LN-6 Alfred Marshall, Irving Fisher, American Institutional Economics, Thorstein Veblen Alfred Marshall Succeeded Ricardo and J
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LN-6 Alfred Marshall, Irving Fisher, American institutional economics, Thorstein Veblen Backhouse: Ch. 8/177-184/, 9/185-200/; Sandmo: Ch. 10, 12/282-292/, 13/295-298. Alfred Marshall 1842-1924 Alfred Marshall succeeded Ricardo and J.S. Mill as the great name of British economics. He dominated the scene through eight editions of Principles of Economics - a Bible for British economists - from 1890 to 1920 and well beyond that. Founder of the Cambridge School of economics. Used the idea of predecessors but added a lot of useful tools, concepts and graphs. Marshall is well covered in Backhouse and Sandmo. Marshall studied mathematics and knew how to use it in economics. He chose to marginalize mathematics in his book. An interesting aspect of Marshall is that he was more attracted to biological metaphors (such as a forests of firms) than the more common mechanical.@ Marshall wrote much else but the promised Vol. II of Principles never appeared. Notice that Marshall was 48 when he published Principles while Jevons died at 47. Marshall’s Principles was used in many universities, including Oslo. Frisch treated it with less than biblical authority, writing write comments on various chapters, called excursus (ekskurs), until the book was thrown out while the excursi remained. More difficult to like Marshall than most other great names in economics, due to his obsessive personality and stiffness and attitudes such as his opposition the assimilation of women into an educational system designed for men.@ From the fancy 2011 calendar I have two months devoted to Marshall, so let us look at them:@@ Rather than overlap with the textbooks I will say a little about Ragnar Frisch’s view on Marshall as expressed in the excursi (cf. Frisch: Alfred Marshall’s theory of value, QJE 64 (1950), 495-524). Frisch had found Marshall’s book useful and inspiring in earlier years, he also noted some weaknesses: ‘Like all human work, Alfred Marshall’s theory of value had its definite shortcomings. To mention but one: Marshall did not see that any optimalization procedure ... depends essentially on a system of prices or other kinds of value coefficients which the enterprise ... that carries out the optimalization, must assume in order that the optimalization shall have a precise meaning. He was apparently under the impression that the premises of the problem of the “best” combination of factors could as a rule be formulated in purely technical terms [which is true only in the special case of constant coefficients]. Since Marshall’s general line of reasoning was certainly not confined to this special case, much of what he said about optimalization turned out to be rather obscure.’ (See figure 2 for the general picture of the supply side).@ In Marshall’s depiction of the economy he distinguished between (1) temporary equilibrium (2) (normal) short period equilibrium (3) (normal) long period equilibrium This distinction had mainly to do with the supply side: ‘Marshall’s analysis of demand is far less extensive ... possibly owing to the strong classical influence.’ Another key idea was to look at the firm as having life cycle like a tree in the forest, and related to that the distinction between strong, weak and average firms, according to the extent they had been able to realize “internal economies”. (See figure 3).@ ‘There are two fundamental concepts in this analysis, which are typical of his way of thinking. They are the “representative firm” and “normal profit”. These two concepts together with the “long-period normal supply price” constitute a logical unity. If we accept two of them, it is not difficult to give a precise definition of the third. Implicitly, therefore, these concepts define one another. But it is not easy to give a precise and explicit definition of each one of them.’ (See figure 6 and 7).@@ Marshall's views on the social setting (excerpt from Palgrave’s ) Marshall saw economics as concerned with those aspects of human behaviour open to pecuniary influences and sufficiently regular and ubiquitous to permit statements of broad scope and some persistence, but emphasized that motivation was not merely a matter of pursuing pecuniary self-interest. Individuals were for the most part seen as imperfect optimizers. Marshall's actors were not imbued with complete knowledge of their environment but had to acquire knowledge slowly, and often painfully, through experience. Nor were they endowed with fixed desires and an intrinsic, unchanging character. Indeed, character and preferences evolved as individuals were exposed to new possibilities and chose to enter into new activities. Economic improvement required appropriate institutions, incentives and attitudes, and would be threatened by wide-scale government intrusions into economic affairs, although some forced income redistribution could be tolerated. But even if economic conditions were improved, the full yield of social betterment would be garnered only if enlarged consumption were turned to ennobling and horizon-expanding channels (rather than, say, to strong drink), involved a due consumption of beneficial leisure, and was accompanied by healthier and less stultifying conditions of working and town life. The government had a guiding role to play here. But even more important would be the assistance and example of employers and the upper and middle classes, who must first rid themselves of a frequent propensity to showy and ostentatious consumption and excessive materialism. The working-class leaders and skilled artisans who had already raised their own standard of life had an important leadership role too. Voluntary individual efforts to assist the rise of the underprivileged must rest on an adequate understanding of economic consequences. For this, as well as to secure an informed electorate, the diffusion of sound economic knowledge was an essential and integral element in the process of socio-economic transformation. Economics thus was itself a noble activity of high importance for the future of mankind. Marshall on predecessors (based on Palgrave’s) In many ways, the list of Marshall's denials of theoretical indebtedness is more remarkable than that of his acknowledgments. He claimed to have developed his ideas on consumer surplus before learning about J. Dupuit. The grudging attitude to W.S. Jevons's marginal utility theory shown in his review (1872), although subsequently relaxed, was never replaced by any acknowledgement of indebtedness. He showed little or no interest in the work of Walras, gave meagre credit to Carl Menger, whose work must have become known to him by the early 1880s, patronized Pantaleoni and Böhm-Bawerk, largely ignored Pareto, and so on. Even in the case of Edgeworth, one of his few intimates, Marshall felt that undoubted theoretical powers were guided by an unreliable judgement and refused to follow Edgeworth's subtle elaborations far. In fact, the only major theorist of the day to command Marshall's entire admiration and respect was J.B. Clark, and even here there was no acknowledgement of serious indebtedness. This tendency to denigrate the work of his contemporaries was matched by an equally strong tendency to overvalue the achievements of A. Smith, D. Ricardo and J.S. Mill. For one reason or another – perhaps a personality quirk, perhaps an effort to boost the public esteem of economics – Marshall was prone to exaggerate the intellectual continuity and maturity of his subject.@@ Irving Fisher 1867-1947 Irving Fisher is the greatest economist America has produced (according to James Tobin). He made seminal and durable contributions on a wide range of economic science. Strongly promoting mathematical economics (with Cournot as his great hero). University educated in mathematics and physics, doctoral dissertation in 1892 - Mathematical Investigations into the Theory of Value and Prices - on the theory of general equilibrium, comparable to Walras but developed independently.@ Much of standard neoclassical theory today is Fisherian in origin, spirit and substance. Most modern models of capital and interest are essentially variations on Fisher's theme, the conjunction of intertemporal choices and opportunities. Fisher’s theory of money and prices is the foundation for much of contemporary monetary economics. Fisher was deeply involved with quantitative empirical research, index numbers and their properties (on which he was a world authority), and other early econometric approaches. Fisher's ideas have frequently been rediscovered by others, e.g. distributed lag regression, life cycle saving theory, the ‘Phillips curve’, ‘consumption tax’ rather than ‘income tax’, the modern quantity theory of money, real vs. nominal interest rates, and many other standard tools in economists’ kits. Fisher was not fully appreciated by his contemporaries, partly because he was far ahead of others, partly due to the reputation he lost. There never was a Fisherian School. (Fisher leads by far over contemporaries in journal citations and is cited for substance much more than for history of thought.) Fisher and the 1929 Crash The stock market on Wall Street crashed on Black Tuesday 29 October 1929. The Crash and the subsequent Great Depression cost Fisher much in academic reputation. He stated a few days earlier, “Stock prices have reached what looks like a permanently high plateau”. For months he continued to assure investors that a recovery was just around the corner. Before the crash Fisher was worth $10 mill., but lost $11 mill.!@ Fisher’s theoretical work Backhouse and Sandmo cover