Alfred Marshall

Al always we refuse to tell anything about the biography of Alfred Marshall. We assume that the reader is able to find this kind of information himself. But we can give a hint:

Alfred Marshall is normally considered a "neoclassical" author. It would be better if this term simply wouldn't exist. It suggests that there is any similarity between an intellectual like Alfred Marshall and a bunch of crazy fools like Vilfredo Pareto, Léon Walras or Carl Menger.

It is said that neoclassical theory is characterised by the "marginal revolution", that means that the focus is put on the last exchanged unit and not on the average. This is important in the context of allocation. An equilibrium is characterised by the fact that it is not possible to improve the situation by reallocating resources, because the marginal revenue or the marginal utilitiy is the same in all possible uses. That means the last unit of a resource yields the same revenue / benefit in any use. That doesn't mean that the average revenue of all the units of the respective resource is the same, but only that the marginal revenue / benefit of the last unit is the same in any use.

If we assume that "the marginal revolution" is the common characteristic of the "neoclassical" theory, we have a lot of problems. First the mere fact that some elements have something in common doesn't mean that they form a group. If we follow this logic, a rat belongs to the same group as an elephant, both have four feets. The second problem is, that the "marginal revolution" never happened. We have this idea in the works of David Ricardo, Adam Smith and Jean Baptiste Say. (In their works the concept is even better explained and presented in a more differentiated way.)

If we want to find a common characteristic, something that we actually don't want, it can be said that the "neoclassical" theory focuses on equilibriums, the classical theory on the long run development of the economy. This wouldn't be completly true, because Alfred Marshall distinguishes clearly between the short run and the long run, see equilibrium in the short run and in the long run, but at least it would be half true.

However there are big differences how the equilibrium is described in the work of Alfred Marshall, Vilfredo Pareto or Léon Walras. The method is different, the scope is different, the context it can be used for analysing a proble is different and the way they prove that at equilbrium the social welfare is maximised. Actually they have nothing to do with each other beside the fact that all three versions get to the conclusion that the situation can't be improved by reallocating resources.

Almost everything we find in modern textbook about microeconomics, price elasticity, producer rent / consumer rent, the supply curve the margina cost curve, the demand curve deduced from the decreasing marginal utility etc. is from Alfred Marshall. However Alfred Marshall warns against the unreflecting use of this concepts, see methodological approach.

Beside the fact that the assumed "marginal revolution" never happened, it doesn't make sense to form a group by arbitrarily chosen characteristics.

It is indeed true that other nowadays denominated "neoclassical" authors like Vilfredo Pareto affirms that the economy works best if the government doesn't intervene at all. That's why we find very often in public debate the statement that nowadays economic thinking follows the "neoclassical" mainstream. The problem is, that other "neoclassical" authors, especially Alfred Marshall, had a much more differenciated and broader perspective.

It is true, that in the marshallian equilibrium the consumer and producer surplus reaches its maximum and any governmental interference, in this isolated analyisis, fixing a minimal or maximum price, imposing a tax on a product or subsidizing it will reduce the consumer and the producer surplus and distort the price signals, see cardinal measurement of utility.

This is however an isolated analysis which tends to overestimate the loss of welfare by governmental intervention. A tax imposed on a product will reduce the consumer for two reasons. Some people will stop buying it and others will pay a higher price. Those who stop buying it, will get a consumer surplus buying something else. The higher price they pay is at the benefit of the government and we can't exclude a priori that the government use this money in a way that benefits the society.

Beside that the amount of the consumer and the producer surplus can only be determined in relationship to period of time. The quicker the competing companies are as efficient at the most efficient, the quicker the producer surplus disappears, for more details see cardinal measurement of utility.

To put it simply. A "neoclassical" mainstream doesn't exist for the very simple reason, that something like a "neoclassical" theory doesn't exist. What people actually mean if they talk about the "mainstream" is neoliberalism. Neoliberalism explicetely argues against any governmental intervention but DOESN'T argues with the concept of the neoclassical theory. Compared to the neoclassical theory neoliberalism is a much broader vision. Neoclassical theory is only about economic efficiency. Neoliberalism is more about freedom. A free market economy is the guarantor of freedom.

In the neoclassical theory governmental intervention is not explitely addressed. It is just not useful. For neoliberalism the government is a menace. (More explicit than Milton Friedman is Friedrich Hayek. The title of his books reveals already his position: Road to serfdom. The more the government intervenes in the economy, the more power is concentrated in the hand of politicians, the greater the risk of an abuse of power. Companies are controlled by competition, bureaucraties are controlled by nobody.)

Neoliberalism is more "dynamic" than the "neoclassical" theory, at least in the simplified version we find in nowadays textbooks. Neoclassical theory is about equilibrium and a an equilibrium is by definition a static state. In the equilibrium nothing changes or, if we take a pendulum clock, there is a regular mouvement around an equilibrium. That means that all the forces that maintain the equilibrium don't change and there is no need to reallocate resources, because they are all used in an optimal way.

It is obvious that we are not really interested in equilibriums. If the equilibrium would remain for a long time, in other words if nothing changes, the future would be predictible. Tomorrow we would have the same situation as yesterday. The economy would be perfectly predictible, it would make no difference if the economy is planned or steered by market mechanisms, see natural price / market price.

The advantages of equilibriums is that they are simple. If we assume that nothing changes, we reduce the complexity and we get a "economic laws", something that can be mathematically modelled and look therefore very "scientific", although we get no relevant results. Introducing the ceteris paribus clause, the assumption that all other things don't change, is not needed. In the equilibrium nothing changes.

In the long run everything changes and most of all the know how and knowledge increases and changes, see education, something Alfred Marshall was well aware of.

The argument that by moving around the supply curve it is possible to take into account technological advances, improve in effeciency, better organisation etc.. is misleading. We just get another equilibrium, but we are more interested in knowing HOW to get there. We are not interested in knowing the impact of the price and amount of technological advances, we want to know HOW technological advance happens. We are not interested in the effects of something, but in the causes.

Most of the concepts we found in textbooks about microeconomics are mathematical models of insights obtained by intuition and intuition are very often wrong. It is well possible that in the age of Alfred Marshall prices increased the demand increased. Nowadays almost any demand can be satisfied by the global suppliers and competition is so strong, that they can't rise the prices. That may explain why the famous marshallian cross we find 100 times in different variations in any textbook is universally accepted, although the real live tells us the exact opposite of what the marshallian cross suggests. In the last fifty year prices decreases dramatically, in relationship to the income, and demand increased dramatically.

Alfred Marshall distinguishes very clearly between a short run analyisis and a long run analysis. An extrem version of a short run analysis it a market were products are only exchanged, but not produced. In this case the equilibrium price can't be reached through a change in the amount and the price because the amount is fixed and only the price can balance supply and demand.

In the long run the supply side can change and the longer the period taken into account the more it can change. If we want a dramatic example: sugar was a luxury good in the 17th century, poor people used, if they could afford it, honey. Nowadays the production of sugar costs always nothing and the price for sugar is so low, that we can say it costs nothing. (At least in Euroupe: 1 kilo 0,65 euro.) What is actually expensive nowadays, at least in comparison with sugar, is honey.

If we want an example that illustrate a change in a shorter period we can take the kiwi. 30 years ago kiwis very quite expensive in Germany, but since they are cultivated in Italia, they are very cheap. In the future we will see the same thing is going to happen with the mango. In the countries where the mangos are cultivated, Bolivia, Cuba etc.. it costs almost nothing. In Germany it's still kind of a luxury good.

The advantage of economics in comparison with other social science is the fact, following Alfred Marshall, that the force o a motive, not the motive itself, can be measured with money.

The advantage which economics has over other branches of social science appears then to arise from the fact that its special field of work gives rather larger opportunities for exact methods than any other branch. It concerns itself chiefly with those desires, aspirations and other affections of human nature, the outward manifestations of which appear as incentives to action in such a form that the force or quantity of the incentives can be estimated and measured with some approach to accuracy; and which therefore are in some degree amenable to treatment by scientific machinery. An opening is made for the methods and the tests of science as soon as the force of a person's motives - not the motives themselves—can be approximately measured by the sum of money, which he will just give up in order to secure a desired satisfaction; or again by the sum which is just required to induce him to undergo a certain fatigue.

Alfred Marshall, Principles of economics, THE SUBSTANCE OF ECONOMICS

The distinction between "the force of a person's motives" and " the motives themselves" is important. If someone spend a huge amout of money for a goldring, we can assume that he has a big interest in buying it. (If we put a side the problem discussed later on, see marginal measurement of utility, that 50 000 dollars is a lot for most people, but for a few people it's just nothing.) But we don't know WHY he buys it. It can be his first love and he is still willing to ruin himself or he did something wrong and has to apologise.

The other problem with this statement is more fundamental. The half sentence "gives rather larger opportunities for exact methods than any other branch" has the problem that the term exact is not defined. Exactness in science is usefull only, if the results of exact measurement are stable. If this is not the case, they are useless.

To put it in a more abstract way. What is measured can be exact, but it is the pure result of something and if this something changes, the result will be different. We have therefore no object facts in social science. What is measured is the result of something and if we don't know the relationship between cause and effect, the measurement may be objective, but useless anyway. This is what the positivism dispute between Adorno and Popper is about. A problem that Alfred Marshall actually mentions himself if he says that what can be measured is the strength of a motive, but not the motive itself.

It is actually true that all parameters and variables, interest rates, prices, costs, turn over, profit etc. etc. that are part of economic modells are monetary units. The problem is that monetary units are only the effect of something and never the cause. That means economics studies the relationship between effects, but not causal relationships. This make sense in the short run, because in the short run nothing changes and therefore a certain stability between the effects can be assumed. In the long run it doesn't make a lot of sense.

Public debates about economic problems, for instance the crisis of Greece, turn around monetary units. Some people say, that wages are to high in comparison to their productivity and therefore the balance of trade of Greece is negativ. If we look at the things from a monetary perspective, wages hast to decrease in order to be competitive. A non monetary perspective would lead to another question: Why is the productivity so low?

The same problem will have later on when discussing about keynesian theory. We can say that in case of great insecurity people won't invest even if the interest rates are very low. The question is, what is exactly insecurity? Insecurity, that is sure and obvious, is a lack of information, but this lack of information can be the result of intransparency and intransparency can be the result of a lack of training and knowledge. This is a non monetarian parameter. We will return on the topic in the chapter about Keynes.

To put it simple: If today, we are still in 2015, institutional investors find it difficult to detect profitable real investments and if they prefere therefore to speculate on the stock market, they have a knowledge problem.

The assumption that economics has more possibilities for "exact research" than other social science, because it has a way to measure the strength of the motives in an exact way, through money, is not really true.

1) The affirmation that only the behaviour, preferences, desires, feelings that can be measured with money are accesible to "cientific" research is not true and beside that, it is problematic, because it would lead to a strange situation if the behaviours that cannot be measured with money but have an impact on economics would be ignored systematically. Perhaps that actually happens, but it is not a good idea.

We don't now what he understands by social science. Nowadays it would be sociology, politics, in part psychology. In his time perhaps moral philosophy. In some areas all this branches of social science obtain very exact results. Prognostics about the outcome of elections for instance are very often astonishly exact. The output of a political or marketing campaigns can be measured as well in a very exact way, if people were asked for concrete details. (What is the name of the actor who participated in a marketing spot for a coffee machine?) In this case it can be measured very exactly how many people looked the spot consciously. With more sophisticated methods it is possible to get some insight on the authoritarian personality.

2) It can be doubted that economy is the most successful of the social science. Law for instance is much more succesful, although nobody actually knows if law is a science. In politics we have much more lawyers, all over the world, than economists, although economists, at least in theory, have the optimal training for this kind of jobs, because any problem has economic aspects. If economics would be conceived more as a transversal science. It is not very clear what Alfred Marshall refers to if he speaks of the "advantages which economics has over other branches of social science". From a purely practical point of view it is not very successful.

One can have the impression that economics is more successful than other social science because economic issues are more present in public debate, but that doesn't mean that the contribution of economists to this issues are very important.

Due to the fact that the issues discussed in economics is very reduced and only parameters and varialbes that can be measured with money are taken into account economics is a more "compact" "science". The fact that all over the world the same concepts are taught in a highly formalised language gives the impression that economics is based on a basis as stable as physics, although almost everything, even the most basic "laws" like the law of the demand and supply are actually incoherent from a logical point of view.

Other brances of social science has a much, much bigger ranch of topics and are very inhomogeneous. They study almost everything, mass tourism, the impact of mass media on society, the impact of education, religion, political views and how they are formed, the change of the role families play in society, sexual preferences, music etc. etc.. In other words, they study a lot of things, but not the topics that are on the political agenda and therefore they don't get through, don't reach the mass media and the broader public.

Actually physics, or science in general, has the same problem. Its range of research is very broad and in most topics they deal with the broader public did not even understand the problem. Only in the case that the results have an impact on the society, for instance in the case that these results allows to storage terrabytes of data on a hard disque the broader public take notice of it, but is then more interested in the economic impact than in the technical progress.

Technological advances and the impact of knowledged are taken into account in economics in a pure quantitative way (if ever). This is not helpful. We are looking for a way to improve the spread of knowledged and the production of knowledge. We are not interested in the effects, but in the causes.

c) Microecnomics is the less controversial part of economics. This is simply due to the fact that it doesn't play any role in public debate. If there is no discussion, there is of course no controversy. Public debate is always about macroeconomic problems, deficits in the balance of payement, inflation, governmental debts, social transferse etc. etc.. Microeconomics is an academic play with ficticious examples constructed under the assumption of the validity of the ceteris paribus clause.

The central arguments of microeconomics we can find already in Wealth of Nations and what we don't find in Wealth of Nations, for instance the pareto optimum, is not relevant.

We can get some insights through the concepts of microeconomics, see cardinal measurment of utility, but the time spent in learning these concepts have to be in a reasonable relationship to the benefit. Three hours is enough. Investing six week in that as it happens nowadays in the study of economics, is definitely too much. The time saved can be dedicated to learn something else: another foreign language, a programming language, found a company, etc.. Even if we found a company "just for fun", a lot of things can be learned by doing it.

d) A small part of what is taught in economics prepares for a concrete job: accounting, law, costing and controlling for instance. That corrborates the idea that the idea that economics is more relevant than other social science, althought this is only a small part of what is studied in economics.

From a pure scientific point of view, if we measure success with relevant results, there is nothing that could suggest that economics is more successful than other branches of the social science. The fact that economics can measure the strength of a motive with money is only an advantage, if the relevant issues are measured. If the things measured with money are mere effects of something but not the causes, it is not very helpfull.

It is not economics itself that puts economics in the center of the debate, but the fact that most problems are economic problems, although economics contributes very little to this debate.

He will relativize the statement below later, see methodological approach, but as any other neoclassical author, he is obsessed by physics.

Economic laws are statements with regard to the tendencies of man's action under certain conditions. They are hypothetical only in the same sense as are the laws of the physical sciences: for those laws also contain or imply conditions. But there is more difficulty in making the conditions clear, and more danger in any failure to do so, in economics than in physics. The laws of human action are not indeed as simple, as definite or as clearly ascertainable as the law of gravitation; but many of them may rank with the laws of those natural sciences which deal with complex subject-matter.


This is wrong. The point is not whether laws or tendencies are simple or not, if we now all the relevant one and whether certain conditions are given or not. The point is, that the laws in physics are stable. We can see that easily if we think on the mathematical methods used in physics and in economics. In physics dominates algebra, because there is a clear and stable relationship between cause and effect.

When it comes to discuss real world problems and not ficticious example, in economics dominate statistics, which describe the relationship between effects.

In the long run we can't even say that we have "laws". What we have are causal chaines and a spontaneous and unpredictible change in one element of this chaine can have an impact on the whole chaine. There is now "economic law" that allows us to predict the impact of the TCP / IP protocoll on the way industry will work in the future and the increase of productivity.

To put it simple: If it were possible to describe the economic development through laws as stable as the lows in physics, there would be no need for a search process by trial and error as we have it in a market economy.

We can imagine how systems work and what are the incentives needed to have the system done what we want, but the outcome of this system is unpredictable. We can assume that people will react on the signal of prices and that they will start producing something or more of that something if prices increases. We can say that price signals are objectively true and leads to the optimal allocation of resources. But we can't predict the future by economic laws. At the moment we are able to do that, we don't need a market economy anymore.

If the problem that a market economy can resolve best, to deal with insecurity, can be resolved otherway, we should have the economy get planned by a central planning commission. What can be planned, should be planned.

Ordoliberalims at first glance sounds trivial. The government have to put the right incentives in order that the economic systems works for the benefit of all. That means in practise that it has to impede monopolistic structure and take care that the intensity of competition is high enough. That's all.

However there is more subtle message. The subtle message is that is it possible to think about the right economic order, but it is not possible to make any affirmations about the outcome of this order. That's why ordoliberalism and neoliberalism is completely ignored in the academic studies.

It's a curious fact that in science with similar problems as economics, for instance molecular biology, there is never a discussion about the methodological approach. In molecular biology exists the same problems. There are hundreds of factors involved and there are only few possibilities to isolate some of them, a change in one factor have an impact on hundred of others, it's more about causal chaines than about laws. However there is no debate about the methodological approach. Any method is used if it helps.

The fact that we have that debate only in economics reveals that use of mathematical modeling doesn't appear very useful to a lot of people for the reasons already mentioned throughout this textbook. The discussion is about relevance. If mathematical modeling would leed to relevant results, nobody would discuss about that methodological approach. Unfortunetaly this is not the case. What is actually relevant can be explained with plain words in a few hours.

Much more important than a discussion about the methodological approach would be a discussion about the role of economics in the society. We don't expect from an egeener that he explains us who an engine of car works and we don't expect from a physician that he explains us in detail the effects of a drug. We expect them simply to resolve a concrete problem.

In general we would not even understand the explanation. If someone suffers from rheumatism and the physician prescribes cortisone we understand perhaps that cortisone suppresses the immune system, but nobody understands really how this works. The user of a computer is not able normally to understand in detail how it works.

The product of an economist is different. His product is the enlightment of the people, because otherwise it doesn't have any impact. The voters have in general, at least the should have, an idea how a certain economic policy works. If a political party proposes a minimal wage, they should understand the pros and cons of this politics. Only if the voters vote in favour of this economic policy it can be realised. The alternative is that people vote arbitrarily for or again just anything. In this case they can throw dice as well.

In order to do that he needs to know how the mass media works and be able to communicate with a broader public. This kind of qualification is not even on the agenda of the study of economics. See as well preliminaries.

It is well possible that economists consider themselves as kind of engeneers. They advise politicians how to adjust certain parameters and politicians will then steer the economy. The problem is, that first politicians need to elected.

It can be said a lot against Milton Friedman, and we will still say a lot about him, but he is one of the very few economists able to reach a broader public. From a marketing point of view the serie free to chose is perfect. (And actually sometimes it is really difficult to say that he is completely wrong, at least at the beginning of the video, even if we don't like him: How to Stay Free Featuring Milton Friedman.)

Economics is interesting example to illustrate a general problem. If a system is steered by wrong incentives, it ends up on the wrong way. In order to make an academic career, economists have to right a lot of never discussed discussion papers in "scientific" newspapers with hight impact points. That has the obvious result that they do this instead of doing something useful. The second problem they will try to create a lot of governmental subsidised "research" instituts. In Germany for instance there are so much of them, that actually nobody knows how many and what they are doing the whole day. In all these "research" institutes we have tons of people who write discussion papers about whatever topicesthey find interesting for whatever reason.

This is, as Milton Friedman states in the video, not to blame. People react on the incentives given by the system, see homo oeconomicus. The problem is, that other incentives are needed if we want them to do the right things, see education / training.

The problems we have in humanities, philosophy, philology, history etc.. The final product is to arouse peoples interest for their issues, something they will not achieve by writing pseudo-scientific papers in "scientific" journals. Nobody would realise if they disappear completely and ist would be much better if the money invested in these kind of things would be invested in something else. Humanists very often complain that the society had become "superficial" and that it is no longer able to read the great philosophers and so on. The problem is, that the issues addressed by humanities are very often in the center of private and public debate, but graduates of humanity doesn't contribute to this debate. We will return on the topic in the chapter about the culture industry.

Economics right now is not such a desperate case than humanities, but similar to humanities there is the risk it they disappears from earth completely. Big part of microeconomics, especially the Vilfredo Pareto abracadabra describe a parallel world important only inside the academic world with little or no relationship to the real world.

As always Alfred Marshall has a differenciated opinion about the use of mathematical modeling. He, the FOUNDER OF MATHEMATICAl modeling, doubts that this methodological approach brought any sustancial insight on economic issues, but believes that it has the effect to formulate the problem in a more precise way.

Secondly, the growth of exact habits of thought in economics is making people more careful to state distinctly the premises on which they reason. This increased care is partly due to the application by some writers of mathematical language and mathematical habits of thought. It is indeed doubtful whether much has been gained by the use of complex mathematical formulæ. But the application of mathematical habits of thought has been of great service; for it has led people to refuse to consider a problem until they are quite sure what the problem is; and to insist on knowing what is, and what is not intended to be assumed before proceeding further.


It is to assume that the "some writers" are the Lausanne school, in other words Vilfredo Pareto and Léon Walras, both of them, to the great regret of Léón Walras, he silently ignores. It is to assumed that he agreed with Francis Edgeworth, who said about Léon Walras that he didn't resolve inexistent problems.

"It is indeed doubtful whether much has been gained by the use of complex mathematical formulæ."

At the other side it is perhaps true that mathematical or graphical modeling helps to formulate a problem in a clearer way. We will try to show that later on, see cardinal measurement of utility, by some example.

If we consider nowadays economics however the risk that graphical or mathematical modeling narrows the perspective is much bigger than the pausible benefits. A graphical or mathematical modell, as any modell, abstracts from certain parameters and variables considered irrelevant. If someone is aware of this problem, it is not a big issue. Than he is well aware that conclusions that can be drawn from the modells are limited, if not, it is a problem.

If for instance someone calculates the consumer and producer surplus he should be aware that the producer surplus is meaningless if there is no period of time given, see cardinal measurement of utility. In textbooks about microeconomics we find a lot of different ways to calculate the producer surplus, although one method would be enough, but the crucial information is missing. (To give an example.)

If we agree or disagree with the statement below is irrelevant. The point is, that Alfred Marshall treats economics more than a social science, focuses more on qualitative statements than on quantitative statemements.

If the choices, alternatives and behaviours of the people depend on the circunstances surrounding them, the discussion becomes more complicated. A wider range of choices and alternatives will trigger a more complex society with even more alternatives and changes and the final outcome is unpredictable.

Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man. For man's character has been moulded by his every-day work, and the material resources which he thereby procures, more than by any other influence unless it be that of his religious ideals; and the two great forming agencies of the world's history have been the religious and the economic. Here and there the ardour of the military or the artistic spirit has been for a while predominant: but religious and economic influences have nowhere been displaced from the front rank even for a time; and they have nearly always been more important than all others put together. Religious motives are more intense than economic, but their direct action seldom extends over so large a part of life. For the business by which a person earns his livelihood generally fills his thoughts during by far the greater part of those hours in which his mind is at its best; during them his character is being formed by the way in which he uses his faculties in his work, by the thoughts and the feelings which it suggests, and by his relations to his associates in work, his employers or his employees.

Alfred Marshall, Principles of economics, INTRODUCTION

It can be doubted that religion does play any important role nowadays. It is to assume that the better trained and wealthier a society becomes, the less is the impact of religion. The actual discussion about the islam is more a debate about the 19th / 20th century and the 21th century.

El tiempo también juega un papel en la medición de la utilidad. Incluso si se lo mide en dinero, como escala úniforme, no se lo puede comparar, nisiquiera en cuanto se refiere a la misma persona. Aparte de esto menciona otra vez que lo que miden economistas son efectos, no causas. Todos los métodos cuantitativos miden efectos, no causas. En las ciencias naturales, sobre todo en la física, esto no es tan importante, porque incluso si se conoce solo los efectos, hay una relación estable entre efecto y causa y por lo tanto el problema no es tan grande, dado que las causas no cambian y producirán siempre los mismos efectos en una relación estable. Pero si las causas cambian cada rato, los efectos son contingentes.

In textbook about economics the decreasing slope of the demand curve is explained by the decreasing marginal utilitiy. If the utility of an item decreases the more we have already consumed, than we will be willing to pay less and less. The problem is not that this is incorrect,or better said only valid in a special case, because normally we consume only ONE UNIT of a good and the falling slope of the demand curve is therefore to be explained by the competition between the competing alternatives for spending the money, see Say's Law.

Our problem is the simplicity of the explanations given in textbooks about microeconomics. They focus more on mathematical modeling than on a detailed explanation. If we compare that with the original version, we immediately realise a big difference.

It is essential to note that the economist does not claim to measure any affection of the mind in itself, or directly; but only indirectly through its effect. No one can compare and measure accurately against one another even his own mental states at different times: and no one can measure the mental states of another at all except indirectly and conjecturally by their effects. Of course various affections belong to man's higher nature and others to his lower, and are thus different in kind. But, even if we confine our attention to mere physical pleasures and pains of the same kind, we find that they can only be compared indirectly by their effects. In fact, even this comparison is necessarily to some extent conjectural, unless they occur to the same person at the same time. For instance the pleasures which two persons derive from smoking cannot be directly compared: nor can even those which the same person derives from it at different times. But if we find a man in doubt whether to spend a few pence on a cigar, or a cup of tea, or on riding home instead of walking home, then we may follow ordinary usage, and say that he expects from them equal pleasures. If then we wish to compare even physical gratifications, we must do it not directly, but indirectly by the incentives which they afford to action. If the desires to secure either of two pleasures will induce people in similar circumstances each to do just an hour's extra work, or will induce men in the same rank of life and with the same means each to pay a shilling for it; we then may say that those pleasures are equal for our purposes, because the desires for them are equally strong incentives to action for persons under similar conditions.

Alfred Marshall, Principles of economics, THE SUBSTANCE OF ECONOMICS

At the end Alfred Marshall will say, see cardinal measurement of utility, that for the measurement with money is precisely enough for some kind of analysis, but here he questions this concept.

He questions that an interpersonal comparison as well as an intrapersonal comparison is possible and that the effect of a motive will be stable in time.

At the end he gives an example for an objective measurement of utility: "But if we find a man in doubt whether to spend a few pence on a cigar, or a cup of tea, or on riding home instead of walking home, then we may follow ordinary usage, and say that he expects from them equal pleasures."

People in general accept the most fundamental of all "economic laws", the law of the demand and supply. The higher the price, the smaller the demand and the higher the supply and the lower the price, the greater the demand and the lower the supply. They accept it, because it is "intuitively" possible, there is actually no graphical or mathematical modeling needed to understand that. Actuall the modell is nothing more that a formalisation of an intuitevely obtained insight. Beside the fact that it is "intuitively" plausible, it is sometimes confirmed by personal experiences, because people notice more changes in the short run than changes in the long run. In the long run the most basic "law" of economics is wrong. The prices of almost any goods, in relationship to the income, has fallen. That is even logical, it can't be otherwise, because if that were not the case, there would be no economic growth.

In other words, even the most fundamental "economic law" is actually wrong. It is helpful to analyse some issues happening in the short run, but misleading if we don't understand the context in which it can be used. Economic laws can never be compared with natural laws, which are very stable in space in time. If the natural laws are no longer valid, there is no need to think about economic laws, because the history of mankind would have finished.

Some may say that this is very philosophical and doesn't have any practical impact. That is what the author of these lines doesn't believe, because the idea that in social science we have relationships as stable as the one we have in physics leads to a lot of errors in thinking. The most illustrative case is David Ricardo. All of what he took for stable was actually nothing else than the result of a specific historical constellation. He assumed that the production of food is scars. The truth nowadays is, that the production of food must be subsidised, otherewise most famers would go bankrupt. There is too much from almost everything. He assumed that the population will always grow. The truth nowadays is, that the populations shrinks. He assumed, that workers will never get a higher wage than the what is needed to guarantee the subsistence level. The truth is, that we have a large range of wages but all wages are highly above the subsistence level.

"Economic laws" in the meaning of natural laws, stable in space and time, don't exist. What we at most are some statistical relationships valid for a certain time and region. That means, that the methodological approach used in physics can't be used in economics and leads nowhere.

Economists believe that the use of quantitative methods is very scientific. The truth is, that quantitative methods can only be used if we have a unity allowing to measure the effects of something and in economics there is only one unit that can be used: money. The problem is that all we measure with money is the result and effect of something, but not the cause.

We can measure with money if a technological advance lead to a greater productivity. But we can't measure what led to this technological advance. This is actually a problem, because therefore it becomes very difficult to steer governmental investments in research and development, see research and development. If we reduce economics to what can be measured with money, almost all interesting questions are excluded from our analysis.

We can see a tendency in economics to focus only on monetarian variables and to try to explain the world only by this monetarians variables. This leads to a way of thinking that cuts out relevant issues.

To illustrate it with an example: The producer surplus can be measured with money and economics focuse on the producer surplus. But that's not the interesting question. The interesting question is how much time it will take until all producers have the same supply curve, actually a aggregate marginal cost curve, and the producer rent vanishes.

Non monetarian changes are behind the european unification as well. The process of european unification is a complex mixtures of political, psychological, social changes that happened in the society and which made the european unification possible. All these changes had nothing to do with economics, although the result of these changes has an heavy impact on economy. It doesn't make a lot of sense to study the effects of something but not the causes.

Max Weber put forward the thesis that religion had an impact on economic success, see The Protestant Ethic and the Spirit of Capitalism. He assumed that protestantism led to an increased importance of economic success and changed therefore the attitude towards economic issues. A pure monetarian analysis would show, if the theory is true, that the economic growth increased in protestant countries, but would not allow an insight on the reasons of this increase.

In other words: The methodological approach is wrong and if it leads to results, it is casual. It is possible that a monetary effect can be explained by a monetary cause, but is is more probable, that we only found relationships between monetary effects and the causes are completely ignored.

We will return on the topic when talking about the keynesian theory, although in this context the discussion is a little bit more complicated. Keynes excludes explicetely any change in the economic structure and asks what can be done, it there is no way to change them through governmental interventions. He then focus on a critical monetary parameter, the interest rate and we don't need any mathematical modeling to see that this parameter has an impact on the economy if an economy doesn't exploit fully his productional potential. However it is chrystal clear that this way we can't resolve problems by lowering the interest rates if there is a fundamental structural problem that has nothing to do with monetarian parameters.

Of all this problems Alfred Marshall was well aware of and what we find in modern textbook about microeconomics is a simplification of the marshallian concepts.

It is often said that Vilfredo Pareto is the inventor of the ordinal measurement of utility. That means that Pareto measures the utility of an item by the readiness to give away a second item in order to obtain more of the first on. If A and B have apples and pears but different preferences for apples and pears they will exchange apples for pears as long as they can improve their situation by doing it. In other words as long as A benefits by giving away a pear and getting an apple and B improves his situation by giving away an apple and getting a pear they will exchanges apple for pears. In this modell we have a pure intrapersonal measurement of utility. We don't know if A profits more from the exchange than B, but we know that both benefits, otherwise they wouldn't exchange, see Vilfredo Pareto.

In hypothetical examples we can draw same conclusions from that. We can say for instance that in the equilibrium, if neither A nor B can improve their situation any more, the optimum is achieved. However this concept is completely irrelevant when it come to discuss real world issues. There is no need either for formulating mathematically a subsitution rate of apple and pears for A and B. Maybe that's a nice passtime for some people who have nothing to do, but it's of no practical use.

Actually Alfred Marshall addressed the problem already, although in his example A and B have only one product respectivly that the change for the respective good of the other. With only one item respectively we don't get indifference curves, but if this is a problem for someone, he has very little real problems.

What he describes below is a ordinal measurement of utility. We don't know the benefit the family with the wool obtains by changing it for wood and the other way round, but we know that they get a benefit, otherwise they wouldn't do it.

One great disadvantage of a primitive economy, in which there is but little free exchange, is that a person may easily have so much of one thing, say wool, that when he has applied it to every possible use, its marginal utility in each use is low: and at the same time he may have so little of some other thing, say wood, that its marginal utility for him is very high. Meanwhile some of his neighbours may be in great need of wool, and have more wood than they can turn to good account. If each gives up that which has for him the lower utility and receives that which has the higher, each will gain by the exchange. But to make such an adjustment by barter, would be tedious and difficult. The difficulty of barter is indeed not so very great where there are but a few simple commodities each capable of being adapted by domestic work to several uses; the weaving wife and the spinster daughters adjusting rightly the marginal utilities of the different uses of the wool, while the husband and the sons do the same for the wood. § 2. But when commodities have become very numerous and highly specialized, there is an urgent need for the free use of money, or general purchasing power; for that alone can be applied easily in an unlimited variety of purchases. And in a moneyeconomy, good management is shown by so adjusting the margins of suspense on each line of expenditure that the marginal utility of a shilling's worth of goods on each line shall be the same. And this result each one will attain by constantly watching to see whether there is anything on which he is spending so much that he would gain by taking a little away from that line of expenditure and putting it on some other line.


Alfred Marshall addresses a real problem, without naming him, in the theory of Vilfredo Pareto. For Vilfredo Pareto money is just a means of payement without any impact on the economy. Goods are changed with goods and money is only a veil. The truth is, that money is not only a means of payement, it is the only means of payement. Whatever is used as money, it must have certain characteristics, especially it has to be possible to split it in small units. In the example of Alfred Marshall, a hypothetical example as he states himself at the beginning, wool is changed for wood. In this case it works because both products can be split up in infinitesimal small entities.

In real live, someone has a car and want a a liter of milk it doesn't work. (Unless he doesn't sell the car in parts.)

The second characteristid needed for money is that is must be accepted as a general means of payement. If someone has a computer and wants to change it for a refrigerator he have to find someone who is willing to give a way his refrigerator and second he has to be looking for a computer. That is difficult to find. It is easier to find just someone willing to give away a refrigerator and give him the money he wants. With that money he can buy whatever he wants.

Even if we consider money just as a means of payement, what is actually wrong, money has a much more important role, see interest rates, things are more complicated and if we abstract from money, as Vilfredo Pareto and Léon Walras do, at least at the beginning, we can't obtain relevant insights.

The sentence "...And this result each one will attain by constantly watching to see whether there is anything on which he is spending so much that he would gain by taking a little away from that line of expenditure and putting it on some other line..." is easy to understand.

The statement is based on the assumption of the decreasing marginal utility. With a certain amount of money we have certain alternatives to spend this money and its quite logical, at least in theory, we will discuss about the topic again in the chapter about Joseph Schumpeter, the money will be spent in a way that the marginal utility of this money is the same in all uses, because otherwise an improvement would be possible. If we can buy an apple or a pear and the marginal utility of the apple is higher, we will buy an apple. However with every apply we buy and consume, the marginal utility of the apples will decrease and therefore at a certain moment we will start buying pears. Due to the fact that the law of the decreaing marginal utility is valid as well for pears, at a certain point strawberries will be bought and so on.

This leads to a general equilibrium, at least in theory. If everybody spend his money this way, and if we assume that the producers use the same logic related to allocation of their ressources all get to the optimum that can be achieved given a certain production structure.

It is said normally that Alfred Marshall only describes a partial equilibrium, but the paragraph shows that Alfred Marshall had as well a general equilibrium in mind, but this modell doesn't allow any further anaylisis. The consumer and producer surplus can't be analysed with this concetp, nor the impact of maximal prices, minimal prices, subsidies, taxes etc..

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Principles of Economics

Alfred Marshall

Economics is about human behaviour that can be measured with money

Alfred Marshall is the founder of microeconomics. Almost all concepts we find in modern textbooks about microeconomics are from him.

The simplified version of microeconomics we find nowadays in textbooks are almost exclusively about equilibriums on the good markets. We can distinguish three types of equilibriums: The general equilibrium of Léon Walras, the ordinal equilibrium of Vilfredo Pareto and the partial equilibrium of Alfred Marshall.

An analysis of an equilibrium is an analysis of a static state.

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