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Tools That
Simplify Analysis
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Alfred
Marshall
1842-1924
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Few economists extend knowledge in any but their narrow areas of
specialization. A handful of master economists, however, have broadly
expanded the frontiers of economic science. Their names and ideas are
scattered across history. Adam Smith, David Ricardo, John Maynard Keynes,
and, in our own time, Paul Samuelson and Milton Friedman, have covered the
gamut of economic theory. Alfred Marshall (1842-1924) belongs in this elite
group.
Born in a middle-class London
suburb, Marshall
was destined for the ministry, according to his stern, evangelical father. An
independent sort, he declined a classics scholarship at Oxford and instead studied math at Cambridge. Marshall's exposure to
philosophy led to a lifelong concern with poverty and other social problems
that plagued industrial England
and, in turn, to the study of economics, in which he excelled. His most
famous student, John Maynard Keynes, described Marshall as the greatest economist of the
nineteenth century.
Many ideas expressed in Marshall's
Principles of Economics (1890) had been developed much earlier, but
his patience and diligence paid lasting dividends. Despite advances in theory
since his death, large parts of economics remain distinctly Marshallian. His
major contributions include the concepts of competitive equilibria, price
elasticity of demand, internal and external economies of scale, increasing
and decreasing cost industries, quasi-rent, and consumer surplus. Before Marshall, a hodgepodge
of theories competed in explaining pricing and value.
An English tradition had refined John Locke's labor theory of value
into the idea that value depends only on supply-the costs of the labor,
capital, and land absorbed to produce a good. However, the Austrian
economists Carl Menger (1840-1921) and Eugen von Bohm-Bawerk (1851-1914) had
developed a subjective, demand-oriented view of prices as determined solely
by buyers' willingness to pay. Debates raged between supply-side and
demand-side theories until, with support from his compatriots F. Y. Edgeworth(1845-1926) and W. S. Jevons (1835-1882),* Marshall ridiculed the
debate as empty, comparable to an argument about whether the top blade or the
bottom blade of a pair of scissors cuts cloth. To Marshall, prices were about equally
dependent on supply and demand-a solution that still satisfies most
mainstream economists.
Perhaps Marshall's greatest contribution to economic methodology was
the way he wove time into his analysis, bequeathing to subsequent generations
of economists not only a powerful tool, but also rules for its effective use.
Marshall
handled continuous change by invoking conditional clauses that he grouped
under the term ceteris paribus. Ceteris paribus allows analysts to study the
issue at hand narrowly and precisely by temporarily ignoring other disturbances.
This step-by-step approach facilitates treatment of broader issues that
contain the narrow one; each bit of new knowledge allows more and more
restrictions to be relaxed.
This method, known as partial equilibrium analysis, is illustrated in Marshall's treatment of
demand, in which the number of consumers, their tastes, expectations, and
money incomes, and the prices of other goods are all assumed constant when
studying how equilibrium price and quantity are determined. As things change
over time, however, each restrictive assumption may be relaxed in turn so
that the analysis proceeds to a new equilibrium. He also applied this
approach with fruitful results to the theories of value and production. In so
doing, Alfred Marshall developed an analytical technique used to this day.
*Marshall
has been credited with welding supply and demand
together in market analysis, but most specialists in the history of economic
thought identify Jevons as "the minister who joined supply and demand in
marriage, nevermore to be considered entirely independently."
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