Marshall and Macroeconomic Analysis
Maynard Keynes included Marshall alongside J.S. Mill, Ricardo, Edgeworth, and Pigou as prominent adherers to the postulates of classical theory (which Keynes associated with an acceptance of Say’s Law), highlighting the fact that the great puzzle of effective demand that Malthus wrestled with was absent from Marshall’s analytical structure. Interestingly, though, not unlike Keynes, Marshall had argued that it was the ‘want of confidence’ that led to the spread of ‘commercial disorganisation’ associated with the evils of unemployment:
The chief cause of the evil is a want of confidence. The greater part of it could be removed almost in an instant if confidence could return, touch all industries with her magic wand, and make them continue their production and their demand for the wares of others ... But the revival of industry comes about through the gradual and often simultaneous growth of confidence among many various trades; it begins as soon as traders think that prices will not continue to fall: and with a revival of industry prices rise (Principles: 711).
Similar to Keynes, Marshall saw the ‘trades which make fixed capital’ (ibid.) as playing a key role in the fluctuations of commercial activity. However, unlike Keynes in The General Theory, in Marshall’s view the only effective remedy was to ensure that ‘credit can be based on the solid foundation of fairly accurate forecasts; and that reckless inflations of credit—the chief cause of all economic malaise—may be kept within narrower limits’ (ibid.: 710). The error in Marshall’s analysis was, according to Keynes (1936 [1973]: 19), captured by Hobson’s comments on Marshall’s failure to grasp the critical importance of a statement found in the Marshalls’ Economics of Industry: ‘But though men have the power to purchase, they may not choose to use it’ (Marshall and Marshall 1879: 154; repeated in Principles: 710). In this respect, Marshall stood convicted in Keynes’s (1936 [1973]: xxxii) judgement of committing the important mistakes associated with extending to the system as a whole conclusions which may have been correctly arrived at in respect of a part of it taken in isolation, leading to the widespread acceptance of Say’s Law, which excluded the possibility that demand could be deficient for the economy as a whole.[1]
Despite the limitations noted above, Marshall’s economics did have an important impact on the approach Keynes and his Cambridge followers were to bring to the development of macroeconomic theory. While, along with many of his contemporaries, Marshall’s perspective on the aggregate economy is often linked with the quantity theory of money, the Marshall that Keynes was familiar with never claimed to be a quantity theorist, associating such views with an excessive preoccupation with the link between money supply and prices.[2] Characteristically, Marshall instead sought to base his approach on both the supply of money and money demand, inspiring the ‘Cambridge cash balance approach’ to monetary economics which provided the foundations for the liquidity preference scheme constructed by Keynes and his followers.
Perhaps more substantial was Marshall’s impact on the methodological perspective employed by Keynes and his Cambridge followers. Keynes’s thinking on economic issues was strongly influenced by his close personal and intellectual associations with Marshall, beginning with his attending Marshall’s lectures in 1905-1906 and promoted through a continuing dialogue between the two close friends. The significance of this influence is aptly summarised in the following terms by the prominent and definitive Keynes’s biographer, Robert Skidelsky:
Keynes and his fellow Cambridge economists were men of a single book, Marshall’s Principles published in 1890, supplemented by a few other published fragments and ‘oral tradition’, mainly about his theory of money ... Keynes was deeply influenced by Marshall. He wholly endorsed his view of economics as ‘not a body of concrete truth, but an engine for the discovery of concrete truth’, a view based on Marshall’s perception that the ‘habits and institutions of industry’ do not stay constant ... Keynes was permanently influenced by Marshall’s technique of dealing with time (Skidelsky 1992: 418).
Keynes fully embraced Marshall’s inclination to forgo analytical rigour in pursuit of increased realism. He shared Marshall’s political perspective on individual liberty, tempered with the desire to actively promote social justice. Most significantly, Marshall’s methodological perspective was to play a critical role in the Keynesian treatment of effective demand, where Keynes’s application of partial analysis was used to reduce the complexities of time and uncertain knowledge in economics to manageable proportions. The role of money and the indeterminacy of expectations associated with uncertainty could not have been effectively portrayed within the general equilibrium framework envisaged by Hicks and embodied in the neoclassical synthesis models that followed, constructed within the ‘Walrasian’, as opposed to the Marshallian, tradition.
- [1] The recognition by Richard Kahn and Keynes of the importance of the study of the short period alsorepresented a significant movement away from Marshall’s emphasis on the long period as the main timeperiod for analysis.
- [2] Much of Marshall’s writings on monetary matters was not published in a systematic form until Money,Credit, and Commerce appeared in 1923, which was the last of Marshall’s published works and largelyrepresented a collection of earlier work on monetary theory, much of it dating back to the 1880s.
