Chapter 4
Alfred Marshall. Metaphysician and Economist
4.1 INTRODUCTION
Alfred Marshall is best known for contributing to economic theory the
concepts of time and ceteris paribus, elasticity, partial equilibrium analysis,
external and internal economies, prime and supplementary costs, and the
representative firm. He was also instrumental in developing the first program
in Economics in the early twentieth century. It is my contention that he also
integrated his economics into his ideas about religion, character, duty, and
intuition, and was influenced by one of the foremost defenders of the
Christian faith of his time, Henry Mansel.
4.2 Henry Mansel
Henry Mansel, a Professor of Moral and Metaphysical Philosophy at
Oxford, provided an intellectual justification for Christian orthodoxy during
the latter part of the nineteenth century. According to Mansel, humans have a
deep desire for knowledge. Satisfying this desire can be achieved either by
knowing all there is to know or by knowing the limits to human knowledge.
Mansel discounted the knowing-all-there-is-to-know option. Especially in the
area of knowledge of God, the limited capacity of our mind or consciousness
cannot adequately conceive the nature of (unlimited) God. At the same time,
the structure of the human mind compels us to believe in the existence of
God even though we cannot adequately reason about God (Davis, 1991, p.
67). The interaction of the supply of mental capacity for religious Truth, and
the demand of the mind to believe in God, produces confusion and
contradiction. What we are left with is faith, about the absolute nature of
things and God. Mansel takes up the argument of the leading intuitionist of
the time, William Hamilton - Mill’s intellectual opponent - that inferences
about the existence of God come exclusively from the mind, and can not be
made from observing the phenomena of matter.
Mansel places a great deal of importance on consciousness, stating that it
is the only criterion of truth in questions of either logic or religion.
According to Mansel, the facts of consciousness includes everything about
which we are aware. All knowledge about the world is based on the facts of
consciousness. The mind does not simply take in information from the
environment. Information about the external environment enters a human
60
Two Minds
being through the senses and then passes, via human consciousness, to the
intellect. However, the process of passing the information from the senses to
the intellect changes the ‘information’ to a form that the mind can
comprehend. Therefore, what we know is the way things appear to us via an
interaction of the thing itself and human consciousness, not the way they are
in themselves (Mansel, 1859, pp. 128-29). This aspect of Mansel’s work can
be seen in Marshall’s early (1870) article, “Ye Machine.”
According to Mansel, every fact of consciousness must be something
conceivable and, everything conceivable is a “possible intuition” (Freeman,
1969, p. 17). Our intuitive faculty is the basis for a fact of consciousness, and
hence the basis for our thoughts, including what we can imagine. Denying
our ability to know absolute truth with certainty, Mansel says “Intuition is
never pure but is always presented together with interpretation” (ibid, p. 26).
Our interpretations are based on our experiences. On the other hand, it is
possible to intuit the rightness or wrongness of actions without considering
their consequences or utility (ibid, p. 55).
4.2.1 Time
An important characteristic of human consciousness is that it is subject to
“the law of Time” (Mansel, 1859, p. 98). That is, everything we are
conscious of is understood as having both a past and a future. Everything we
are conscious of is ‘moving’ through time. However, understanding the
absolute first link in a chain of events, or the ultimate cause of events is
impossible for the human mind because to understand the first cause is to
imagine a time before time. This is impossible because everything we are
conscious, including out thoughts, is bounded by time; our thoughts are
bounded in time. Everything we understand is understood in terms of “our
own relation to time” (ibid, p. 103). The problem is that humans cannot find
the the first moment of what we call reality.
Thus according to Mansel, (the perception of) time is of paramount
importance to human life, it is one of the primary conditions of human
experience (Mansel, 1859, p. 184). Furthermore, time is not absolute; our
perception of time is related to our consciousness, and hence the experience
of time is an intuitive experience. Being an intuitive experience means that it
is an a priori law of the human mind, determined by the mind what the
experience should be, before the experience occurs (ibid, pp. 185-86).
4.2.2 Short and Long Run
Alfred Marshall
61
Mansel did not believe that religious faith and science were incompatible
with each other. In an essay, “On Miracles,” Mansel says, “In one respect,
indeed, the advance of physical science tends to strengthen rather than to
weaken our conviction of the supernatural character of the Christian
miracles” (Mansel, xxxx, p. 21). Scientific progress, “within a longer or
shorter period” (ibid, p. 22; emphasis added), explains what was hitherto
unexplainable, it converts unknown causes into known causes. However,
over the short or long run, as the new known causes fail to explain miracles,
the belief in the hand of God in miracles grows stronger.
4.2.3 Equilibrium, Ceteris Paribus
Miracles are also not a violation of the laws of nature. Laws of nature are
the powers and properties of nature whereby identical causes create identical
effects. Given all the laws of nature, a miracle is an introduction of a new
hitherto unknown power for a very specific purpose and then immediately
withdrawn. Mansel did not use the term ceteris paribus, but his explanation
of a miracle involves holding all known laws of nature constant and
introducing a new law. As opposed to Mansel’s view, the scientific or
skeptical view was that, ceteris paribus, the introduction of a new power
would disturb the equilibrium of the universe. Mansel’s response to the
‘change in equilibrium’ view is that such an assertion has never been proven.
He also discounted this view because since the entire known universe is a
manifestation of the unknown, an equilibrium of the universe must also be
an unknown.
4.2.4 Elasticity
Just as miracles represent non-physical causes of observed events, so to
is the free Will of man the “power indispensable to all moral obligations and
to all religious beliefs” (ibid, p. 28) and capable of producing results which
physical causes cannot. In addition, the world contains “an elasticity, so to
speak, in the constitution of nature, which permits the influence of human
power on the phenomena of the world to be exercised or suspended at will,
without affecting the stability of the whole” (ibid, p. 28). To understand this
requires distinguishing mind from matter, and recognizing that the former
can influence the latter. Thus, neither miracles nor the effects of human
power violate the laws of nature. Rather, they are the product of a (free)
agent who transcends the laws and thus cannot, by definition, neither obey
nor violate the laws. Ultimately miracles represent a class of phenomena
which we do not understand, brought into the world by God for a definite
62
Two Minds
purpose, at a definite time and place, “without disturbing the economy of the
universe” (ibid, p. 31; emphasis added).
4.2.5 Duty
Another important intuition is the “sense of moral obligation” (Freeman,
1969, p. 52) or duty. It is an intuition because it is part of the structure of our
mind implanted there by God. The sense of moral obligation is a source of
religious feelings and gives us a sense of God’s goodness. The study of
morals is thus a study of character or personality. And while mathematics can
stand alone as a theory of mathematics, the chief value of moral science is in
its applications to the real world.
4.2.6 Joy of Religion
At the end of Lecture 2 in his famous Bampton Lectures, Mansel says,
“Philosophy, as well as Scripture, rightly employed, will teach a lesson of
humility to its disciple; exhibiting as it does, the spectacle of a creature of
finite intuitions, surrounded by partial indications of the Unlimited; of finite
conceptions, in the midst of partial manifestations of the Incomprehensible.
Questioned in this spirit, the voice of Philosophy will be but an echo of the
inspired language of the Psalmist: ‘Thou hast beset me behind and before,
and laid thine hand upon me. Such knowledge is too wonderful for me: it is
high; I cannot attain unto it’” (Mansel, 1859, p. 90).
How can we know God? Our first sense of God does not come through
the intellect (reasoning). Humans learn to pray before they learn to reason;
we have an “instinct for worship” (ibid, p. 115). Therefore, the origin of
religious practice is something other than reason. The problem with relying
on reason for our religious practices it that reason creates “barren
abstractions” and “inexplicable contradictions” (ibid, p. 117). On the other
hand, a religion based on feeling “abandons itself to the wild follies of
fanaticism, or the diseased ecstasies of mysticism” (ibid, p. 117). Mansel was
not against reason/rationality. However, he did believe that reason has its
limits which only psychology (the study of the human mind) can establish.
Psychology, in addition, can show the way to truths beyond which reason can
attain (Freeman, 1969, p. 14). Therefore, both spirit (intuition) and
understanding (reason or reflection) are necessary for religious practice.
4.2.7 Applied Theology
While reason and hence empiricism has limits when it comes to
questions of religion, a science must be based on something with a concrete
Alfred Marshall
63
existence and within the realm of experience. One reason Mansel objected to
“rational theology” – a study of the human soul – because the finite human
mind cannot conceive either a moment before time (ibid, p. 23) or the infinite
(God). Marshall placed emphasis on experience as the basis for “practical
instinct” or intuition which enhanced decision making. Marshall insisted on
using money as a prime motivator of economic behavior because money, as
opposed to love or pride, is measurable. Marshall divided the study of market
prices into the short and long run time periods. (A firm may always have
capital but distinguishing a long and short run allows you to conceive the
limits faced by the firm.)
Marshall followed Mansel in his belief that human experience was
central to human life, and central to the human experience was the
experience of time. It is also central to economic life, and this is one way in
which Marshall applied Mansel’s philosophy to economics. Marshall also
held strong feelings of moral obligation towards the poor, and wanted to
apply economics to the study of mankind in its day-to-day existence.
4.3 Alfred Marshall
4.3.1 Economic Method
Marshall says that Mansel’s defense of Christian orthodoxy “showed me
how much there was to be defended” (Keynes, 1966, p. 8). It is possible to
read Marshall’s appreciation of Mansel’s work when Marshall says, “I have
come to the conclusion that the Unknown probably has concerns in which
this world plays a part almost as insignificant as that played by a single small
insect in the history of this minute world…Every year my reverence for the
Unknown becomes deeper; my consciousness of the narrow limitations of all
the knowledge in this world becomes more oppressive; and my desire to add
to that quantity something that will count, though it is a microscopic fraction
of that microscopic whole, become stronger” (Marshall, 1966, p. 368). How
do you push back the unknown and gain understanding of this world?
Marshall’s answer was, in part, “dividing” time into time periods, the
judicious use of the ceteris paribus assumption, and focusing on costs and
benefits at the margin. Focusing on the margin also illustrates economic
freedom. Marshall says that economic freedom is nowhere illustrated as
when a business owner “endowed with genius” experiments with different
input combinations and technologies in order to increase efficiency. This
involves substituting inputs until the net product for all inputs is proportional
to the price paid for each input. He does this generally by “trained instinct
64
Two Minds
rather than formal calculation…” (Marshall, 1920, p. 406; emphasis added).
In other words, economic freedom is best exemplified by using intuition in
business. This freedom is illustrated by the substitution of inputs with a
higher MP/$ for inputs with a lower ratio, until, in equilibrium, MP/$ are
equal for all inputs.
Marshall also considered the joy brought about from religion as the
“highest joys of which men are capable” (ibid, p. 16). But Marshall was also
focused on the here-and-now. Hence, his statement that when it comes to
economics, “We must begin with that which is within us, not with that which
is above us; with the philosophy of Man, not with that of God” (Mansel,
1859, p. 89). Marshall’s path to economics started with metaphysics and the
controversy between the empiricist John Stuart Mill and the intuitionist
William Hamilton. A.C. Pigou notes that Marshall’s conviction that mankind
has a limited ability to know metaphysical truths, is what turned Marshall’s
career path to psychology, then ethics, and ultimately economics (Pigou,
1966, p. 82). While he came to economics through metaphysics, psychology,
and ethics, he kept all of these in economics, seeing the solution to
economics as the “handmaiden” of ethics, and the solution of economic
problems in the utilization of man’s “higher” faculties (Keynes, 1966, p. 9).
Marshall’s ethical system included a belief that once you determine what is
good it is your duty to try to create it in the world. Hence his belief that faith,
hope, and charity are some of the most valuable of human possessions.
Keynes attributes Marshall with “the most essential of the economist’s
needed gifts – he was conspicuously historian and mathematician, a dealer in
the particular and the general, the temporal and the eternal, at the same time”
(ibid, p. 12; emphasis added). Marshall defined economics as how people
live and think in their ordinary business of life.
4.3.2 Alfred Marshall’s Incongruities
Just as there is an “Adam Smith problem,” so are there “Alfred Marshall
Incongruities.” The Smith problem involves the apparent inconsistencies
between Smith Wealth of Nations, and his Theory of Moral Sentiments,
written 16 years before in 1759. I’ve tried to make my own position clear as
to why I believe there isn’t any Adam Smith problem. The Alfred Marshall
incongruities are named for the fact that Alfred Marshall, a name
synonymous with neoclassical theory, holds some views quite divergent from
those synonymous with neoclassical theory in his time and ours. Marshall, it
seems, was quite the behavioral and socio-economist.
The first incongruity is that according to Marshall we do not always act
on the basis of deliberation and calculation; we “do not weigh beforehand the
results of every action…” (Marshall, 1920, p. 20). We act on the basis of
altruism, habits, customs, and intuition. Marshall used the terms practical
instinct and trained instinct as synonyms for intuition. Trying as he did to
Alfred Marshall
65
find complementarity between economics and evolutionary theory, Marshall
adds that habits, customs, and what we call intuition are “most nearly sure to
have arisen from a close and careful watching the advantages and
disadvantages of different courses of conduct” (ibid, p. 21). In other words,
intuition is based on experience and serves an evolutionary purpose.
Intuitions are rational even if they are stored in the subconscious. Especially
in business, inappropriate habits and customs “quickly die away” (ibid, p.
21).
In addition to considering such non-quantifiable aspects of life such as
spirit, intuition, habit and custom, but, economics must also consider various
motivators of human behavior. Including various motives behind behavior is
one of Marshall’s applications of the “Principle of Continuity.” This
principle applied to behavior asserts that the motives or modes of human
behavior are a continuous variable from complete altruism to complete
selfishness. Because human behavior cannot be reduced to a single rule,
Marshall refuses to exclude any human motivation a priori (ibid, p. vi). As
one example he lists four major egotistic motivations: (1) economic
advantage and need; (2) punishment and reward; (3) honor and recognition,
and; (4) the desire for work, and the pleasure of activity. In addition, the
altruistic motive is the “impelling force of the inward command to moral
action, the pressure of the feeling of duty, and the fear of one’s own inward
blame, that is, of the gnawings of conscience. In its pure form this motive
appears as the ‘Categorical Imperative,’ which one follows because one feels
in one’s soul the command to act in this or that manner, and feels the
command to be right… The following of the command is no doubt regularly
bound up with feelings of pleasure, and the not following it with feelings of
pain” (ibid, p. 784). In other words, at bottom, morality is utilitarian.
Despite the number of motivations affecting human behavior, over the
long run the most stable motive affecting economic behavior is money. In
other words, economics is concerned with how mind and spirit are
manifested in human behavior as measured by a measurable motive, money
(ibid, pp. 14-17).
A second incongruity is Marshall’s conviction that, not only are there
various motives of human behavior, but economists themselves need various
modes of thinking. Economists need “the three great intellectual faculties perception, imagination and reason: and most of all he needs imagination, to
put him on the track of those causes of visible events which are remote or lie
below the surface, and of those effects of visible causes which are remote or
lie below the surface” (ibid, p. 43). For Marshall the truth is that economists
need to combine knowledge and analysis, and “disciplined imagination”
(ibid, p. 44, 48). The limits of human knowledge also require that they
66
Two Minds
proceed with “caution and reserve” (ibid, p. 46). And they need the use of the
“faculty of sympathy” which allows them to put themselves in the situation
of another, especially the situation of those in other economic/social classes
(ibid, p. 45). The founders of modern economics, he says, were men
possessed of a “gentle and sympathetic temper, touched with the enthusiasm
of humanity” (ibid, p. 47). For example, Adam Smith, possessing more
“philosophical insight” (ibid, p. 246) than many others of his day, did not
accept the philosophy of ‘what is, is right.’
The faculties needed by economists arises from the fact that in matters of
economics what is not seen is often more important than what is seen. Just as
the number of combinations of moves in a game of chess is enormous, so too
are the unique situations we find in nature. As a result economists must use a
varied number of research methodologies (ibid, pp. 29-30); always attempt to
simplify things by focusing on how incentives, most notably opportunities
for income, affect behavior, and; be “greedy” for facts (ibid, p. 38). To get
below the surface, to find the “causes of causes” (ibid, p. 779) analytical
thinking is not enough. Complementary with analytical thinking – a “cool
head” are common sense, practical or natural instinct – intuition – life
experiences, a “mother-wit, of a sound sense of proportion” (ibid, p. 778),
and a “warm heart.”
Economics without common sense produces little, while analysis extends
the usefulness of common sense. However, “in every practical problem it is
common sense that is the ultimate arbiter” (ibid, Notes?, p. 157). Common
sense guides the research, chooses the data to be used, combine data from
different fields of knowledge including their importance in the final product.
In fact, “Economic science is but the working of common sense aided by
appliances of organized analysis and general reasoning” (ibid, p. 38).
Common sense solves problems by first breaking it up into its parts,
considering each part with the use of the ceteris paribus assumption, and then
combining all the parts into a whole. Economic theory can enhance our
knowledge of economic life by assisting common sense but neither replacing
it nor determining the order with which common sense looks at a problem. It
also aids common sense by reasoning about human motives which are
measurable. In this world, and he doesn’t eliminate the possibility of other
worlds where this may not be true, money is the best measure of human
motives. The effect of money on behavior is best left to scientific thinking.
Having analyzed the money part of the economic problem, scientific thinking
then leaves common sense to be the final arbiter (Marshall, 1966, p. 164).
A third incongruity is Marshall’s belief that economics is different from
natural science in fundamental ways. One difference is the inability for
anyone to create a complete science of man. Any scientific statement of
human behavior must be “inexact and faulty” (Marshall, 1920, p. 32). A
complete science of atoms, maybe, but not a complete science of man. A
Alfred Marshall
67
second difference is treating humans as if we are machines. Humans have
free will, consciousness and its creations -- imagination and intuition.
Exactness in economics is difficult, and facts alone are never enough. In fact,
facts never speak for themselves. What is needed is experience, common
sense and trained instinct (intuition) combined with scientific thinking.
A fourth incongruity, is Marshall’s opposition to “armchair economics.”
Economics is neither an “intellectual toy” nor a way of solving “imaginary
problems not conforming to the conditions of real life” (Pigou, 1966, p. 84).
Economic theory is not sufficient to solve practical economic problems. One
has to apply theory to one’s interpretation of economic life, and
interpretation comes from both consciousness and common sense. While
facts are important, “Facts by themselves are silent. Observation discovers
nothing directly of the actions of cases, but only of sequences in time”
(Marshall, 1966, p. 166), There is an almost infinite number of causes of
events, and no set of causes ever occurs twice producing the same event
twice. As a result, economic life changes quickly and constantly, and all
conditions which affect behavior mutually determine each other. This makes
economics difficult and lacking in “finality” (Keynes, 1966, p. 35). It is also
why common sense is so important, why a successful economist must have a
“profound knowledge” of economic life (ibid, p. 33), and why the past isn’t a
good guide to the future. One must apply intuition and imagine the future in
order to get a “direct feel” (Pigou, 1966, p. 85) of the real world. And after
all is said and done, “Economic laws and reasonings in fact are merely a part
of the material which Conscience and Common-sense have to turn to account
in solving practical problems, and in laying down rules which may be a guide
to life” (Marshall, 1920, p. vi).
4.3.3 The Importance of Human Character
Economics, says Marshall, is a study of the behavioral or external
manifestations of internal states as measured by money. And while
economics does not attempt to understand the internal – mental and spiritual
– characteristics of humans, neither does economics ignore either the mental
and spiritual characteristics of humans. This is because the mental and
spiritual manifest as desire, and it is important to know whether particular
desires create a “strong and righteous character” or a less desirable one (ibid,
p. 17). Character’s moral dimension, is associated with a concern for
altruism, and is relatively low discount rate for time. Associated with the
latter, character, also positively correlated with the ability to anticipate and
plan for the future. Because the future is uncertain, different individuals have
different subjective expectations about the future. Those with character are
68
Two Minds
those with patience, self-control, foresight, and a time perception which
allows them to forecast and prepare for the future. In other words, time is a
subjective, intuitive concept, and those with character are skilled with time,
being willing and able to see further into the future (Raffaelli, 1994, p. 83).
For Marshall, this has an effect on savings, and organizations.
Character is formed at work, by the nature of the work and the relations
at work. Character is as much a function of how income is earned as how
much is earned. Marshall doesn’t exclude non-economic forces affecting
character. He says, “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” (ibid, p. 1). And while it is true that religion, family, and friends
can be a source of character even among the poor, it is also true that in
general material poverty causes moral poverty (ibid, pp. 1-2). However,
Marshall did not believe that income and character are always linearly
related. For some moderate income earned by steady but moderate work
offers the best opportunities for character growth. For others, the strenuous
pursuit of the goal should be alternated with periods of deep rest.
Character has a moral aspect, the ability to sympathize with the
sufferings of others and to act for the benefit of others. The ability to
sympathize has evolutionary implications for Marshall who states that the
races with the strongest populations are those exhibiting the most powerful
sympathy (ibid, p. 243). What is the source of sympathy? Marshall says that
during the “ruder stages of human life (ibid, p. 243) sympathy may be due to
heredity and unreasoned impulses. Eventually, sympathy becomes a choice
as it is fostered by the “far-seeing” teachings of religious and other leaders
(ibid, p. 243). Deliberate, sympathetic, moral choices are ultimately created
by associations and experience. Marshall refers to a highly developed state of
associations as our “sixth sense” (Marshall, 1994, p. 139), our “subtle
instincts” (Marshall, 1920, p. 253) or a “store of knowledge and a faculty of
intuition” (ibid, p. 252; emphasis added). Our sixth sense is an always latent
ability within man for perceiving the “electrical states” of other people and
things. What is particularly helpful in the creation of intuition are regular
periods of relaxation, and focused study about a relatively narrowly defined
set of issues.
4.3.4 Ye Machine
In an article written around 1870, “Ye Machine,” (Marshall, 1994)
Marshall uses the image of a machine to discuss consciousness, human
cognition and intuition, and moral character. The concept of consciousness
Alfred Marshall
69
was necessary in order for Marshall to mount an intellectual front against
extreme empiricism, physical determinism, and the mind as a submissive
container. Consciousness is the necessary condition for our human
experiences, and our sense of order. At the same time, consciousness could
not explain the workings of the human mind. Marshall’s solution is to place
consciousness inside the evolution of a machine. The machine takes in data
or impressions, what Marshall calls sensations, from the outer environment
which produce “ideas of sensations” in the brain, which produces “ideas of
action” in the brain, which produces actions. There are three ‘players’ in this
sequence: the outer environment, the brain, and the body which is stationed
between the environment and the brain. The brain does not directly perceive
the outer world or reality. The brain knows those parts of the outer world
which are first filtered through the body. Sensations or actions repeated, and
all the associations and connections created from the repetitions, become the
basis of memory, expectations, and instinct. Thus, thunder and lighting
become associated with each other, as do sights or sounds associated with
other sights or sounds. Meditation is the process by which an idea leads to a
“long train of ideas to others very different from them” (ibid, 118). Actions
or ideas which cause their own continuation are “pleasurable” ideas or
actions; ideas and actions which have the opposite affect are “painful.”
The machine’s brain has two parts, the cerebrum and the cerebellum. The
cerebrum is the largest part of the brain and accounts for about 2/3 to ¾ of
the brain’s weight. It includes the cerebral cortex, and is divided into two
hemispheres, the right and left hemispheres. The cerebrum is the seat of
conscious mental processes, gives us a sense of past, present, and future –
time – and thus allows us to react to the past and plan for the future. The
cerebellum controls bodily functions. The brain is connected to the outside
world through the body. As the brain evolves so do the connections among
the various parts. These parts create, as it were, well-developed pathways
that improve decision making ability with less need for mental exertion by
the cerebrum. One of the effects of these pathways is the transformation of
sympathy from seeming to be an unreasoned impulse or instinct, to reasoned
choices.
The ability for reasoned choices includes the ability for a liberal
education. Thus, the machine would learn language by associating sounds
with objects. With practice it could ‘speak’ the correct sound associated with
an object. With more practice it would differentiate similar objects and
associate each different but similar object with the appropriate sound.
Differentiated sounds could also be integrated to form more complex sounds
which would allow for the communication of ideas. In this way there is the
growth of language which helps other machines. The machine learns math by
70
Two Minds
making good guesses, and the pleasure derived from good guesses creates
associations in its brain facilitating learning and arithmetic reasoning. Of
course the machine’s reasoning would be subject to error, as there is no way
of “preventing any of the numberless other associations which would spring
up from usurping, owing to some accidental advantage, the place of that
which is really wanted” (ibid, p. 125). This springing up has similarities with
false intuitions, or errors in reasoning brought to the attention of the
economics profession so forcefully by Kahneman, Tversky, and others
(Kahneman, Slovic, and Tversky, 1982; Kahneman, and Tversky, 1979).
The learning of music would be facilitated if music gives the machine
pleasure, thus creating the machine to continue producing pleasurable –
harmonious – music. In all aspects of liberal education, the machine avoids
unwarranted specialization, the source of bad habits and the dampening of
the human mind and character. The machine can also receive a moral
education. The basis of the machine’s moral structure is sympathy. If the
machine perceives that another machine needs coal, then it thinks about itself
needing coal. This leads to actions to relieve the other machine of its coal
needs. Sympathy, experience, and association create moral habits. The
evolution of the machine may be said to end with the ability for intuition.
Marshall says, “Finally, it might completely develop associations
corresponding to that sixth sense which has always probably been latent in
man, and is now coming prominently forward – I mean that of the so called
electrical states of other persons and things. In this way it might not only
instantly perceive the whole internal state of another Machine, but it might,
by forced vibrations, control its actions. Sympathy might also by this means
be much developed” (Marshall, 1994, p. 130; emphasis added). You would
ever guess that Alfred Marshall, one of the founders of neoclassical theory,
spoke about intuitive, ‘mind’ reading, telekinetic machines! The
simultaneous differentiation and integration of the machine’s parts is an
example of the simultaneous differentiation and integration characterizing
the development of all organisms in the world, be they biological, industrial,
or any other.
4.3.5 Scale vs. Atmosphere
The division of labor’s enhancement of efficiency is another illustration
of a “fundamental unity of action between the laws of nature in the physical
and in the moral world. This central unity is set forth in the general
rule…that the development of the organism, whether social or physical,
involves an increasing subdivision of functions between its separate parts on
the one hand, and on the other a more intimate connection between them”
(Marshall, 1920, p. 241). Each part becomes less self-sufficient and more
dependent on the other parts. In the market, the subdivision results in the
Alfred Marshall
71
division of labor which creates specialized skill and knowledge, and
increases the demand for specialized machinery. The increased connection
leads to greater use of both credit and modern means of communication (sea,
road, rail, telegraph). As it applies to the brain, Marshall says that despite the
fact that the physical basis of mental work was not well known in his day,
what was known is that specialization and integration within the brain results
from practice and experience. With practice and mental effort “new
connections between different parts of the brain” are created (ibid, p. 252).
The effect of the division of labor on increased efficiency is commonly
known as practice makes perfect. With practice what at first seems difficult
becomes habit, an automatic “reflex” (ibid, p. 250), not requiring the use of
the cerebrum, the brain’s “chief central authority” of thinking (ibid, p. 251).
Any activity practiced regularly creates new connections between parts of the
brain, allowing for faster and more effortless solutions. Information is stored
in the brain and pieces of information are connected to one another through
pathways. Through experience the flow of information becomes automatic.
For example, a novice at any physical activity learns a skill only because the
brain’s cerebrum works ‘full-time’ controlling every movement of the body.
As a result the brain has little ‘room’ left over for other things such as
thinking about other things. With practice, however, the job of performing a
skill is left to the local nerve centers and the activity is performed as if
automatically without thinking.
A skilled artist, for example, has created hand-eye connections which
leave the cerebrum free for other things, for example, holding a conversation
(ibid, p. 251, fn 1). Therefore, practice increases both specialization and
integration. Marshall gives the examples of skating and painting, and the
work of businessmen, scientists, doctors, and lawyers which require
conscious attention at first but become semi-automatic with practice (ibid, p.
251). These well-developed pathways manifest as a “store of knowledge,”
“subtle instincts” or “intuition” (ibid, pp. 252-53; underline added). Intuition,
he says, “can be obtained in no other way than by the continual application of
the best efforts of a powerful thinker for many years together to one more or
less narrow class of questions” (ibid, p. 252). To repeat one very important
effect of the division of labor: it enhances intuition.
Business managers must have two broadly defined skills. First, the
manager must have a thorough knowledge of the particular trade in question.
This includes forecasting supply and demand, recognizing new market
opportunities, and have good judgment but be a risk taker. Second, the
manager must be a “natural leader” (ibid, p. 297), choosing the right people
for job, and earning the trust of those employed. In other words, a business
72
Two Minds
manager has to be of two minds - both a people-person and an expert at the
non-people details of business.
A large scale organization has the advantage of “economy of skill,
economy of machinery and economy of materials” (ibid, p. 278). Marshall
refers to these well-known advantages as internal economies. But he also
offers an alternative set of advantages he calls external economies. In his
Industry and Trade, Marshall says that external economies represent
“opportunities of a strong man with moderate means, who concentrates his
energies on a speciality” (Marshall, 1923, p. 244). External economies are
achieved from, what appears as part of the title of chapter 10, Book 4, in his
Principles, “the concentration of specialized industries in particular
locations” (Marshall, 1920, p. 267). Just as regular practice allows the brain
to make more connections among its various parts, so does the interaction of
many (relatively) small firms in a localized area allow for more connections
among its parts. The main reasons that lead to the localization of industries
are physical conditions such as climate and soil, and nearby mines and
quarries, and; the existence of a court and its large retinue of wealthy patrons.
There thus develops a group of skilled (and unskilled) workers in a relatively
small area. Their interaction over time creates great advantages, one of which
is the “mysteries of the trade become no mysteries; but are as it were in the
air, and children learn many of them unconsciously” (ibid, 271). Ideas pass
from one person to another, enhancing other people’s ideas which enhance
the growth of knowledge. So, many (relatively) small firms create an
atmosphere with many of the advantages of a smaller number of relatively
large firms. The effect of the division of labor stem from both internal and
external economies.
Smaller organizations can benefit from division of labor and “economies
of atmosphere,” and from what we now call x-efficiency. In other words, xefficiency is a form of external economies. Marshall says that “The master’s
eye is everywhere; there is no shirking by his foremen or workmen, no
divided responsibility, no sending half-understood messages backwards and
forwards from one department to another” (ibid, p. 284). The general body of
empirical literature on x-efficiency supports Marshall’s position.
Specifically, the literature which shows the relative strength of x-efficiency
vs economies of scale or economies of scope supports Marshall’s position
(Frantz, 1997).
4.3.5 Time
Marshall wasn’t analyzing the effects of either the short run or the long
run on economic phenomena because he knew that the division of time exists
only in his imagination. “For the element of time which is the center of the
chief difficulty of almost every economic problem, is itself absolutely
Alfred Marshall
73
continuous: Nature knows no absolute partition of time into long periods and
short” (Marshall, 1920, p. vii). At the same time, he used his imagination to
create a “direct feel” (Pigou, 1966, p. 85) of the real world. For this he
needed an artificially boundary of time: the short and long run periods. Thus
the quote immediately above continues, “… but the two shade into one
another by imperceptible gradations, and what is a short period for one
problem is a long period for another” (Marshall, 1920, p. vii). The short and
long periods do not absolutely exist, but can be a convenient way of getting a
direct feel of life. So be it.
Marshall’s famous statement about economics is that “Economics is a
study of mankind in the ordinary business of life; it examines that part of
individual and social action which is most closely connected with the
attainment and with the use of the material requisites of wellbeing” (ibid, p.
1). Marshall knew that the ordinary business of life is complex because life is
complex. He accepted Cournot’s analysis that in economic problems it is not
enough to analyze the effect of A on B, B on C, and so on, because A, B, and
C are simultaneously determining each other. But of course life doesn’t
consist of only A, B, and C, but A through Z, A` through Z`, and so on. Life
has a very complex cross-sectional element. It also has a very complex time
series element because “the main body of movement depends on the deep
silent strong stream of the tendencies of normal distribution and exchange;
which ‘are not seen,’ but which control the course of those episodes which
‘are seen’” (ibid, p. 828). While it is not possible to observe neither all of the
cross sectional elements, A – Z, A` - Z`, nor the unseen basis for the seen
movements over time, it is possible to observe changes in benefits and costs.
Marshall looked into the n-dimensional matrix we call life and saw
something recognizable and translatable into the “ordinary business of life”
via supply and demand curves. We can conclude that he was either a creative
genius or a mystic.
The ordinary business of life is not as simple as predicting the changes in
the motion of a rock swinging from a string. For one thing, people are not
rocks. Another, related, reason is that both the demand schedule and the
supply schedules change over time. This means that for the study of supply
and demand, and equilibrium, the time dimension is of great importance. The
time period we use to analyze a market may vary depending upon the
particular circumstances of the particular market. However, it is assumed that
the circumstances of the market – fashion or taste, input substitutions,
technology – do not change during this period of time (ibid, p. 342). In the
normal case demand curves slope downward to the right and supply curves
slope upward to the right, equilibrium being where the demand price and
supply price are equal with each other. The conditions affecting supply and
74
Two Minds
demand change constantly, each time changing the equilibrium. Marshall
uses his famous metaphor of a pair of scissors to explain the determination of
price. The two blades of the scissors corresponding to the force of utility
(demand) and cost (supply) in determining price.
Constant change leads to the “great importance” (ibid, p. 347) of time in
the determination of supply and demand. The normal or “natural” value of a
commodity in the long run is “the average value which economic forces
would bring about if the general conditions of life were stationary for a run
of time long enough to enable them all to work out their full effect” (ibid, p.
347). However, the future is not perfectly foreseeable, and the general
conditions of life are not stationary. This makes it difficult to apply economic
theory to life’s practical problems. To presage a sticky problem, time, being
an intuition, is part of man’s inner world. The simplest case of market
equilibrium is when a person produces what he wants and the stock is already
available. A boy picking blackberries for himself to eat will pick them until
the MU of blackberries equals the marginal disutility of picking them (or the
MU of playing rather than picking).
A case representing a modern market is a daily corn market where all the
corn for sale already exists. With buyers willing to buy more at lower prices
and selling willing to sell more at higher prices, an equilibrium exists where
Qd = Qs. In anything more than a day market, the quantities supplied and
demanded, and prices accepted and offered depend upon estimates of an
uncertain future. It is in the face of an uncertain future that Marshall says
market quantities and prices depend upon the thoughts which people have of
the future. In particular it depends upon how “far-sighted” (ibid, p. 338) -intuitive -- are both buyers and sellers. This is not the all of it. Marshall says
that he is particularly interested in market adjustments “ranging over still
longer periods than those for which the most far-sighted dealers in futures
generally make their reckoning” (ibid, p. 338).
Marshall is going to extend his intuition further than the most intuitive
buyers and sellers generally extend their intuition when making market
decisions. In other words, Marshall is attempting ‘to go where no man has
gone before.’ How he gets there is by combining intuition and analysis. He
imagines or intuits the general outline of what he admits is an unknowable
world, and then analyzes in a step-by-step fashion the path that individuals,
firms, and society take in that world.
Marshall states the obvious, that our abilities for prophesy are less than
perfect, that the unexpected will occur, and the forces of adjustment will not
work themselves out completely through time. However unrealistic the
assumptions, Marshall analyzes the unknowable. The outlines of the
unknowable world is that it contains free and competitive markets in which
there is only one price per marker at any one point in time, and a reasonable
high degree of knowledge on the part of buyers and sellers. How do you
Alfred Marshall
75
analyze the unknowable? By ‘breaking up’ time, imposing the ceteris paribus
assumption, and assuming the existence of the stationary state. Time, and its
concomitant dilemma of having to analyze the unknowable world “make it
necessary for man with his limited powers to go step by step, breaking up a
complex question, studying one bit at a time, and at last combining his partial
solutions into a more or less complete solution of the whole riddle” (ibid, p.
366). Going step by step means placing aside “those disturbing causes,
whose wanderings happen to be inconvenient, for the time in a pound called
Ceteris Paribus” (ibid, p. 366). The stationary state means that economic
activity is “motionless” or stationary -- average age, per-capita income,
output, internal and external economies, and the average size of the
representative firm are constant. In addition, every effect has only one cause,
and price is determined by cost. Last but not least, the short and long run
natural value are identical with each other, and time has no essential effect on
economic activity.
Of course, Marshall understands neither can time be broken up, nor is the
stationary state a reality, nor is ceteris ever paribus. Breaking time up into
discrete units and assuming ceteris paribus is the only viable option he sees
for analyzing “the difficult problem of the interaction of countless economic
causes” (ibid, p. 369). Assuming the stationary state is only his starting point.
The method from going from the stationary state to “the actual conditions of
life” (ibid, p. 369) is called the statical method. “By that method we fix our
minds on some central point: we suppose it for the time to be reduced to a
stationary state; and we then study in relation to it the forces that affect the
things by which it is surrounded, and any tendency there may be to
equilibrium of these forces. A number of these partial studies may lead the
way towards a solution of problems too difficult to be grasped at one effort”
(ibid, p. 369). In other words, by the statical method the economist holds an
image in the mind and then analyzes sources and the extent of changes in that
imaginary world. Marshall, who stated that economists need intuition or
imagination, and the ability for analytical thought, combined both in the
statical method. Especially for “very long” periods, using the statical method
is “dangerous; care and forethought and self restraint are needed at every
step” (ibid, p. 379, fn f).
The issue of time includes the issue of the stationary state, which
Marshall considers a fiction but useful for economic analysis. In the
stationary state the influences of time on costs and value are minimal as the
conditions of supply and demand, distribution and exchange are “motionless”
(ibid, p. 367). There is no sense of time in the stationary state, and no
distinction between short and long run. Yet, the stationary state “is full of
movement; for it is a mode of life” (ibid, p. 367). In the stationary state firm
76
Two Minds
size remains constant. Marshall gets around this by speaking of the
“representative” firm which remains approximately the same size. In the
stationary state value is governed by costs of production, and every effect
would have one cause. Speaking of the conditions existing in the stationary
state Marshall says, “But nothing of this is true in the world in which we live.
Here every economic force is constantly changing its action, under the
influence of other forces which are acting around it” (ibid, p. 368). Because
the world in which we live so subject to constant change created by
“countless economic causes” (ibid, p. 369). Thus, “A man is likely to be a
better economist if he trusts to his common sense, and practical instincts,
than if he professes to study the theory of value and is resolved to find it
easy” (ibid, p. 368).