Thursday, 15 November 2012

Economist of The Week - Alfred Marshall


In the latter half of the 19th century, a drastic shift of paradigms began to emerge in economic thought. Dubbed the Neoclassical, or Marginal Revolution, a new generation of economists began to embrace the theory of marginal utility and simultaneously, a more mathemathical approach towards mathematics. This week's economist is the "champion" of this new movement, and one of the most influential economists ever, whose ideas are still in everyday use - Alfred Marshall.

Source: Wikimedia

Early life


Alfred Marshall was born into a middle-class British family, living in the London suburb of Clapham in 1842. His father worked as a bank cashier, and was a deeply religious Evangelical; his spiritual influence has likely contributed to Marshall's later inclination towards philosophy and theology. In a family of intellectuals, it was no question that Marshall would proceed into higher education.

Education


Studying first at the Merchant Tailor's School (a private school with origins traceable back to 16th century British - surprise - tailors), he continued to proceed into the University of Cambridge, principally excelling in mathematics at St John's College. Upon graduation, he was named Second Wrangler - a term unique to the university, meaning that he was the second best student of his year upon graduation, in 1865.

A sudden shift of interests


Until this point, Marshall was virtually destined to become a mathematician - but then something happened, which had profound consequences not only on his future career, but on the history of the economic sciences.
What was later dubbed as a "moral crisis" wasn't a crisis in a strictly personal sense - first, it happened gradually, and second, Marshall shared his doubts with a range of his British contemporaries, struggling (bluntly put) to find a golden mean between his Anglican background and his liberal academic environment.
These doubts lead Marshall towards philosophy, precisely, metaphysics; in his later pupil John Maynard Keynes's words, "the philosophical foundation of knowledge, especially in relation to theology."

From philosophy to economics


Marshall received a fellowship at St Johns College upon graduation, hence he was free to continue his philosophical enquiries. His interest soon started shifting towards ethics (a.k.a moral philosophy, the field of Adam Smith - remember?). While continuing to search for a solution for replacing theology with an alternative set of moral principles, Marshall became acquainted with a British philosopher, Henry Sidgwick.
Sidgwick was an utilitarian - like John Stuart Mill and Jeremy Bentham before him, he believed that the concept of good originates from utility. His exact position was called ethical hedonism, stating that the greatest good is what causes the greatest pleasure (rather than happiness). His influence on Marshall was so profound that he dubbed Sidgwick as his "spiritual mother and father." And from utilitarianism - as Mill's example shows - it's just a step further to engage in economics.

Early economic career


In 1868, Marshall became a lecturer of moral sciences at the University of Cambridge. Content with teaching, Marshall has simultaneously began to write a series of articles on the problems of protectionism in international trade (which he later published in a book in 1879).
More importantly however, it was near the beginning of the decade, in 1871, that the first five female students enrolled to the recently opened Newnham College of Cambridge, founded by no other but Henry Sidgwick. Among them was the moral philosophy student Mary Paley - Marshall's future wife, whom he married in 1877, three years after Paley's final exams.

Marriage and consequences


Contemporary customs of Cambridge required celibacy from professors; it happened so that at the age of  34, Alfred Marshall and his wife needed to find a new job and home. They did so at the newly founded
University College, Bristol - Marshall became the principal of an institution which aimed to educate local middle-class businessman children. While an involuntary transfer to such a (then-) fringe location might have been fatal in an academic career for many, yet it wasn't for Marshall and Paley. Mary actively helped with his husband's work; she taught during the day, and Alfred taught during the evenings.

Research activities


The couple's jobs did not prevent them from engaging in academic research; in 1879, they released an economics textbook. Entitled Economics of Industry, it was chiefly written by Mary but revised, updated and published under the name of Alfred Marshall. The book, while based on strong mathematical foundations, had a tone understandable to the layman as well. The book was the first which brought Marshall to fame; upon the tragic death of William Jevons in 1882, he became the most respected economist of Britain. 
(A tragic side note of the story is that Marshall later came to despise the book, mostly due to the contributions of her wife, dismissing them as useless; his machismo caused Mary to give up economics altogether, though she remained a faithful partner of Marshall until his death.)


Magnum opus


Following his first book's success, Marshall's career began to skyrocket. He began to work on what was to be his main work, the Principles of Economics; simultaneously, after a short excursion at Oxford in 1883-1884, he returned to his alma mater Cambridge to become the Professor of Political Economy at the university. (He and Mary bought a house there as well; the Balliol Croft later became a student's hall for the Lucy Cavendish College a century later.)
The book, published after a decade of preparation in 1890, has transformed the world of economics much like Wealth of Nations did 114 years earlier, parallelling it's importance, length and progressive tone.
 The book's principal strength was that while it drawed from the achievements of economics (eg. the marginal utility theory, and the law of diminishing returns), he also put forward his own ideas (most famously, the Marshall curves) and quantified, scientified the achievements of the former. More to this, he did so in a down-to earth manner, writing to the layman, using understandable diagrams, and leaving mathematical calculations to footnotes; no wonder his book has brought him worldwide fame and success.

Ideas


Out of the numerous contributions of Marshall to economics, the most famous is certainly his curve (pictured to the right, from the original book). Based on this visual approach, Marshall has worked out two very important terms: consumer's rent (today consumer's surplus) and producer's rent (today producer's surplus). Let's suppose that this graph visualises the market for say, water.

Consumer's surplus means the difference between the price a consumer would be willing to pay and what they do pay.  
The demand curve declines according to marginal utility; the first few drops water can save life, but the more water is around, the less precious it becomes. Hence when the market reaches and equilibrium at a given quantity and a given price, the consumer has a profit, shown on the graph as the FDA shape.

Producer's surplus is the opposite; in this case, imagine a well owner who has to bring up each successive bucket of water from greater depths, meaning bigger costs for him (the aggregate costs covered by the area OSAH) At a market equilibrium, the surplus comes from the difference of the actual price and the lowest price still acceptable for the seller - the shape SAF.

This framework for assessing easy market situations has been an indispensable tool for economists for the last 122 years - and we can thank Alfred Marshall for that.

Later life and death


Marshall became revered and celebrated worldwide upon the publishing of his book; nonetheless, he has continued working on a second edition. Unfortunately, his insistence on meticulousness and going into details came into conflict with the breadth of fields he wished to study; the second volume of the Principles, along other works, was never completed.
Due to deteriorating health, Marshall retired from the university in 1908, living in Cambridge until his death along his wife. Respected as the "grandfather" of modern economics, he has seen through the First World War and tutored such pupils as John Maynard Keynes and Arthur Cecil Pigou. He died in 1924, but universities, societies, faculties and professorships continue to carry his name worldwide - the economist with an importance rivalled possibly only by Adam Smith.  

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