The Marshallian Cross Economist Marshall

The Marshallian Cross, Economist Alfred Marshall

During the last quarter of the nineteenth century, a controversy arose among economists concerning the relative importance of demand and supply in price, or value, theory. Classical economics as set forth in the Principles of J. S. Mill had emphasized supply; however, Jevons, Menger, and Walras had stressed demand, and Jevons and others went so far as to assert that value depends entirely upon demand. It is difficult to assess the impact of this controversy on the content and form of Marshall's theory of relative prices. He asserted that the essential elements of his own views on value and distribution were worked out before 1870 but that it would be "foolish if he troubled himself to weigh and measure any claims to originality that he had."14 Marshall was vexed by criticisms of his supply-and-demand analysis that suggested that he had tried to reconcile the positions of the classical and marginal utility schools. He was looking for truth, not just peace, he asserted; moreover, his supply-and-demand analysis had been formulated before Jevons, Menger, and Walras began to write on the subject.

Marshall believed that a correct understanding of the influence of time and an awareness of the interdependence of economic variables would resolve the controversy over whether cost of production or utility determines price. The demand curve for final goods slopes downward and to the right, as individuals will buy larger quantities at lower prices. The shape of the supply curve depends upon the time period under analysis. The shorter the period, the more important the role of demand in determining price; the longer the period, the more important the role of supply. In the long run, if constant costs exist and supply is therefore perfectly elastic, price will depend solely on cost of produc­tion. In general, however, it is fruitless to argue whether demand or supply determines price. Marshall used the following analogy to show that causation is not a simple matter and that any attempt to find one single cause is doomed to failure:

We might as reasonably dispute whether it is the upper or under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or costs of production. It is true that when one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not strictly accurate, and is to be excused only so long as it claims to be merely a popular and not a strictly scientific account of what happens.

Possibly even more important is Marshall's insistence that marginal analysis had been misused by many economists. They wrote, he said, as though it is the marginal value (whether cost, utility, or productivity) that somehow determines the value of the whole. For example, in analyzing the prices of final goods, it is not correct, according to Marshall, to say that marginal utility or marginal cost determines price. Marginal analysis simply suggests that "we must go to the margin to study the action of those forces which govern the value of the whole."16 Marginal utility or marginal cost does not determine price, for their values alone with price are mutually determined by factors acting on the margin. Here again Marshall provided a very apt analogy to illustrate his point. Jevons had isolated the essential elements in price determination: utility, cost, and price. But he was mistaken in trying to find a single cause and in viewing the process as a chain of causation, with cost of production determining supply, supply determining marginal utility, and marginal utility determining price. Marshall maintained that this is mistaken because it ignores the interrelationships and mutual causation among these elements. If we place three balls in a bowl, one being marginal utility, one being cost of production, and the third being price, it is clearly incorrect to say that the position of any one ball determines the position of the others. But it is true that the balls mutually determine one another's positions. Thus, demand, supply, and price interact with one another at the margin and mutually determine their respective values.

Marshall attempted to place his theory of price in the context of both Ricardo's theory of value and the controversy over whether it is utility or cost of production that determines price. Marshall believed that his own theory of price was fundamentally in the Ricardian line. Although the marginal utility writers would hardly have agreed, he suggested that Ricardo recognized the role of demand but gave it limited attention because its influence was so easy to understand; instead, he devoted his energies to the much more difficult analysis of cost. Marshall found Ricardo's cost of production theory of value to include both labor and capital costs. Most historians of economic theory consider this an overly generous interpretation of Ricardo. The main defect in Ricardo's value theory, according to Marshall, was his inability to handle the influence of time, exacerbated by his inability to express his ideas clearly. Marshall rejected the claim of Jevons and other marginal utility writers that they had effectively demolished Ricardo's theory of value and replaced it with a correct version by emphasizing demand almost exclusively. Viewing his own contribution as merely an extension and development of Ricardo's ideas, Marshall felt that his treatment of Ricardo left the basic foundation of the Ricardian theory of value intact. We will postpone our evaluation of Marshall's value theory until we have surveyed his other ideas.