Marshall, Surplus and the Short- and Long-run Aspects of Welfare
Alfred Marshall’s nearly lifelong commitment to economics grew out of his concern with the social problems of his time, the most conspicuous one being the resilience of poverty amid modern advances in wealth and productivity, as pointed out in the opening pages of Principles of Economics (Marshall 1890 [1920a]: 1-4; see also Whitaker 1975; Pigou 1956: 82-83). The central analytical idea in Marshall’s pure theory of welfare lies in his general concept of surplus, which accrues to both consumers and producers. The first category, consumer’s surplus, comprised the excess of total utility or satisfaction afforded by a commodity over the real value of what the individual paid for it. The second one, producer’s surplus, had an analogous meaning, being defined as the accumulated excess of utility provided by the infra-marginal units of labour or saving over their respective reward, be that in the form of wages or interest (Marshall 1890 [1920a]: 830-831).[1]
Setting aside the complex difficulties associated with estimating surpluses (see, however, Groenewegen (2010: 26-32) and Myint (1948: 142-172)), the idea in its simplest form allowed Marshall to qualify the doctrine of maximum satisfaction associated with a position of equilibrium between demand and supply. While he recognizes the existence of gains from trade between two individuals, and that this may be reflected in surplus analysis, Marshall argues that this does not mean that satisfaction is always maximized in the aggregate by free competition. First, it ignores questions of distribution of wealth by treating the welfare implications of a dollar in the hands of the rich as the same as a dollar in the hands of the poor, a proposition which Marshall rejected. Second, and most important to him, for those commodities experiencing increasing returns, it may be possible to improve welfare by expanding output beyond the amount obtained under free competition. This particular policy may be facilitated by consumers transferring some of their surplus to producers to fully offset the reduction in producers’ surplus that the expansion in output causes (Marshall 1890 [1920a]: 472-473).
In addition to his ‘surplus’-based theory of welfare economics, Marshall also developed a broader and peculiar approach in his interpretation of social problems which, for the sake of clarity, can be split into two distinct lines of reasoning. The first one may be called practical, or involving short-term considerations, while the second one has a strong historical leaning, when he considers the subject from a long-run perspective. It is better here though to first recapitulate Marshall’s views about the evolution of Britain’s economy in modern times and, after that, to look into what he understood as feasible in the short run to remedy certain long-run trends affecting social welfare.
For Marshall, competition could be destructive or creative. Historically, he said, its negative aspects had been most noticeable during the initial phases of the Industrial Revolution. That had been the case because the first entrepreneurs were harsh and often ignorant, focused just on running their gloomy factories with the sole purpose of maximum profit. The workingmen, for their part, had to face ruthless competition for extenuating job posts without the protection of any kind of association. Moreover, the 1795 Act granting outdoor relief according to the price of bread and the number of children resulted in a rapid expansion in the poorest segment of the population, in turn resulting in a fall in wages. After the Napoleonic Wars, the Corn Laws and the action of the law of diminishing returns on the soil prevented a more steadfast advance of the British economy. The Factory Acts and the repeal of the Corn Laws in the middle of the nineteenth century, however, opened up a new phase of development for England’s industry and her people (Marshall 1890 [1920a]: 1-48, 1969).
During the nineteenth century, Marshall explained, the remarkable progress in transportation, mechanization, and knowledge proved to be the basic force propelling the long-run rise in the national dividend. This process allowed a continuous cheapening of staple foods, fuel, communications, and transportation that enhanced the living condition of all ranks of society and most strikingly of the poor.[2] The eventual success of material prosperity in permanently eradicating poverty, however, would require a new type of behaviour from capitalists and workers in order to modify the structural conditions of the demand and supply of labour. More to the point, the well-to-do would have to cut their consumption of superfluities in order to save more and keep the demand for labour unabated or directly help the most needy through taxes or acts of economic chivalry. The poor would have to postpone marriage to reduce procreation in order to provide comfort and guidance to their offspring so that these children could become well-remunerated skilled workers in the future (Marshall 1873, 1890 [1920a]: 220-236, 1907).[3]
Since the process of moral reconstruction would take time, Marshall supported a series of short-run initiatives which he saw as helpful in restraining poverty. First, the expansion of trade unions was seen by him as a sure welfareenhancing phenomenon for the protection they offered to the labourer against the employers’ bargaining power and also for establishing standard wages across many trades. Cooperative enterprises, particularly in the marketing of staple foods, were deemed by him as another form of association beneficial for the workers. Secondly, a system of universal education with open playing spaces was imperative in order to grant all youngsters not just knowledge and a healthy upbringing but essentially that strength of character required to make them responsible parents in maturity. Thirdly, the state should intervene to stipulate housing regulations and to provide aid in medical and sanitary matters for the poor. Furthermore, urgent measures needed to be taken to protect children from the poorest segment of society, the residuum, guaranteeing them a dignified future and thus putting a definitive end to the perpetual cycle of poverty (Marshall 1873, 1890 [1920a]: 689-722, 1969; see also Elliott 1990; Reisman 1990; Jensen 1987).
Although convinced of the Benthamite principle that an additional unit of wealth added more to the happiness of the poor than to the rich, Marshall defended income redistribution by a quite different route. On the one hand, a substantial part of the consumption by well-off people was spent on articles of fashionable luxury which they could easily do away without sacrificing their standard of living or even their savings. On the other hand, Marshall saw a well-fed and highly educated population as a key condition to the growth of wealth, considering such an approach as the best investment a nation could realize with its capital (Marshall 1873, 1890 [1920a]: 220-236, 1926). At this point, his long- and short-run factors of welfare improvement come together. The material progress in the living standard of the lower classes, associated with the provision of an adequate system of education, would enhance society’s productive power and, therefore, reinforce the long-run trend towards a richer and morally stronger nation, rendering unnecessary in the future any schemes for social enhancement (Marshall 1890 [1920a]: 689-722, 1926: 197-262). This idea is further articulated in the Principles, when Marshall reflects on the true sources of wealth:
The older economists took too little account of the fact that human faculties are as important a means of production as any other kind of capital; and we may conclude, in opposition to them, that any change in the distribution of wealth which gives more to the wage receivers and less to the capitalists is likely, other things being equal, to hasten the increase of material production (Marshall 1890 [1920a]: 229).
- [1] ‘The excess of the price which he would be willing to pay rather than go without the thing, over thatwhich he actually does pay, is the economic measure of this surplus satisfaction. It may be called consumer’s surplus’ (Marshall 1890 [1920a]: 124). For the historical reception and theoretical implicationsof this particular proposal, see Groenewegen (2010), Dooley (1983), and Myint (1948: 142-172).
- [2] ‘The main drift of this study of Distribution then suggests that the social and economic forces already atwork are changing the distribution of wealth for the better: that they are persistent and increasing instrength; and that their influence is for the greater part cumulative’ (Marshall 1890 [1920a]: 712).
- [3] As expressed by Groenewegen: ‘Self-help, encouraged if necessary with initial assistance, was the mainthrust of Marshall’s views on social welfare and poverty’ (Groenewegen 2010: 37).
