Alfred Marshal Economic Fluctuations

Marshall Economic Fluctuations Model, Alfred Marshall Money and Prices

Although Marshall's overriding concern was with microeconomic theory, he contributed significantly to macroeconomics by studying the influence of mone­tary forces on the general level of prices. Although some of Marshall's earliest writings (1871) concerned the quantity theory of money, he did not publish any systematic work on money until 1923, in a book entitled Money, Credit, and Commerce. His ideas on macroeconomic topics, though not yet published, were well developed in his lectures and in evidence presented before governmental commissions. The first five editions of his Principles carried the subtitle "Volume 1," but in the sixth edition(1910) he changed this to "An Introductory Volume." In 1895, with the publication of the third edition of the Principles, Marshall announced three prospective volumes: Modern Conditions of Industry and Trade; Credit and Employment; and The Economic Functions of Government. He published Industry and Trade in 1919 but never was able to write the other two volumes. What Marshall did write on macroeconomics primarily concerns economic stability or instability and the forces determining the general level of prices.

Marshall essentially accepted J. S. Mill's views on the stability of the economy: there can never be an insufficiency of aggregate demand, because a decision to save involves a decision to invest. It is impossible to have general overproduction. This line of reasoning was initiated by Adam Smith and elaborated by James Mill, Ricardo, and J. B. Say; it is now known in the literature as Say's Law. There were, of course, fluctuations in economic activity during Marshall's time, and some writers, particularly J. A. Hobson in England, were advocating underconsump-tionist theories. Marshall believed that an understanding of the causes of economic fluctuations was "not to be got by a study of consumption, as has been alleged by some hasty writers."23 Marshall's explanation of the causes of economic fluctuations follows J. S. Mill, who stressed the influence of business confidence. During an upswing, business confidence is high and credit expands rapidly; during a downswing, businesses become pessimistic and credit rapidly contracts. Mill's acceptance of Say's Law led him to assert that depressions could not be attributed to any fundamental problem within the system. Marshall suggested two public policies to address depression and unemployment. The first is to control markets so that credit is not overexpanded in periods of rising business confidence, because overexpansion may lead to recession. If depression does occur, governments can help restore business confidence by guaranteeing firms against risks. Marshall was not totally satisfied with this solution, because it would be difficult to implement without some adverse results. Guaranteeing businesses against risk, for example, would insure both competent and incom­petent businesspeople and thus interfere with market processes that reward the capable and punish the incapable.

Although Marshall's contribution to the understanding of the causes of business fluctuations was meager, his explanations of the forces that determine the general level of prices are significant. He recognized that his microeconomic analysis was based on the assumption that full employment existed and that there were no important changes in the general level of prices