis. On the one hand, his-torians of economic thought have frequently placed Marshall (along with W.S. Jevons, Carl Menger and Leon Walras) at the forefront of the development of what has become popularly termed ‘neoclassical’ economics. Joseph Schumpeter (1954: 837), for example, argues that Marshall’s theoretical structure, ‘barring its technological superiority and various developments of detail’, is ‘fundamentally the same as that of Jevons, Menger, and especially Walras’.3 Influential writers such as Stigler (1941: 8) viewed ‘neoclassical’ economics as stemming directly from Marshall’s contributions, a judgment often found in history of economic thought texts.4

When applied to Marshall’s original writings, the term ‘neoclassical’ may be employed with some justification. Marshall’s work was never anti-classical in the manner that Jevons, and to a lesser extent, Menger and Walras opposed the contributions of Adam Smith, David Ricardo and J.S. Mill. Indeed, Marshall (along with perhaps Gustav Cassel and in some respects Knut Wicksell) stood almost alone amongst the early ‘neoclassicals’ in his attempts to establish the existence of continuity between his own theoretical apparatus and the ‘classical’ framework.

The term ‘neoclassical’ was coined originally by Thorstein Veblen (1900) at the turn of the twentieth century to characterise specifi-cally the ‘Marshallian version of marginalism’.5 Increasingly, this term has become associated with the brand of marginalist economics that emerged from the writings of Menger, Walras and others such as J.B. Clark and which was formalised in the writings of Samuelson and his many followers. While many of the ‘handy tools’ that have come


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to define the marginalist approach can be mined from the crevices of Marshall’s Principles, it cannot be argued that Marshall’s own analytical structure was founded on the key marginalist principles. Therefore, at least in the context of the common usage of the term, Marshall’s sta-tus as a prominent co-founder of the neoclassical school of economic analysis is rather tenuous.

Perhaps Marshall’s greatest claim to fame within economic orthodoxy emerges from the role he is perceived to have played in the refinement of a theory of value based on the interaction of independent demand and supply functions constructed within a partial equilibrium framework. Within this setting, Marshall developed a number of concepts which Stigler (1990) proposes have had a lasting effect upon economic doctrine. First and foremost, Marshall made time itself a major factor in the theory of value; thereby, the role of time was ‘made manageable’ through time period constructs which drew a distinction between the short and long period analysis. Second, there was the doctrine of external and internal economies, which Stigler likens to ‘handy tools as adverbs and logarithms’. Third, there was the prominence Marshall gave to the theory of the firm, focusing on the role it plays as a decision-making unit in decentralised industries. In addition, Marshall’s introduction and emphasis upon con-sumer surplus is judged to have been a significant step in the development of welfare economics, later to be ‘revived in the writings of J.R. Hicks’. Marshall is also seen to have contributed a variety of advances which con-tributed significantly to what has become human capital theory, and in monetary economics particularly in the area of the demand for money.

However, Marshall’s exposition of the static partial equilibrium method is highly qualified, leading many commentators to puzzle over Marshall’s ‘ambivalent attitude’ towards the subject matter in the Principles, and the ‘schizoid’ attitude towards equilibrium analysis in particular (Blaug 1962: 398–9). This sentiment, and indeed hostil-ity to Marshall’s economics by some prominent mainstream econo-mists, is once again most plainly stated in the following passage from Samuelson’s evaluation of Marshall:

Marshall was a victim of what the modern Freudians call self-hate. He was a good chess player who was ashamed of playing chess, a good analytical economist who was ashamed of analysis ... All of this prattle about the biological method in economics – and the last dec-ades’ genuine progress in biology through the techniques of physics has confirmed my dictum of 20 years ago that talk of a unique bio-logical method does mostly represent prattle – cannot change this


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Introduction 7

fact: any price taker who can sell more at the going price than he is now selling and who has falling marginal cost will be in equilib-rium. Talks of birds and bees, giant trees in the forest, and declining entrepreneurial dynasties is all very well, but why blink at such an elementary point? (Samuelson 1967: 112)6

Marshall has therefore often been seen to be the ‘inventor’ of many of the analytical tools essential to the construction of modern mainstream economics; and for this reason he is accorded a prominent position in the development of economic analysis. However, his ‘timidity’ in applying the handy tools, and superfluous ‘prattle’ about the biological method in economics, not only left his own work incomplete, but also ‘paralyzed the best brains in the Anglo-Saxon branch of our profession for three dec-ades’ (ibid.: 109). Once the ‘ambiguities’ in Marshall’s theoretical structure could be cast aside, the handy tools (such as those listed by Stigler) could be used to assist in the assembly of the ‘neoclassical’ theoretical edifice.

It is not surprising, therefore, that a closer reading of Marshall’s origi-nal contributions reveals that, despite the prominent position designated to him, little in fact remains of Marshall’s theoretical structure and meth-odological approach. As Schumpeter’s (1941) semi-centennial appraisal observed more than fifty years ago, Marshall’s analytical apparatus appeared to be ‘obsolete’, a perception reiterated by subsequent commen-tators such as Brian Loasby (1978) in his aptly titled article ‘Whatever Happened to Marshall’s Theory of Value?’ As is argued throughout this book, the answer to this question is as asserted by Loasby (ibid.: 2): ‘Marshall’s own theory was found much too difficult by his successors, who replaced its elaborate structure with a plain and simple doctrine.’

As is the case with many of the ‘great economists’, an assessment of Marshall’s contribution to economics must distinguish carefully between his own writings and the later distorted renditions of his work emanating from his critics and disciples alike. In particular, Marshall’s contributions must be disentangled from what came to be branded as ‘Marshallian economics’, if the ‘perplexities’ in Marshall’s economics can begin to be unravelled. It is only then that Marshall’s legacy can be fully appreciated and his contributions suitably assessed.

1.3 The ‘new view’ of Marshall’s economics

The ‘traditional’ assessment of Marshall and his work has, over recent decades, been strongly challenged by a growing number of Marshall scholars. In place of the traditional evaluations has emerged a ‘new


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view’ which entails an entirely novel way of interpreting Marshall’s contributions, as described succinctly by one of its leading proponents, Marco Dardi:

The ‘new view’ regards the latter [Marshall’s thought] as being chiefly a scientific treatment of human history, based on a philosophical vision which is almost an outgrowth of a personal variant of evolu-tionary psychology extended to social and industrial organisation. For those involved in this historical revision, the most surprising aspect has been the ease with which, set against the backdrop of his general philosophy of history, different parts of Marshall’s economic canon – partial equilibrium and period analysis, as well as the theory of industrial organisation in its connection with social and ethical progress – fit together like those of a puzzle that form a coherent pattern. Not bad for an author who had a reputation for lacking in rigour and for a certain fuzziness! (2010: 522)

The ‘new view’, at least in the form described by Dardi, has only been systematically conveyed over the past two decades. Prior to this there were a small number of writers, amongst whom Giacomo Becattini (2003: 13, 26) lists Ronald Coase, George Shackle, Nicolas Goergescu-Roegen and Brian Loasby, who had seen similar ‘unexpressed potentials’ in Marshall’s thought. To Becattini’s non-exclusive list should be added Gerard Shove (1942), who in his centenary appreciation of Marshall’s life pointed to some of the neglected themes, some of which were also recognised by the likes of Joan Robinson and Nicholas Kaldor in their later reinterpretations of Marshall’s work.7 These themes became more discernible amongst the flurry of articles that coincided with the cen-tenary celebrations of the publication of the first edition of Marshall’s Principles; notable examples including contributions by Loasby (1990) and D.P. O’Brien (1990a).8

The ‘new view’ of Marshall’s work has evolved by and large from an assessment of Marshall’s previously unpublished writings and cor-respondence which have been made more readily accessible through substantial archival investigations. This work has greatly extended the insights provided in Maynard Keynes’ (1924) detailed memoir of Marshall, together with the selected writings and correspondence assem-bled in Pigou (1925), and the posthumously published recollections of his wife and once co-author, Mary Paley Marshall (1947). Paving the way was John Whitaker’s (1975a, 1975b) edited volumes on Marshall’s early economic writings, where the context of these writings was carefully


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Introduction 9

established through editorial commentary.9 Insights into Marshall’s professional activities have been extended through Groenewegen’s (1996) supplement to Maynard Keynes’ (1926b) collection of Marshall’s official papers. Most importantly, the absence of a substantive Marshall biography was remedied with the publication of Groenewegen’s (1995) A Soaring Eagle. Here the reader’s attention is drawn most emphatically to the significance of Marshall’s early writings on philosophy, history and psychology, where a number of enduring intellectual influences were accumulated which had a lasting effect on Marshall’s approach to thinking about economics. Groenewegen demonstrated clearly that an assessment of Marshall’s legacy could not proceed satisfactorily with-out an awareness of these early influences on Marshall as he embarked on his intellectual journey to his chosen profession. Most importantly, Marshall the economist could not be divorced from Marshall the man and the intellectual and social environment of his times.10

The subsequent archival work that has informed much of the recent Marshall literature has been extensive. Most significant has been Tiziano Raffaelli’s (1994) edited collection of Marshall’s early philosophical con-tributions and Simon Cook’s (2005a, 2006a) presentation of Marshall’s historical notes and essays.11 Marshall’s correspondences were also con-veniently assembled in John Whitaker’s (1996) edited three volumes. The interpretations of this material, suggesting some of the conclu-sions referred to by Dardi above, have been inspired by the insightful analysis in Raffaelli’s (2003) Marshall’s Evolutionary Economics, which, as the title suggests, focuses attention on the importance of the influence of evolutionary thinking in both Marshall’s early and later writings. More recently, on the basis of his continuing extensive analysis of the Marshall archives, Cook (2009) has reasoned that the defining charac-teristics of Marshall’s economics can be best understood when placed in the context of the nineteenth-century philosophy which Marshall had studied intensively prior to his published works on economics. In Cook’s analysis, the links between historical philosophy and economics are emphasised, with the impact of Hegel’s Philosophy of History on this aspect of Marshall’s thinking accentuated to the point where the label ‘Neo-Hegelian Political Economy’ is applied.

More generally, many of the elements that have come to constitute the ‘non-traditional’ view of Marshall and his work are contained in articles contributed to Richard Arena and Michel Quéré’s (2003) The Economics of Alfred Marshall, aptly subtitled, ‘revisiting Marshall’s leg-acy’. As summarised by the editors, ‘the Marshall we learned about in the textbooks is not the one that is promoted here’ (ibid.: 9). The same


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perspective can be found in many of the contributions to the Elgar Companion to Alfred Marshall, as is observed in the editors’ discerning introduction (Raffaelli et al. 2006: xiii–xxiv). Collectively, these sources reveal a number of what Becattini (2003: 15–17) refers to as anomalies of Marshall that render Marshall’s thought incompatible with the neoclas-sical mainstream to which Marshall is habitually, though often grudg-ingly, ascribed. The most important of these is that man is a variable entity, as opposed to the Ricardian and neoclassical visions. The distri-bution of characteristics of human groups depends on their history, and the potentialities of these groups in turn depend on that distribution. Also emphasised is the significance of Marshall’s evolutionary explana-tions of industrial organisation and economic development to his over-all theoretical structure, as opposed to something which is somehow or other superimposed on a static analytical core. At the same time, the purposeful nature of human action is emphasised, and how this is influenced by, and in turn shapes, economic and social institutions.

In general terms, the interpretation and assessment of Marshall’s eco-nomics presented in this book is aligned with, and is certainly strongly influenced by, the ‘new view’ of Marshall’s work. This impressive body of literature, along with the insights derived from the archival investi-gations, is referred to recurrently in the chapters ahead. However, the finding conveyed by Dardi (2010), that when set against the backdrop of his general philosophy of history, the different parts of Marshall’s economic canon ‘fit together like those of a puzzle that form a coherent pattern’, does not receive unqualified support. It may well be possible to perceive this coherent pattern when Marshall’s published writings are reconstructed in a manner that appears consistent with a reasoned interpretation of what remains of Marshall’s unpublished historical and philosophical papers. However, no such unity is celebrated by Marshall in his published writings on economics. Instead, the successive editions of Marshall’s Principles are characterised by the inner tensions described earlier in this chapter. While Marshall was unmistakably seeking to weave a consistent pattern between his equilibrium-based theories of value and biological (or evolutionary) explanations of industry organisation, this remained largely an unfulfilled ambition in his own writings.

On the other hand it cannot be maintained that there were ‘two Marshalls’, as is often argued; one seeking the biological Mecca with the other endeavouring to formalise a logically coherent equilibrium-based theory of value.12 As is emphasised throughout this book, Marshall endeavoured to preserve a unity between these two aspects of economic


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Introduction 11

reasoning. Indeed, the separation of the theories of value and of growth and development was perhaps the greatest tragedy associated with ‘get-ting Marshall out of the way’.

1.4 Outline of the book

Consideration of the issues discussed above is organised as follows in this book. Chapter 2 details the development of Marshall’s thinking on the nature and role of theory in economic analysis, as revealed in his early writings on philosophy, psychology and history that preceded the publications of his Principles. Emphasis is placed on the often over-looked influences on Marshall’s early thinking that directly fashioned the methodological approach which came to be adopted by Marshall in the Principles. This is followed in Chapter 3 with an examination of the nature and intended role of Marshall’s ‘economic biology’, developed most directly in his treatment of industry organisation and change in Book IV of the Principles. An assessment of Marshall’s application of the ‘speculations of biology’ is also presented, largely in the context of the evolutionary thinking during Marshall’s time. Chapter 4 exam-ines the equilibrium analysis found in Marshall’s Principles, and deter-mines its intended connections with the ‘biological’ themes discussed in the previous chapter. It is in this chapter that the precise nature of Marshall’s ‘reconciliation problem’ is established. This requires a close consideration of Marshall’s long-period analysis and representative firm theory, given the widespread misrepresentations of these aspects of Marshall’s economics found in the literature that has followed. The reasons for Marshall’s own dissatisfaction with his equilibrium-based value theory are also established, along with his more general cautions regarding the limitations of the applications of mechanical analogies to economic thinking. It is here that the ‘equilibrium versus evolution’ struggle emerges in Marshall’s scheme, a struggle that ultimately chal-lenges the operational viability of the theoretical structure being con-structed in the Principles.

Attention in Chapters 5 and 6 is focused directly on the Marshallian cost controversies of the 1920s, generally seen to be centred most directly on Piero Sraffa’s (1926) critique of ‘Marshall’s theory’, and cul-minating in the ‘Symposium’ published in the Economic Journal in 1930. This chapter begins by outlining the treatment of increasing returns and long-period analysis in the Marshallian literature as it evolved after Marshall, along with some early criticisms emanating from the ‘Empty Economic Boxes’ debates involving John Clapham, Dennis Robertson


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and Marshall’s anointed successor to the Cambridge Chair, A.C. Pigou. The substance and relevance of Sraffa’s critique is then assessed, par-ticularly in terms of the interpretation of ‘Marshall’s theory’ portrayed in Sraffa’s published contributions. A general conclusion reached is that the cost controversies had little relevance to the conceptual and meth-odological difficulties found in Marshall’s Principles, reflecting instead on the extent to which the Marshallian approach had departed from Marshall. Chapter 6 considers the process which Samuelson (1967) approvingly described as ‘the negative task of getting Marshall out of the way’. The Marshallian responses to Sraffa’s critique are outlined; in particular, the subversive manner in which Marshall’s representative firm came to be replaced with Pigou’s equilibrium firm. This shift in analysis confirmed the abandonment of Marshall’s ‘economic biology’ and in its place the largely unambiguous and unqualified acceptance of static equilibrium analysis.

An understanding of the reasons for the growing divergences between Marshall and the Marshallians requires a consideration of Marshall’s pivotal role in the process by which economics was professionalised, along with the nature of Marshall’s own professional relationships with his colleagues. These themes are taken up in Chapter 7, where Marshall is characterised as providing ‘leadership from the rear’, in the sense that his role was to establish the structure that would support the professionalisation process in Britain, and then to manoeuvre his colleagues in whatever way he saw appropriate to reinforce these struc-tures. Marshall avoided and discouraged significant debate within the profession in order to portray the impression of solidarity in the funda-mental principles that defined economics as a distinct discipline. The scientific environment during the early twentieth century turned out to be rather hostile to evolutionary thinking, and Marshall did little to actively promote his agenda of ‘economic biology’. Moreover, Marshall established close professional and personal alliances with prominent colleagues such as Edgeworth and Pigou, whose views on the nature and role of economic theory were fundamentally opposed to those espoused by Marshall himself. This chapter concludes with a brief account of the demise in the popularity of evolutionary thinking during the early decades of the twentieth century, indicating another potentially signifi-cant impediment in the pursuit of Marshall’s biological Mecca by those of his ‘loyal disciples’ who may have shared Marshall’s ambitions.

Chapter 8 considers the often neglected criticisms of ‘Marshall’s the-ory’ emanating from across the Atlantic in the writings of Frank Knight and Joseph Schumpeter, which are shown to be connected much more


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Introduction 13

closely to the difficulties that Marshall had struggled unsuccessfully to resolve. These contributions led directly to Allyn Young’s (1928) input into the cost controversies, where the precise nature of Marshall’s dif-ficulties is accentuated, and the damaging implications for equilibrium analysis confirmed. The concluding chapter reiterates the book’s central conclusions and considers their relevance to contemporary economic analysis.

Where pertinent, discussion in this book is frequently accompanied by direct reference to the published writings of Marshall and his promi-nent critics and followers. This is to avoid, and at times counterbalance, what are claimed here to be misinterpretations of Marshall’s work that have flourished in the secondary literature, and in some of the revision-ist reconstructions of Marshall’s contributions to economics.


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237

Index

1930 Economic Journal Symposium, 130–8

a priori knowledge, 18, 19, 21agents of production, 48, 84Arena, Richard, 9Arrow, Kenneth, 192artificial intelligence, 18Ashley, W.J., 159–60, 211–12n17, 214n6associationism, 18, 19

Babbage, Charles, 18, 24, 58, 199n9Backhouse, Roger, 193n3Bain, Alexander, 18, 19, 20, 30Bateson, William, 65–6, 68Becattini, Giacomo, 8, 10, 57Bentham, Jeremy, 17Blaug, Mark, 1, 3, 177Blitch, Charles, 169Bowley, Arthur, 30British Economic Association, 146British Historical School, 152,

157, 158–9business size, 58–63

Cambridge chair succession, 149–53, 189

Cambridge Economics Tripos, 4, 145, 148–9, 151, 152, 159, 165, 210n7, 212n23, 213n24, 214n36

Cambridge School of Economics, 145, 149–53

Cannan, Edward, 159, 161, 164, 211–12n17

capital accumulation, 115Cassel, Gustav, 5ceteris paribus clause, 74, 184Clapham, John, 45–6, 102, 105–6Clark, J.B., 5classical political economy, 15,

31–2, 109Clifford, William, 17Coase, Ronald, 8

Coats, A.W., 3, 141–2, 155, 159–62competition, 56–7, 97–102, 112,

130–1, 180, 186free, 82–3, 112, 139imperfect, 118–22, 180–1nature of, 81–4perfect, 82, 112, 116–17, 131,

136, 139stable, 172

competitive equilibrium, 2, 109–10, 113–14, 117, 126, 133–4, 138, 186–7

consciousness, 18, 20constant costs, 118constant returns, 54, 119, 187consumer preferences, 75consumer surplus, 37Cook, Simon, 9, 18, 27, 196n17Corsi, Marcella, 58cost controversies, 96–7, 138, 139–40,

141, 165, 175, 187–8cost curves, 98–101, 103–4, 113–14, 132Cournot, Augustin, 25, 33, 34, 36,

37, 38Cournot’s error, 59, 111cumulative causation, 139, 179, 181,

218n14Cunningham, William, 45, 157, 159Cunynghame, Henry, 97–105Cunynghame-Edgeworth-Pigou

approach, 97–102, 165, 205n2Marshall’s objections to, 102–5

Dardi, Marco, 8, 9, 27, 94Darwin, Charles, 16, 19, 22, 24, 43,

49, 63–5, 68–9, 167, 183Deane, Phyllis, 193n4, 194n10decreasing costs, 54, 98–101, 107,

109, 113, 128, 134, 165, 174, 178, 206n10, 215n46, 216n2

deduction, 28–9, 157–8, 183demand, 34, 44, 92, 98

for money, 6

9780230_302709_13_ind.indd 2379780230_302709_13_ind.indd 237 10/24/2011 3:55:13 PM10/24/2011 3:55:13 PM

PROOF

238 Index

demand curve, 33demand functions, 1, 6demand schedules, 75, 76De Vries, Hugo, 65De Vroey, Michel, 78diminishing returns, 54, 96, 97,

102, 115diseconomies, 91, 129, 134, 135distribution theory, 34, 35, 44,

115–16, 148‘The Duty of the Logician’ (Marshall),

21–2

economic agents, 78decision-making by, 24

economic analysis, 3, 29, 42, 44, 69, 73, 108, 120, 142, 153, 180, 183–9

development of, 1history of, 5–7realism in, 106role of history in, 44–6role of theory in, 11time dimension in, 103–4

economic biology, 2, 11, 12, 42–70, 148, 163, 179, 185, 191

assessment of, 63–70increasing returns to scale and, 53–8industrial organisation and, 51–3life-cycle theory and, 58–63role of history, 44–6

economic development, 10, 26economic dogma, 41economic evolution, 24, 47–8economic growth, 11, 115economic history, 44–6Economic Journal, 146economic methodology, 28–31, 170–2economic order, 94–5economic orthodoxy, 6, 145, 153–61economic progress, 47, 50–1, 69, 116,

177–80economics

defined, 47professionalisation of, 141–68

Economics of Industry (Marshall and Marshall), 35, 38–9, 55, 72, 81–2, 143, 183

economics profession, development of, 4–5

economic theory, 39–42economies of scale, 53, 56, 110, 111,

117, 129, 131, 135–6, 165, 180, 185, 188, 206n10

Edgeworth, Francis, 3, 83, 97–105, 142–3, 163

empiricism, 18, 19, 21, 29, 30‘empty economic boxes’, 105–8equilibrium, 2, 44, 74, 171

competitive, 2, 109–10, 113–14, 117, 126, 133–4, 138, 186–7

evolution and, 87–95, 172–6, 192general, 77–8, 118–22, 126, 190industry, 133–4long-period, 79–81, 84–7, 173, 180multiple, 88–9partial, 33, 94, 95, 178–9, 183

equilibrium analogy, 71–4equilibrium analysis, 6–7, 12, 13, 33,

39, 60, 71–95, 112, 120, 176, 185, 188, 190

competition and, 81–4long-period analysis, 84–7reconciliation problem and, 87–95

equilibrium firm, 117, 123–9, 131, 162, 187

equilibrium price, 76–7, 117, 126equilibrium theory, 35, 43, 74–8, 190Essay on Value (Marshall), 54, 88Eugenics movement, 69, 167evolutionary economics, 166–7, 191evolutionary epistemology, 17evolutionary philosophy, 17–24, 28evolutionary theory, 16, 17–24, 49,

52–3, 64–6, 68–9, 191–2declining influence of, 166–8equilibrium and, 87–95, 172–6

external economies, 6, 54–8, 87, 100, 101, 109–12, 119, 123, 131–5, 172

Fawcett, Henry, 195n7‘Ferrier’s Proposition One’ (Marshall),

19–20Fishburn, Geoffrey, 65, 67, 202n30Foster, John, 81, 84Foxwell, Somerton, 144, 145,

149–53, 157free competition, 82–3, 112, 139


PROOF

Index 239

Freeman, Richard, 151‘The Future of the Working Classes’

(Marshall), 36–7

Galton, Francis, 65, 66, 145, 167, 201n5

Garegnani, Pierangelo, 138general equilibrium, 77–8, 118–22,

126, 190German Historical School, 26, 29, 40,

157, 158, 160, 183Goergescu-Roegen, Nicolas, 8gradualism, 65, 66, 68–9Groenewegen, Peter, 3, 9, 18, 27, 34,

66, 83, 93, 147, 152, 196n17Grote, J., 18, 19, 20, 22Grote Club, 18, 19, 21, 25Guillebaud, C.W., 32, 37, 46,

193n1

Haeckel, Ernst, 49Harcourt, Geoffrey, 130, 203n9Hegel, Georg, 9, 16, 24–8, 183, 196n17Henderson, Hubert, 97–8, 125heredity, 65–6Hicks, J.R., 6, 119history, role of, 44–6History of Civilisation (Marshall), 26Hobson, J.A., 105, 160–1, 214n41Hodgson, Geoffrey, 167, 191Hofstadter, Richard, 167human capital theory, 6, 37

idealism, 19–20, 30imperfect competition, 118–22, 180–1increasing returns to scale, 1, 2, 37–8,

53–61, 85, 89–90, 97–102, 109, 112–13, 129, 133–5, 138, 172, 177–80, 186, 187, 190

induction, 28–9, 157–8, 183industrial atmosphere, 56industrial cooperation, 62industrial districts, 56–8industrial organisation, 10, 33, 39,

48–53, 60, 80, 116Industry and Trade (Marshall), 52,

61–2, 81, 92, 111, 189industry concentration, 57–8industry equilibrium, 133–4

inheritance, 65–6of acquired characteristics, 64,

66–8Mendelian, 65, 66, 68–9

innovation, 21, 52, 55, 56, 174–5intermediate zone, 119, 121internal economies, 6, 54–5, 84–5, 87,

110, 134, 135intuitionists, 18–19irreversibilities, 90–1, 111

Jevons, W.S., 5, 24, 33–4, 38, 142–3, 156

joint stock companies, 58, 61–3, 135–6

Jowett, Benjamin, 18, 215n44

Kahn, Richard, 139Kaldor, Nicholas, 8, 181, 191Kant, Immanuel, 16, 18, 19, 21–2, 30Keynes, John Maynard, 3, 4, 8, 9, 31,

97, 129, 137, 146, 150, 153Keynes, John Neville, 28, 145, 147,

149, 150, 152, 157–8Kidd, Benjamin, 66Knies, Karl, 26Knight, Frank, 112, 169–72, 180knowledge, 18, 19, 21, 22, 26, 51,

56, 72knowledge-based economies, 85,

90, 116Koot, Gerard, 46Krugman, Paul, 191

labourdivision of, 49–50, 54–60specialised, 56

labour theory of value, 116Lamarckism, 64–8, 184Laurent, John, 63law of substitution, 84laws of return, 100, 114–18, 121Leslie, Cliffe, 38liberal education, 21life-cycle theory, 58–63, 85List, Friedrich, 26Loasby, Brian, 7, 8, 18, 21–2, 57–8localisation of industry, 56, 60Lock, R.H., 68


PROOF

240 Index

logic, 18, 20long-period analysis, 84–7, 93, 97, 98,

109, 116, 117long-period equilibrium, 79–81, 84–7,

173, 180long-period supply schedule, 91, 92–3Lyell, Charles, 16

Maas, Harro, 24MacWilliams – Tullberg, Rita, 148Maine, Henry, 25Maloney, John, 3, 142, 146, 154, 157Mansel, H.L., 15–16Marchionatti, Roberto, 140marginal productivity, 34, 37, 39, 105,

116, 198n31marginal utility, 37marginalism, 5–6, 24, 105, 154–5market period, 76market size, 59Marshall, Alfred

see also specific worksCambridge chair succession issue

and, 149–53, 189development of economic thought

of, 14–42early economic writings, 31–5economic biology of, 43–70economic orthodoxy and, 153–61education of, 14–17equilibrium analysis, 71–4equilibrium theory, 74–8followers of, 161–6historical investigations by, 24–8history of economic analysis

and, 5–7inaugural lecture by, 39–44legacy of, in economics, 3–5, 7–11,

164–5, 184as misunderstood, 1–2modern economics and, 190–2professional career, 14reconciliation problem, 1, 87–95representative firm theory, 2,

123–9role of, in professionalisation

process, 142–9, 161–2Marshall, Mary Paley, 8, 14, 35, 38,

55, 148

Marshallian economics, 7, 182–6Marshall’s theory, 108–18, 138, 169,

186–7new view, 7–11partial rehabilitation of, 129–36Sraffa’s critique of, 108–14, 136–40

Marx, Karl, 58mathematics, 15, 17, 29–30, 41, 43Maurice, F.D., 25Mechanical and Biological Analogies in

Economics (Marshall), 91mechanical model of the mind, 20–1,

24, 28, 30, 51–2Mendel, Gregor, 65–6, 68–9Menger, Carl, 5, 157mental processes, 19–22Metcalfe, Stanley, 94–5, 191–2,

204n16Methodenstreit, 157methodological pluralism, 31Mill, J.S., 5, 17, 18, 19, 32, 38,

58–9, 147monetary economics, 6money, demand for, 6Money Credit and Finance (Marshall),

15, 194n2monnopolisation, 85monopoly, 130Moss, Laurence, 63multiple equilibrium, 88–9mutation theory, 66

natural selection, 64–5, 84, 167, 184, 200n23

neoclassical economics, 5–7, 10, 153–4

neurophysiology, and the human brain, 20–1, 23–4, 28, 51–2

New Growth Theory, 191Niman, N.B., 191non-Euclidean geometry, 17non-proportional returns, 116normal values, 74, 80, 127, 171

O’Brien, D.P., 8, 83Opie, Redvers, 203n8opportunity costs, 116organic growth, 43organisation, 51


PROOF

Index 241

Parcimony, law of, 19, 30partial equilibrium, 1, 6, 33, 57, 94,

95, 178–9, 183particular demand curve, 83particular expenses curve, 90–1perfect competition, 82, 112, 116–17,

131, 136, 139philosophy, 15, 16–24Philosophy of History (Hegel), 24–8physical sciences, 39, 43, 163physics, 15Pigou, A.C., 3, 8, 97–108, 111, 112,

123, 128–9, 131, 132, 149, 150, 152, 153, 161, 162, 165, 172, 176, 186, 189, 202n30

Economics of Welfare, 102, 106, 107, 131, 176

Wealth and Welfare, 68, 101, 189Prendergast, Renee, 55, 110Price, L.L., 159prices, 34, 75–7, 79–80price-taking behaviour, 171Principles of Economics (Marshall), 2,

3, 5, 6, 8, 14, 23, 32, 33, 39, 43–4, 48, 49, 53, 67, 71–2, 81–3, 93, 124, 140, 155, 162–3, 187, 188, 189

promised second volume of, 93, 163, 199n7, 204n19

producer surplus, 37product differentiation, 113productive imagination, 30professionalisation process, 142–9progress, 47–53, 64–5, 69, 116, 199n7progressive economy, 78psychology, 15, 16–24Punnett, R.C., 68pure theory, 29, 105–8, 133, 141, 165,

171, 188Pure Theory of Domestic Value

(Marshall), 33, 54–5, 89, 90purposeful action, 51

Quéré, Michel, 9, 87

Rafaelli, Tiziano, 9, 23, 30, 191Rau, K.H., 197n30, 200n15realism, 36, 106reconciliation problem, 1, 11,

87–95, 185

religion, 15–16representative firm theory, 2, 38,

84–7, 90, 95, 98, 99, 117, 123–33, 135, 137

returns to scale, 1, 37–8, 53–61, 85, 89–90, 104, 106

Ricardo, David, 5, 40, 48, 115, 203n7Robbins, Lionel, 123–8, 158Robertson, Dennis, 81, 107, 125,

129–36, 137, 162Robinson, Joan, 3, 8, 105, 129,

166, 190Romer, Paul, 191Roncaglia, Alessandro, 121–2, 138Roscher, Wilhelm, 26Rosselli, Annalisa, 139routines and routinisation, 20, 21, 24,

51–2, 59, 77, 84, 94Royal Commission on Labor, 4Royal Economic Society, 4

Samuelson, Paul, 1, 6–7, 112, 188scale economies, 63, 76, 85, 89, 116,

216n1Schmoller, Gustav, 26, 157, 158, 159,

213n33Schumpeter, Joseph, 3, 5, 7, 91, 112,

169, 171, 172–6, 180, 190, 192science, religion and, 15–16secular change, 80self-consciousness, 18, 19, 20, 22, 26Setterfield, Mark, 191Shackle, George, 8, 88, 96, 136short-period equilibrium, 79–81Shove, Gerald, 3, 75, 129–36, 157, 188Sidgwick, Henry, 16–18, 25, 144,

147–8, 211n13small businesses, 62–3Smith, Adam, 5, 48–9, 51, 74, 83–4,

177–8, 191social Darwinism, 167social evolution, 24–6, 49–51, 89social forces, 57social progress, 69social sciences, 16, 166–8socio-economic theory, 25specialisation, 55, 58, 59, 175Spencer, Herbert, 16, 18, 21–4,

63–5, 183


PROOF

242 Index

Spinoza, Baruch, 17Sraffa, Piero, 3, 96–7, 129–31, 186–7

competitive equilibrium, 113–14constant costs, 118constructive suggestions by, 118–22critique by, 108–14, 136–40general equilibrium, 118–22imperfect competition, 118–22on Marshall’s laws of return,

114–18standardisation, 52static equilibrium analysis, 39, 43,

111–12, 126–7, 137, 174, 176, 177, 188

static partial equilibrium method, 6stationary state, 73–4steady state, 94Stigler, George, 3, 5, 6, 83, 110Streissler, E.W., 34substitution, principle of, 84supply, 34, 44, 92, 98supply adjustment, 33supply curves, 33, 54, 97, 98, 99, 104,

113–14, 117supply functions, 1, 6, 117supply prices, 75–6, 79–80supply schedules, 1, 75, 76, 89, 90, 91,

92–3, 136

tariff reform debates, 151theory of value, see value theoryThomas, Brinley, 198n43time dimension, 72–6, 78, 190

time period analysis, 6, 79–81trade protection, 160

‘U’ – shaped average cost curve, 113–4, 129, 205n4

undertaker, 51, 53, 62, 200n15utiliarianism, 17, 18utility, 34, 37, 75, 116, 156

value theory, 6, 7, 10–11, 32–5, 38, 102, 107–8, 115, 118–20, 148

variation, 52Veblen, Thorstein, 5, 163, 1984n1,

218n3Viner, Jacob, 65von Thunen, J.H., 34, 197n29

wages fund doctrine, 32, 34, 198n40Walker, F.A., 38Walras, Leon, 5, 77, 78Weismann, August, 64, 66–7welfare economics, 6Whitaker, John, 8, 9, 38, 196n17White, Michael, 24Wicksell, Knut, 5women and university education, 147,

148, 211n14working classes, 15, 36–7, 40, 47

‘Ye Machine’ (Marshall), 20–1, 23–4, 28, 30, 51–2

Young, Allyn, 13, 107, 127, 169, 177–80


PROOF

9780230 302709 01 prexiv · 2011-10-25 · 1.4 outline of the book 11 ... 8.2 joseph schumpeter on...

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