7 - Alfred Marshall, John Bates Clark and the marginalist synthesis

Summary

Cambridge scholar Alfred Marshall is recognized as the most important British economist of the late nineteenth and early twentieth century. Not only was he versed in the works of classical economists such as Smith and Ricardo, he was also familiar with the writings of lesser-known Continental European writers such as Thünen and Cournot. Furthermore, he also knew the works of the marginalist authors Jevons, Walras and Menger. His extensive knowledge of the existing economics literature enabled him to provide a unified view on economic theory, to which he added the important notion of “consumer surplus” and, with his period analysis, the role of time in economic theory. Marshall’s Principles of Economics (1890) became the leading textbook in economic theory and in it he attempted “to present a modern version of the old doctrines with the aid of the new work” (Marshall 1890: xi).

Under the guidance of Cournot, and in a less degree of von Thünen, I was led to attach great importance to the fact that our observations […] relate not so much to aggregate quantities, as to increments of quantities, and that in particular the demand for a thing is a continuous function, of which the marginal increment is, in stable equilibrium, balanced against the corresponding increment of its cost of production.

(Marshall 1890: xvi)

Marshall’s work can be seen as a synthesis of classical and mathematical economic theory, guided by the principle of marginalism. In this chapter, we will first consider Marshall’s views on wealth, value and utility and examine his period analysis. We will then explore his notion of “consumer surplus”, which paves the way for economic welfare theory (to be investigated in the next chapter). Marshall realized that there is a strong similarity between the theory of rent and consumer surplus, which he originally named “consumer’s rent”. This idea was taken up by the American economist John Bates Clark, who extends the theory of rent to become a general economic theory of income distribution. We will describe his static view of the economic system, in which the distribution of income is determined by the theory of rent and by the principles of marginalism.