The Marshall Method In Action

Understanding the Complex: The Marshallian Method in Action

Marshall had two reasons for regarding the study of an economy as complex and difficult. On the one hand, everything seems to depend upon everything else: there is a complex and often subtle relationship among all the parts of the system. On the other hand, "time is a chief cause of those difficulties in economic investigations which make it necessary for man with his limited powers to go step by step."11 Causes do not instantaneously bring final effects; they work themselves out over time. But as one cause, such as an increase in demand, is making its influence felt, other variables in the economy may independently change (e.g., supply may increase), so it is often difficult to isolate a single cause and be certain of its effects. If the laboratory technique of the physical sciences (whereby it is possible to hold constant all influences except one and then observe the results of repeated experiments) were available to the economist, this problem would not exist. But because the methodology of the laboratory is not available to economists, an alternative must be used. Marshall provided this alternative when he carefully developed his basic thought system.

According to this system, because economists cannot hold constant all the variables that might influence the outcome of a given cause, they must do so on the theoretical level by assumption. In order to make some headway in analyzing the complex interrelationships in an economy, we hypothesize that changes in certain elements occur ceteris paribus, "with other things being equal." At the start of any analysis, many elements are held constant; but as the analysis proceeds, more elements can be allowed to vary, so that greater realism is achieved. The ceteris paribus technique permits the handling of complex prob­lems, at the cost of a certain loss of realism.

Marshall's first and most important use of the ceteris paribus technique was to develop a form of partial equilibrium analysis. To break down a complex problem, we isolate a part of the economy for analysis, ignoring but not denying the interdependence of all parts of the economy. For example, we analyze the actions of a single household or firm isolated from all other influences. We analyze the supply-and-demand conditions that produce particular prices in a given industry, ignoring for the moment the complex substitute and complemen­tary relationships among the products of the industry under analysis and those of other industries. One important use of the partial equilibrium approach is to make a first approximation of the likely effects of a given cause. It is therefore particularly useful for dealing with policy issues—predicting the effect of a tariff on imported watches, for example. Simple supply-and-demand analysis can be used within a partial equilibrium approach to predict the immediate implications of such a policy. Marshall's procedure is first to limit a problem very narrowly in a partial equilibrium framework, keeping most variables constant, and then to broaden the scope of the analysis slowly and carefully by permitting other things to vary. His method has been called, appropriately, the one-thing-at-a-time method.