Alfred Marshall in 1885: "The Present Position of Economics" —Timothy Taylor

This is a key observation of Alfred Marshall that predicts the development of post-classical economics, which came to be dominated by neoclassical economics, although it was overshadowed for a time by Keynesianism, owing to the pressures of the time (war, depression, and another war).

The key observation is this:

Marshall notes that when people think about the main intellectual contribution of Adam Smith, they often point to what we now refer to as the "invisible hand" idea--that when people act in their own self-interest--though hard work, innovation, shopping for desired goods and services–they will often benefit the social welfare. However, Marshall argues that in fact, Smith's key insight was something quite different: "His work was to indicate the manner in which value measures human motive." In other words, Smith started the process of drawing linkages between the ways that people act and the monetary incentives they face in terms of prices and wages--which is what makes human motives into something measurable. Marshall thought this idea was the true core of economic thinking:

Subsequently, this key assumption about measurable value being chiefly economic morphed into the assumption that the whole of value is reducible to economic value. The life sciences and the other social sciences, as well as the humanities, and even business, especially where demand is based on marketing and advertising, shows that this broader assumption is incorrect.

However, conventional economists used this erroneous assumption to develop the further assumption of a supposed law of supply and demand based on an "invisible hand" that guides economic behavior toward maximum efficiency in use of the factors, similar to conservation in physics.

This point of view became the basis for concluding that a market state would provide optimal social and political organization through the spontaneous arising of natural order based on the dominance of economics through free markets (inclusive of free trade and free capital flow), that is, laissez-faire. And everyone would live happily ever after.

Even though that has never been the case, those committed to theses assumptions ideologically argue that the market is not free enough from government intervention and further pruning back of government is required for social and political optimality based on economic optimality.

While Marshall was not totally on board with this point of view about value and he qualified it, subsequent economists soon took it to its extreme. Keynes famously criticized it based on radical uncertainty and irrationality ("animal spirits").

These are still the dominant trends of thought in the Anglo-American world, which the Anglo-American elite are now trying to impose on the rest of the world through neoliberal globalization and liberal interventionism. The current administration cannot make up its mind between the Jacksonianism that Donald Trump ran on and Wilsonianism as the dominant view of US foreign policy.

Conversable Economist
Alfred Marshall in 1885: "The Present Position of Economics"
Timothy Taylor | Managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul, Minnesota

See also

Lars P. Syll’s Blog
Marginal productivity theory — a dangerous thought virus
Lars P. Syll | Professor, Malmo University

Timothy Taylor — Some Thoughts About Economic Exposition in Math and Words

Avoiding mathiness and economism.

Conversable Economist
Some Thoughts About Economic Exposition in Math and Words
Timothy Taylor | Managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul, Minnesota

Branko Milanovic — Labor theory of value: a primer

This is a different post from my normal posts. It is a primer and I must ask indulgence from many readers for whom this is all too well-known and obvious. Why do I write it then? Because recently I was several times surprised by the casualness with which people talk of “labor theory of value” apparently implying thereby that it is some weird concoction where the price of a good should simply be proportional to the number of hours one has put in producing it. I have heard it from non-economists and it has not truly surprised me; but I have heard it from economists too and thought it was odd. So I decided to write this 1200-word primer.…

Global Inequality
Labor theory of value: a primer
Branko Milanovic | Visiting Presidential Professor at City University of New York Graduate Center and senior scholar at the Luxembourg Income Study (LIS), and formerly lead economist in the World Bank's research department and senior associate at Carnegie Endowment for International Peace

Diane Coyle — Economics and humankind

“Political economy, or economics, is a study of man’s actions in the ordinary business of life; it inquires how he gets his income and how he uses it. It follows the actions of individuals and of nations as they seek, by separate or collective endeavour, to increase the material means of their well-being and to turn their resources to the best account. 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.” — Alfred Marshall, Economics of Industry

Here is the complete reference: Elements of economics of industry, being the first volume of Elements of economics, p. 1.

The Enlightened Economist

Economics and humankind

Diane Coyle | freelance economist and a former advisor to the UK Treasury. She is a member of the UK Competition Commission and is acting Chairman of the BBC Trust, the governing body of the British Broadcasting Corporation

Another good Marshall quote:

Balliol Croft, Cambridge 27. ii. 06 My dear Bowley,

I have not been able to lay my hands on any notes as to Mathematico-economics that would be of any use to you: and I have very indistinct memories of what I used to think on the subject. I never read mathematics now: in fact I have forgotten even how to integrate a good many things.

But I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules — (1) Use mathematics as a short-hand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I did often.

I believe in Newton’s Principia Methods, because they carry so much of the ordinary mind with them. Mathematics used in a Fellowship thesis by a man who is not a mathematician by nature — and I have come across a good deal of that — seems to me an unmixed evil. And I think you should do all you can to prevent people from using Mathematics in cases in which the English language is as short as the Mathematical …

Your emptyhandedly,

Alfred Marshall

Lars P. Syll — Alfred Marshall on the proper use of math in economics

Alfred Marshall on the use of mathematics in economics. Keeper quote.

Lars P. Syll’s Blog
Proper use of math in economics
Lars P. Syll | Professor, Malmo University

Lars P. Syll — Advice on mathematics for Ph. D. students

Compare with Alfred Marshall:

Alfred Marshall’s advice to A.L. Bowley, a former student and distinguished pioneer of mathematical economics and statistics in the 1920s, to: “(1) Use mathematics as shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This I do often”.

Lars P. Syll | Professor, Malmo University
Advice on mathematics for Ph. D. students

Quoting Roger Farmer

Matias Vernengo — The meaning of short and long-term and the natural rate

Good (Post Keynesian, i.e., post capital debates) explanation of "the natural rate of interest," as well as "long run" and "short run."

Naked Keynesianism
The meaning of short and long-term and the natural rate

Matias Vernengo | Associate Professor of Economics, University of Utah

Corey Robin — Nietzsche’s Marginal Children: On Friedrich Hayek

The contributions of Jevons and Menger were multiple, yet each of them took aim at a central postulate of economics shared by everyone from Adam Smith to the socialist left: the notion that labor is a—if not the—source of value. Though adumbrated in the idiom of prices and exchange, the labor theory of value evinced an almost primitive faith in the metaphysical objectivity of the economic sphere—a faith made all the more surprising by the fact that the objectivity of the rest of the social world (politics, religion and morals) had been subject to increasing scrutiny since the Renaissance. Commodities may have come wrapped in the pretty paper of the market, but inside, many believed, were the brute facts of nature: raw materials from the earth and the physical labor that turned those materials into goods. Because those materials were made useful, hence valuable, only by labor, labor was the source of value. That, and the fact that labor could be measured in some way (usually time), lent the world of work a kind of ontological status—and political authority—that had been increasingly denied to the world of courts and kings, lands and lords, parishes and priests. As the rest of the world melted into air, labor was crystallizing as the one true solid....

[Carl] Menger interrupted his abstract reflections on value to make the point that while it may “appear deplorable to a lover of mankind that possession of capital or a piece of land often provides the owner a higher income…than the income received by a laborer,” the “cause of this is not immoral.” It was “simply that the satisfaction of more important human needs depends upon the services of the given amount of capital or piece of land than upon the services of the laborer.” Any attempt to get around that truth, he warned, “would undoubtedly require a complete transformation of our social order.”

The crux of the difference between right and left — all are created equal, or some (the owners) are better than others. The ideal of the left is democracy; the ideal of the right is feudalism.

The Nation
Nietzsche’s Marginal Children: On Friedrich Hayek
Corey Robin

Bill Mitchell — A chicken in every pot!

Bill takes down the foundation of neoclassical economics, equilibrium at full employment. Neoclassical economics posits equilibrium at full employment, while Keynes posited equilibrium at less than full employment under capitalism unless government intervenes to increase effective demand.


Bill Mitchell — billy blog
A chicken in every pot!
Bill Mitchell

Pseudo-argument

Many quasi-economic arguments — really pseudo-arguments — involving economic policy stem from Alfred Marshall who founded new classical economics on the premise that what classical thinkers had called "political economy" — the study of the socio-economic system including government — was too complex to handle with any precision. Marshall proposed a new methodological approach that he called "economics" as a discipline limiting the scope of its study to rather narrow aspects of the economy capable of being examined with some precision using mathematics and graphs based on partial equilibrium (like the familiar supply and demand curve), and the representative firm.

Of course, if this method is scaled to include all firms in aggregate, it commits the fallacy of composition. To his credit Marshall himself realized this danger and cautioned others against.

Marshall meant these simple models as aids to thinking about more complex issues, not as models of them. Extending the simple to the complex involves a logical jump, which is an illegal move in the game, owing to the fallacy of composition, for example, and it also involves the fallacy of overgeneralizing. Such sophistical arguments also generally involve straw man arguments designed to make the opposition look foolish. It's just rhetoric made to look like reasoning in order to advance an ideological view under the guise of being "scientific."

Arguments that mainstream economists present to the public are often based on this kind of over-simplification and over-extension of the part to the whole. I suppose they would defend what are doing by saying that to communication with lay people they need to oversimplify. But in so doing, they are essentially misrepresenting the conclusions they are presenting, which do not hold at all.

I suspect that at least some of them know better, and they are simply couching ideological norms in reasoning that pretends to be that of an expert in economics when is just propagandizing or moralizing. For example, can it coincidental that their line of reasoning always fits their political ideology?

But even in their professional work such "experts" are overshadowed by the notion introduced by Marshall that political economy is based on an ineffective method. As result they miss the forest for the trees. Keynes saw through this error and corrected it in his macro approach, the validity of which both neoliberal and Austrian economists deny, since both marginalize the role of government, even though government is necessarily a key component of the economy in a modern developed state.

Unfortunately, both neoliberals and New Keynesians seem to miss this point. For example, Brad DeLong is one of the few professors teaching political economy these days and he is quite well informed about the subject. But when it comes to his own practice of economics, even he seems to ignore political economy or minimize it in his popular presentations about economic policy. As a layperson in economics, I find this curious.

[Originally posted as comment to a post at Bill Mitchell's billy blog. Slightly edited here.]

We need to get back to a contemporary understanding to political economy as a comprehensive socioeconomic approach that includes all relevant factors including government.