Alfred Marshall and Modern Economics

The above passage, taken from the Preface to the last four of the eight editions of Marshall’s Principles, introduces the central themes under discussion in this chapter. The intended role of the biological and mechanical conceptualisations in Marshall’s writings is examined, together with the difficulties Marshall encountered in reconciling these different perspectives. The interpretation of these themes in Marshall’s work by his contemporaries and immediate followers is then considered, largely in the setting of the Marshallian cost controversies of the 1920s.²

This chapter examines aspects of the development of equilibrium analysis within mainstream economics once Alfred Marshall had been ‘got out of the way’ following the Marshallian cost controversies of the 1920s. Attention is focused on the extent to which the equilibrium-based approaches under consideration have been able to address and overcome the limitations that Marshall had insisted were inherent in the application of mechanical equilibrium analogies to economic analysis. Discussion begins with the ‘new’ partial equilibrium theories of imperfect competition developed from the 1930s which Samuelson (1967: 109) characterised as ‘finally exorcising the Marshallian incubus’. Consideration then turns to general-equilibrium analysis, traditionally seen as the flagship of mainstream equilibrium theorising, where the difficulties associated with the incorporation of increasing returns and associated ‘market imperfections’ are emphasised. Important challenges to the ascendency of equilibrium analysis flowing from the ongoing controversies over capital theory and the Sonnenschein—Mantel—Debreu theorem are explored in the context of the methodological issues that had concerned Marshall.¹ This is followed with an evaluation of the game-theoretic approach, identified as a significant ‘redirection’ in modern mainstream economic analysis that in part gained popularity as a direct result of a recognition of the shortcomings in the more traditional equilibrium-based approaches.

This chapter extends discussion in the previous chapter to consider the establishment of equilibrium analysis within macroeconomic theory. This discussion also provides an opportunity to reflect on Marshall’s influences on the contributions of his favourite pupil, John Maynard Keynes and on the extent to which subsequent development of macroeconomic theory has diverged from the methodological approach adopted by both Keynes and Marshall.

The observation by Evsey Domar captures the demise in the status of growth theory within mainstream economics during the first half of the twentieth century. Questions relating to the possibilities for economic progress had been at the forefront of Marshall’s economic enquiries, just as it had in the writings of his revered classical predecessors. However, interest in such matters had clearly waned during the Marshallian era, with attention increasingly focused on the static equilibrium analysis of relative prices and resource allocation. The ‘Keynesian revolution’ saw consideration directed more towards the short-period analysis of aggregate output and prices, subsequently embedded in a variety of alternative short-and long-period equilibrium frameworks, as outlined in Chapter 4.

In the setting of modern economics, Marshall’s economic biology Mecca is most obviously situated within evolutionary economics. In this chapter, some very general themes in evolutionary economics are discussed; themes which would no doubt have been of interest to Marshall if he had been embarked on a journey towards his selected Mecca during more recent times.¹ The arrival of modern evolutionary theory is often associated with the 1982 publication of Richard Nelson and Sidney Winter’s An Evolutionary Theory of Economic Change; however, the application of evolutionary thinking to economic analysis has a long history, with the work of two acclaimed pioneers, Thorstein Veblen and Joseph Schumpeter, acknowledged in this chapter.² Marshall’s less widely recognised credentials as a pioneering evolutionary economist are reconfirmed in the chapter that follows.

As is conveyed in the following review of the Arena and Quere’s (2003) edited volume on Marshall’s legacy, assessments of Marshall’s contribution often diverge along the following lines:

There are (at least) two sorts of Marshallian: the book-4 Marshallian and the book-5 Marshallian. Most of the contributors to this volume are book-4 Marshallians. Their collective point is that Marshall’s true legacy was not the period analysis of book 5 but something much more dynamic, Darwinian, and empirically based. There is something in this view, although the present reviewer’s position is that much though Marshall would have liked to have left a different legacy, he did not actually succeed in doing so.

(Collard 2004: 401)