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Alfred Marshall in 1885: “The Present Position of Economics” —Timothy Taylor

Summary:
This is a key observation of Alfred Marshall that predicts the development of post-classical economics, which came to be dominated by neoclassical economics, although it was overshadowed for a time by Keynesianism, owing to the pressures of the time (war, depression, and another war). The key observation is this: Marshall notes that when people think about the main intellectual contribution of Adam Smith, they often point to what we now refer to as the "invisible hand" idea--that when people act in their own self-interest--though hard work, innovation, shopping for desired goods and services–they will often benefit the social welfare. However, Marshall argues that in fact, Smith's key insight was something quite different: "His work was to indicate the manner in which value measures

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This is a key observation of Alfred Marshall that predicts the development of post-classical economics, which came to be dominated by neoclassical economics, although it was overshadowed for a time by Keynesianism, owing to the pressures of the time (war, depression, and another war).

The key observation is this:
Marshall notes that when people think about the main intellectual contribution of Adam Smith, they often point to what we now refer to as the "invisible hand" idea--that when people act in their own self-interest--though hard work, innovation, shopping for desired goods and services–they will often benefit the social welfare. However, Marshall argues that in fact, Smith's key insight was something quite different: "His work was to indicate the manner in which value measures human motive." In other words, Smith started the process of drawing linkages between the ways that people act and the monetary incentives they face in terms of prices and wages--which is what makes human motives into something measurable. Marshall thought this idea was the true core of economic thinking:
Subsequently, this key assumption about measurable value being chiefly economic morphed into the assumption that the whole of value is reducible to economic value. The life sciences and the other social sciences, as well as the humanities, and even business, especially where demand is based on marketing and advertising, shows that this broader assumption is incorrect.

However, conventional economists used this erroneous assumption to develop the further assumption of a supposed law of supply and demand based on an "invisible hand" that guides economic behavior toward maximum efficiency in use of the factors, similar to conservation in physics.

This point of view became the basis for concluding that a market state would provide optimal social and political organization through the spontaneous arising of natural order based on the dominance of economics through free markets (inclusive of free trade and free capital flow), that is, laissez-faire. And everyone would live happily ever after.

Even though that has never been the case, those committed to theses assumptions ideologically argue that the market is not free enough from government intervention and further pruning back of government is required for social and political optimality based on economic optimality.

While Marshall was not totally on board with this point of view about value and he qualified it, subsequent economists soon took it to its extreme. Keynes famously criticized it based on radical uncertainty and irrationality ("animal spirits").

These are still the dominant trends of thought in the Anglo-American world, which the Anglo-American elite are now trying to impose on the rest of the world through neoliberal globalization and liberal interventionism. The current administration cannot make up its mind between the Jacksonianism that Donald Trump ran on and Wilsonianism as the dominant view of US foreign policy.

Conversable Economist
Alfred Marshall in 1885: "The Present Position of Economics"
Timothy Taylor | Managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul, Minnesota

See also

Lars P. Syll’s Blog
Marginal productivity theory — a dangerous thought virus
Lars P. Syll | Professor, Malmo University

Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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