3. Alfred Marshall on Organic Growth

See, for example, Marchionatti (1992) and Lavezzi (2003) for a reconstruction of Marshall’s growth ideas. Lavezzi describes some aspects of Marshall’s growth ideas as a “bridge” between Smith and Young.

Marshall (1890, p. 758) stated that Smith’s “chief work was to combine and develop the speculations of his French and English contemporaries and predecessors as to value”. Marshall is also reported to have said: “It’s all in A. Smith” (Schumpeter 1954, p. 835).

Perhaps Marshall was unaware of Jevons’s and Walras’s works, given his reading habits, before he wrote his Principles in 1890, as noted by Schumpeter (1952, p. 96). Further: “This seems to account for Marshall’s tendency to impute to Mill and Ricardo practically all that the reformers of economic theory had to say” (ibid., p. 96). As Marshall, in a letter to J.B. Clark dated 24 March 1905, himself admitted: “[M]y main position as to the theory of value and distribution was practically completed in the years 1867 to 1870; when I translated Mill’s version of Ricardo’s or Smith’s doctrines into mathematics” (See Pigou 1925, p. 416).

See Niman (1998) for the view that Marshall, though classified as a neoclassical economist, was attempting “to create a framework suitable for capturing the characteristics of an ‘evolutionary economics’” (ibid., p. 190).

The high theme of progress, as Caldari (2018, p. 104) points out, is a very broad concept and underlies almost all of Marshall’s writings. It encompasses “the growth of mankind in numbers, in health and strength, in knowledge, ability, and in richness of character” and constitutes “the end of all our studies” (Marshall 1920, p. 139). For Marshall “the Mecca of the economist lies in economic biology” as the inner nature and outer form are constantly changing. Therefore, mechanical analogies may be suited as a general introduction; in the later stages of economics when we approach the real conditions of life, biological analogies are to be preferred.

His student and successor at Cambridge, A. C. Pigou (1925), pointed out that he came to economics through ethics. “Economics for him was a handmaid to ethics, not an end in itself, but a means to a further end: an instrument, by the perfecting of which it might be possible to better the conditions of human life” (Pigou 1925, p. 82).

For Marshall organization was the fourth agent (or factor) of production, the other three being land, labour and capital.

Marshall (1890, p. 757) in the Principles is full of praise for Smith and noted that because of his wide travels both in Scotland and abroad (France), and also because of his close association with Scottish businessmen, he got to know the world practically and had “unsurpassed powers of observation, judgment and reasoning”. Whenever he differed from his predecessors, “he was more right than they; while there is scarcely any economic truth now known of which he did not get the first glimpse”. Further: “since he was the first to write a treatise on wealth in all its chief social respects, he might on that ground alone have a claim to be regarded as the founder of modern economics”.

“The framework of progress, for Marshall as for Smith, is provided by the division of labour, continually extended by the growth of the market, to which its results contribute in turn” (Loasby 1989, p. 52).

Loasby (1989, pp. 52–53) notes that increasing returns have to be worked for and cannot be selected from a previously defined production set as an increase in labour and capital generally leads to improved organization which in turn improves their efficiency. Further, increasing returns are not returns to scale in the sense of an output resulting from an equi-proportional increase of all inputs. Changing methods of production call for machinery, unskilled and skilled labour to be combined in new proportions. “Thus, increasing returns result from the exploitation of possibilities of substitution which are opened up by production on a larger scale” (ibid., p. 53).

As noted by Katia Caldari (2018, p. 98), device of the representative firm was used by Marshall to introduce “time” in his analysis that “would allow [him to deal] with a long-period equilibrium without foregoing the several individual firms in disequilibrium, which belong to the industry in question”. Neil Hart (2012, p. 86) regarded the representative firm as representing the supply curve of the industry in miniature. Further, through this device, Marshall was able to visualize the industry supply schedule which was different from the cost functions of heterogeneous firms comprising the industry (ibid., p. 90). This however prevented “time irreversibility” which arises when change is analysed in an equilibrium framework. Due to this difficulty Marshall (1920, p. 807), again as Caldari notes, had to admit that his theory was out of touch with reality.

Marshall postulates a constant demand curve in his theory of long-period equilibrium as noted by Dasgupta (1990, pp. 254–55). It is only the condition of supply which changes. Comparing Ricardo and Marshall, both of whom use a ‘corn’ model, he points out that in both the processes lead up to a stationary state; while in Ricardo land is held constant, in Marshall it is demand. “The process in both is irreversible and hence, as I would judge, ‘dynamic’” (ibid., p. 255). Therefore he finds it intriguing that Harrod (1948, p. 15), who has done much towards clarifying the concept of dynamics, judges Marshall’s system as static and Ricardo’s system as dynamic.

Dardi (2003), for example, holds the view that Marshall’s partial equilibrium analysis is “dynamics in disguise”. See also Raffaelli (2003, p. 45).

See Hodgson (1993) for the view that although Marshall recognized the value of biological analogies, he did not fully incorporate an evolutionary theory (or an adequate evolutionary analysis), with the result that his followers were easily able to replace the biological elements of his system with notions similar to Newtonian mechanics.

See also Richardson (1975, p. 351), who wrote: “Smith offers us in effect both a theory of economic equilibrium and a theory of economic evolution: and in each of these competition has a key role to play. Within The Wealth of Nations no obvious tension exists between the two theories, partly no doubt because they are sketched out in a manner loose enough to make it difficult to establish inconsistency. Later writers, however, in striving for greater analytical rigour, developed the theory of equilibrium in terms of a model of reality that is clearly very different indeed from that implicit in Smith’s theory of evolution”.

Most authors generally agree, as Loasby (1989, p. 48) notes, that Book V is the “core” of Marshall’s Principles. If one interprets Marshall from this perspective, “Marshall’s contribution must appear hesitant, fumbling, and sometimes even willfully perverse. He fails to pursue the logic of his analysis, seems not to understand the formal requirements of perfect completion which nowadays are listed in elementary textbooks, wanders into imperfect competition without realizing it, and by his insistence on the prevalence of increasing returns exposes his whole scheme to destruction by Sraffa (1926)” (Loasby 1989, p. 48). However his theory of value in Book V appears in a very different light when read in its proper sequence after Book IV, which deals with economic change and the division of labour, and in conjunction with Industry and Trade (ibid., p. 49). Loasby points out that Marshall’s motivation for studying economics was to improve the condition of the people, and for this division of labour was one of the chief means. So it would appear that Book IV should take precedence over Book V in Marshall’s scheme although he himself did not help clarify matters by showing aversion to controversy, by displaying non-committal attitude to economic policy except free trade, and by his determination to build consensus which had unintended consequences (ibid., pp. 47–48).

In an Economic Journal article, Marshall (1898, p. 44) stated that “economic problems are not mechanical but are concerned with organic life and growth”. See also Groenewegen (1991, f.n. 1).

In this regard Dasgupta (1990, pp. 256–57) notes: “I do not believe Marshall would ever go in for an over-all growth theory. Substitution between goods and factors which, like his marginalist contemporaries, he recognized as basic in economic theory would present a formidable obstacle to process analysis in the context of the economy as a whole. As it is, Marshall assumes stationariness for the whole economy, as he does for his chosen commodity; a single commodity could obviously not be in stationary equilibrium unless the rest of the economy which feeds it remained stationary also… He would much rather confine himself to his one-commodity world where he could enunciate propositions which were free from ambiguity”.

While individual firms may rise and fall frequently, the industry on the whole may be moving forward. Marshall (1890, p. 457) again gives an analogy of leaves of a tree: “[A]s the leaves of a tree…grow to maturity, reach equilibrium, and decay many times, while the tree is steadily growing upwards year by year”.

Marchionatti (1992, p. 562) provides a list of four factors (including those noted above): “[F]irst, the rise of diminishing returns in the life of the firm so reducing the capability to adopt technological changes; second, the external economies stimulating the diffusion of technological change; third, the difficulties of marketing; and finally, the technical constraints on the exploitation of internal economies”.

Schumpeter (1951, p. 93) notes that Marshall was one of the first economists to realize the evolutionary nature of economic science. For him, human nature was malleable and changed with environment. Like Mill, he did not say that in political economy some problem or the other was completely settled. “On the contrary, he was fully aware that he was building an essentially temporary structure” (ibid., p. 93).

Comparing Marshall with Smith, Schumpeter (1954, pp. 834–35) points out that both had a similarity of general conceptions particularly with respect to economic evolution. Both combined “theory” and “facts” in approximately equal measure. Marshall’s work not only followed from Smith’s but he also recognized his kinship with Smith. Both the Wealth of Nations and Principles, were the works of fully matured minds taking decades of thought to mature. While Marshall was more well received than Smith in Britain, Smith was more successful abroad. “The reason is not far to seek. Marshall’s message – howsoever much he liked the idea of being ‘read by businessmen’ – was after all a message to the economics profession” (ibid., p. 834).

See also Loasby (1982, p. 112) who stated: “A fairly casual reading of Book IV of A. Marshall’s Principles is sufficient to indicate that Marshall had an entrepreneurial theory of the firm and an entrepreneurial theory of competition…”. After Marshall the theory of the firm broadly developed along two lines: Coase (1937)–Williamson (1981) transactions-cost analysis which has implication for the size of the firm, and Penrose’s (1959) theory of the growth of the firm.

Schumpeter quotes John M. Keynes’s (1930, II, p. 406) Treatise on Money here.

See also Blaug (1996, p. 375) who points out that the device of the representative firm allowed Marshall to state the conditions of equilibrium for an industry without requiring the individual firms to be in equilibrium.