Alfred Marshall (1842--1924)

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 these pages. 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 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 the changes 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 hodge-podge 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) [1] , 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 clothe. 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.

 

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