The Neo-Classical School: Alfred Marshall

The materials for a restatement of the basic ideas in economics were present. They waited only for a mind with the breadth and skill to weave them into a comprehensive pattern. That man appeared in the figure of Alfred Marshall (1842-1924). An English economist of the classical tradition, he brought together the best thought of his time into a description and explanation of economic processes which served as a model for economic thought in England for several decades. As of Ricardo, it can be said of Marshall: he was the most representative figure of the economic activity of his times. That many of his ideas have lost their popularity is testimony to the changed character of the times rather than to the shortcomings of Marshall's ideas. In most cases, even his severest critics found their inspiration in something Marshall said or hinted.

On the question of competition itself as a means of organizing the economic order, Marshall had some very definite opinions. He assumed that competition would produce those forms of business enterprise best adapted to their environment. This did not mean, however, that they were most beneficial to their en­vironment. In fact Marshall said that he did not doubt that an economic order operated by virtuous men co-operating actively with one another would be superior to the best forms of com­petition. His question was, however, whether such a co-operative ideal could thrive in the present environment.

Hence, we can assume that Marshall thought of a competitive economic order as a workable order under present circumstances but not neces­sarily the best order possible. Competition, in the sense that Mar­shall used the term, allowed for certain forms of co-operation among business men, and for some intervention on the part of government. As a matter of fact, he believed that enlightened government intervention might enlarge the scope of economic freedom. It is well to note, however, that free competition was not the perfect competition of the early economists, which as­sumed perfect knowledge of the market and perfect mobility of the factors of production. Free competition in Marshall's opinion required only the exercise of faculties possessed by the average well-informed man and a reasonable mobility of labor and capital considering the situation. Marshall was quite well aware of the forces tending to restrict the operation of economic forces. These were law, custom, trade union regulation, inertia, and sentimen­tal attachments. Nevertheless competition and economic free­dom were continuous and all-pervading.

In his discussion of the effects of competition upon the process of exchange, Marshall clearly deserted the idea of a perfectly competitive market. In the first place, he noted all kinds of dif­ferent markets, each with its own peculiar characteristics. For example, at the two extremes there were world' markets and isolated markets; and between, with innumerable valuations, lay the majority of markets with which business men normally must deal. Further, Marshall's idea of a normal market did not mean a freely competitive market, although one might assume that for illustrative purposes such was the case. But the ordinary market was subject to a variety of influences some of which were competi­tive and some were not.

The relation of competition to supply and demand, especially the former, was one of the chief points of Marshall's work. As we have noted before, the willingness of a producer to increase his supply depended upon the character of his costs of production, i.e. whether they were increasing, decreasing, or constant. Whereas the early economists assumed that all costs were con­stant, Marshall knew that costs varied greatly. The producer with increasing costs would expand his output only if an unusual demand so far outran the normal supply as to keep the price above the increased cost. The latter two cases, constant or de­creasing cost, represented sources of instability since an increase in supply might prove quite profitable if some obstruction pre­vented the operation of freely competitive forces. But there were other modifications that required attention. One situation Mar­shall noted was the time required for a change in the market, especially as time affected the supply of goods. Marshall said, in speaking of exchange value: "... as a general rule, the shorter the period we are considering, the greater must be the share of our attention which is given to the influence of demand on value; and the longer the period, the more important will be the influence of the cost of production on value." Marshall knew that with the tremendous amounts of fixed capital tied up in business enterprises variations in supply to meet short run changes in market price or demand were unlikely. Business men fre­quently continued to operate at a loss rather than retire from business and lose the large original investment. Realizing the importance of long time trends, Marshall's price formula was expressed in terms of cost of production. He said that prices tended to be set at the cost of production of the most expensive unit necessary to meet the existing demand. That is if the most efficient producers could not supply the demand, less efficient producers would be encouraged to enter production, and the market price would be set at the cost of production of that one of the less efficient producers whose addition to the supply just met the demand.

When Marshall turned his attention to the effects of monopoly on the market, he made some rather striking comments. The rapid increase in capital and the intense drive toward greater specialization he knew constituted real threats to freedom of economic action. Yet he held that there was an element of monopoly in every competitive business, and that the power of monopolies was of "uncertain tenure; consequently every mo­nopoly must give attention to the factors of present or latent competition if it intended to survive." In spite of the encroach­ment of monopolies and other forces seeking control of the mar­kets, Marshall believed that such tendencies were counteracted by the development of new instruments of competition. Govern­ment intervention was one, greater consumer information was another, the increase of small investors a third, new emphasis upon trade morality, and a diminution of trade secrecy through newly developed avenues of publicity were others. Throughout, the net effect of Marshall's work is to emphasize the continuing power of competition as a regulator of economic activity. Con­sequently in spite of his emphasis upon the imperfect nature of competition, he remains in the classical tradition by accepting a freely competitive market as a starting point for his investiga­tions and in his confidence that the power of competition would in the end establish equilibrium between the forces of production and consumption.