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hurry. Consequently I accepted the many second-hand reports which
alleged that the contributions of Samuelson, Hicks, Robinson, Sraffa,
Keynes, Chamberlin, Triffin and others represented major or revolutionary
advances in economic science which displaced the contributions of
Marshall. If the truth were told, economic theory is no better off – maybe it
is even worse off.
With respect to Marshall’s Principles the only apparent accomplishment
of more modern writings is a monumental obfuscation of the problem that
© LAWRENCE A. BOLAND
22 Principles of economics Marshall’s ‘Principles’ and the ‘element of Time’ 23
Marshall’s method of analysis was created to solve. A clear understanding sufficient explanation of phenomena. The Principle of Substitution
of the methodological problem that concerned Marshall is absolutely presumes the truth of what Marshall calls the Principle of Continuity. Since
essential for a clear understanding of the Marshallian version of Marshall wishes to apply the Principle of Substitution to everything, he
neoclassical economics. Unfortunately, owing to our technically oriented needs to show that the Principle of Continuity applies to everything. In
training, we have lost the ability to appreciate Marshall’s approach to the simple terms, the Principle of Continuity says everything is relatively a
central problem of economic analysis which is based on the methodological matter of degree. For Marshall there are no class differences, only matters
role of the element of time. Having said this I do not want to lead anyone to of degree. He takes the same attitude towards the differences between ‘city
think that I am simply saying that one can understand Marshall by mulling men’ and ‘ordinary people’, between altruistic motives and selfish motives,
over each passage of everything he wrote. Reading the history of economic between short runs and long runs, between cause and effect, between Rent
thought has its limitations, too. My main interest is improving my and Interest, between man and his appliances, between productive and non-
understanding of modern neoclassical economics, so I view historical productive labour, between capital and non-capital, and even between
works as a guide rather than a rule.1 It is my understanding that is at issue, needs and non-essentials. In all cases whether the degree in question is
not Marshall’s. Nevertheless, appreciating why Marshall saw problems more or less is relative to how the distinction is being used in an
with ‘the element of Time’ and its role in economic analysis can be a explanation. For example, ‘what is a short period for one problem, is a long
period for another’ [p. vii]. 3
fruitful basis for a critical understanding of Marshall’s version of
neoclassical economics. Sometimes it seems that Marshall is probably the only neoclassical
Unlike neo-Walrasian equilibrium models, which take time for granted, economist who fully appreciates the methodological problem of the
Marshall’s economics allows time to play a central role. 2 Simply stated, the applicability of the Principle of Substitution. To be sure of its applicability,
recognition of the element of time is Marshall’s solution to the problem of he postpones its introduction until Book V, the fifth of six major parts of
explanation which all economists face. That problem can only be his book. The first four Books are devoted to convincing the reader that the
appreciated in relation to a specific explanatory principle or behavioural assumption of maximization is applicable by demonstrating the universal
hypothesis. Such a relationship was introduced in the preface to Marshall’s applicability of the Principle of Continuity. There must be available a
continuous range of options4 over which there is free choice (i.e.
first edition where he refers to the Principle of Continuity. But he explains
neither the role of continuity in the problem of explanation nor the problem substitutability is precluded whenever choice is completely limited), and
itself. The problem, it turns out, results primarily from a second explan- the choice must not be an extreme (or special) case – otherwise the
atory principle, the Principle of Substitution, which he introduces later (in question would be begged as to what determines the constraining extreme
Book V). I will argue here that Marshall saw an essential role for time in limit.
economic explanations for the simple reason that he wished to apply only
these two principles to all economic problems.
THE ‘ELEMENT OF TIME’
Marshall stresses (e.g. in his original preface) that the applicability of the
THE TWO EXPLANATORY ‘PRINCIPLES’
Principle of Continuity (and consequently the applicability of the Principle
It seems surprising that there are only two explanatory principles stated by of Substitution) depends heavily on ‘the element of Time’. By ignoring the
Marshall – the Principle of Substitution and the Principle of Continuity. element of time, our teachers (and their textbooks) would have us believe
These two explanatory principles are distinguished from ‘laws’ (or that the Principle of Substitution is the only hypothetical aspect of the
‘tendencies’) which also play a role in his explanations. The principles are ‘Principles’. If one could reduce everything to maximization then
assumptions (we assume because we do not know) but Marshall considers explanation would certainly be made at least formally easier. Samuelson
‘laws’ to be beyond doubt. saw that it was possible for even the notion of a stable equilibrium to be
The Principle of Substitution is easily the more familiar of the two since reduced to the Principle of Substitution [e.g. Samuelson 1947/65, p. 5], that
it is merely what we now call the neoclassical maximization hypothesis. It is, to a matter of constrained maximization. Time, if considered at all, is
says, everyone is an optimizer (i.e. a maximizer or minimizer) given his or deemed relevant only for the proofs of the stability of equilibria. Most of us
her situation (including his or her endowment). But by itself it is not a have been trained not to see any difficulty with the element of time – for
© LAWRENCE A. BOLAND
24 Principles of economics Marshall’s ‘Principles’ and the ‘element of Time’ 25
fear of being accused of incompetence. Marshall regards ‘conditions’ as variables which are exogenously fixed
Marshall’s view is quite the contrary: the element of time is central. For during the period of time under consideration. He relies on their fixity in
instance, to presume that at any point in time a firm has chosen the best his explanation of behaviour where these fixed variables are the constraints
labour and capital mix presumes that time has elapsed since the relevant in a maximization process. In this regard, Marshall’s neoclassical
givens were established (viz. the technology, the prices, the market programme is indistinguishable from the mathematical approach of his
conditions, etc.), and that period of time was sufficient for the firm to vary contemporary Leon Walras. However, in Walras’ approach, as it is taught
those things over which it has control (viz. the labour hired and the capital today, the constraints are given as stocks to be allocated between
purchased) prior to the decision or substitution. Even when its product’s competing uses. And, of course, Walras is usually thought to consider all
price has gone up the firm cannot respond immediately. Nor can it stop processes to be completed simultaneously as if the economy were a system
production and its employment of labour merely because the price has of simultaneous equations. Nevertheless, although both approaches to
fallen [cf. p. 298]. Contrary to modern textbooks, in Marshall’s economics explanation are ‘scientific’ in Marshall’s sense, the mathematical concep-
very short-run market pressures are more ‘the noise’ than they are ‘the tion of an economy is rejected [p. 297].
signal’ when viewed from the perspective of the entrepreneur’s decision In Marshall’s view the problem of explanation is that there are too many
process.5 conceivable ‘causes’. It is not that one has to rely on exogenous givens as
Time is an essential element in Marshall’s method of explanation. being ‘causes’ in any hypothesized relationship, but rather that there are so
Marshall tells us quite a lot about explanation in economics. He stresses the many exogenous variables to consider. This problem was not the one faced
need to recognize the role of fixed ‘conditions’, but he also stresses that the by followers of Walras who are more concerned with the solvability of his
‘fixity’ is not independent of the defining ‘time periods’. 6 Marshall’s use of system of equations. Marshall’s problem was the direct result of the
the term ‘conditions’ can lead to confusion, so it might be useful to method he used to deal with the necessity of conditional explanations.
examine his theory of explanation more specifically by distinguishing Where followers of Walras in effect try to attain the greatest generality or
between dependent, independent and exogenous variables, and between scope of the explanations by maximizing the number of endogenous
fixed and exogenous conditions. These distinctions crucially involve the variables and minimizing the number of exogenous variables, Marshall
element of time. deliberately adopts a different strategy by attempting to maximize the
The relationship between dependent and independent variables is number of fixed exogenous variables at the beginning of his analysis so as
supposed to be analogous to the relationship between causes and effects. to reduce the explanation to a sequence of single-variable maximizing
Marshall, however, cautions us that all such distinctions are relative. For choices. All other variables are fixed because they are exogenous givens or
instance, in the very short period the market price is the dependent variable because they are exogenously fixed by a prior maximization process. The
and, given the demand, the quantity supplied is the independent variable. exogenous reason that they are fixed in any problem is the logical basis for
But, in the usual short run, the market price is the independent variable and, their use in his explanation.
given technology (i.e. the production function), the quantity supplied is the There is a difficulty with Marshall’s approach to explanation whenever
dependent variable. there are many variables. It is difficult to distinguish between the
In the preface to the Principles Marshall recognizes the usual type of endogenous conditions – those which are exogenously fixed for the period
interdependence as being an instance of the Principle of Continuity. He of time considered (e.g. fixed capital in the ‘short run’) – and the truly
specifically credits Cournot with teaching us to face the difficulty of exogenous conditions that can never be explained as outcomes of a
‘mutual determination’. Marshall calls this type of interdependence a maximization process (e.g. weather, social conditions, states of knowledge,
mathematical conception of continuity although he refers to this conception etc.). Although exogenous variables need not be fixed, in Marshall’s
only in regard to the relationship between causes and effects. 7 Today we approach they are treated as fixed by limiting the length of the period of
might say that, in Marshall’s short period, price and quantity are both time to which the explanation refers.
endogenous variables and are simultaneously determined by the In Marshall’s view, the problem of explanation is thus one of carefully
exogenously given technology and demand. Thus, the distinction between defining the fixity of the ‘conditions’ by defining the relevant period of
independent and dependent variables is only a matter of verbal convenience time for the operation of the explanatory Principle of Substitution. Of
since both are endogenous. course, what is a relevant period of time depends conversely on what are
© LAWRENCE A. BOLAND
26 Principles of economics Marshall’s ‘Principles’ and the ‘element of Time’ 27
the relevant exogenous conditions for the application of the Principle of another aspect of the element of time. If the state of affairs at any point in
Substitution. For example, in Marshall’s short period – ‘a few months’ [p. time is to be explained as a consequence of someone’s optimizing choice, it
314] – virtually everything but the level of output and the amount of labour must have been possible to alter one’s choices – and this possibility is both
employed is by definition fixed; but in his long period – ‘several years’ [p. a matter of the time available and the continuity of options. Needless to
315] – everything but technology and social conditions is endogenous. say, it also presumes the ability to know what is the best option. Learning
As with Walras’ economics, in Marshall’s economics the truly what is the best option takes time [p. 284]. This question of learning, I
exogenous variables are the only bases for explanations. Any variable would argue, is the explanatory problem involving the element of time. Of
which is fixed for a period of time and which serves as a constraint on course, for Marshall, the inductive scientist, time is all that is necessary for
anyone’s maximization process must be explained at some stage or be the accumulation of the needed knowledge. Unlike the classical school,
explicitly identified as an exogenous variable. More important, if it is not Marshall sees no need to assume ‘perfect knowledge’ because he explicitly
an exogenous variable, its fixity at any stage must be explained in terms of wishes to recognize the period of time under consideration – a period he
acceptable exogenous variables.8 Even though Marshall’s approach begins would consider sufficiently long to obtain any ‘necessary knowledge’. 10
by maximizing the number of fixed exogenous variables, his ultimate
objective is, like that of the followers of Walras, to explain as much as
MARSHALL’S STRATEGY
possible. Since by definition exogenous variables are those which are to be
left unexplained, the Marshallian methodological strategy then is to reduce It would be misleading to suggest that Marshall’s problem of explanation is
the number of exogenous variables in stages. Marshall obviously merely a matter of defining a long-run equilibrium, for it is also a matter of
considered the methodological problem of explanation in economics to be how the long-run equilibrium is reached. Again, in Marshall’s view [p.
solvable. 304], the explanatory problem is that there are too many exogenous
In Marshall’s economics the truly exogenous variables are the only variables in the short run during which most decisions are made. His
‘causes’ in the strict sense. According to Marshall’s view, if one is to strategy is intended to reduce the number of exogenous variables by
provide a long-run explanation, ‘time must be allowed for causes to increasing the number of variables to which the Principle of Substitution
can be applied at later stages.11 Marshall thus considers the problem of
produce their effects’ [p. 30]. Of course, this ‘is a source of great difficulty
in economics [because] the causes themselves may have changed’ [p. 30]. explanation to be solvable since he recognizes that there is a different
Note, however, that the changeability of ‘causes’, that is, the changeability degree of changeability for each variable (another application of the
of exogenous variables, is not the problem of explanation, but rather, it is Principle of Continuity). In short, Marshall’s strategy is to distinguish
the more narrow methodological problem of verifying or refuting one’s between short-run and long-run explanations. Any complete explanation
explanation.9 must specifically assume which variables can be changed most quickly –
Even when changes in the exogenous givens are assumed away, the that is, the variables must be ordered according to their changeability.
fundamental problem for all explanations involving time still exists. The Different orderings may yield a different path to the long-run equilibrium.
logic of explanation (for example, of all the co-determined endogenous Unless the assumption is very specific it may be impossible to distinguish
variables) requires that we recognize at least one exogenous variable; and between a long-run moving equilibrium and a short-run movement toward
given maximization with exogenous tastes and exogenous constraints, a new long-run equilibrium.
changes in endogenous variables are explained as being caused by changes Although Marshall gives a prominent role to the distinction between
in at least one of the exogenous variables. But this means that an long and short periods, it is not sufficient to solve his problem of
explanation of long-run dynamic behaviour requires at least one exogenous explanation – which, as I have said, is a problem concerning the
variable which is impervious to the amount of real time elapsed in the long methodological choice of exogenous variables that are impervious to time.
run (otherwise, the explanation might be circular). For this purpose, the Yet most commentators seem to think that Marshall’s ‘statical method’ –
explanatory element of time involves the identification of at least one time- namely, the contents of Book V – constitutes his solution to the problem of
independent exogenous variable – that is, one which does not change over explanation. This is a mistake.
the defined long run. The first point to be made is that Marshall’s ‘statical’ or partial
It should be noted that Marshall’s view of explanation also recognizes equilibrium method of analysis yields incomplete explanations. The
© LAWRENCE A. BOLAND
28 Principles of economics Marshall’s ‘Principles’ and the ‘element of Time’ 29
‘statical’ method is relevant only for decisions ‘on the margin’ or in the opposed to the short-run or long-run equilibrium price) is the only real time
neighbourhood of an equilibrium position. By itself the method examines observable price. This theory of market prices assumes that the supply
the necessary but not the sufficient conditions for equilibrium. The second quantity is fixed – virtually everything is fixed but the price. The remainder
point to be made is that Marshall does offer a more complete explanation of the discussion in Book V is an examination of what happens to the
which is based on the contents of Book IV. By itself, Book V deals only market price over time when more and more of the fixed givens are
with the ‘noise’ in order at best to explain it away. A source of an allowed to change. For example, Marshall begins by allowing the firms to
explanation of an economy’s true dynamics and its application of the make substitutions in their quantity supplied in response to the current level
Principle of Continuity to the element of time is to be found in Book IV. of the market price (relative to costs). This ‘short-run’ process of
These two points will be discussed in turn. substitution requires some time – ‘a few months or a year’ [p. 314].
Marshall says that he wishes to argue that demand determines the
market price in one extreme – the very short run – and technology
The insufficiency of Book V
determines the market price in the other extreme – the long-run
equilibrium. Implicitly the real world is somewhere in between. 13 Again,
I do not think Marshall ever claims that Book V alone represents a
complete explanation of an economy’s behaviour. Yet, judging by modern the meaning of ‘determines’ is only a matter of relationships made
textbooks, one could easily think that Book V is ‘the principles of necessary by virtue of his defined equilibria. If at a point in time the
economics’. What we call microeconomic analysis today can all be found economy is at a long-run equilibrium, it must also be at a short-run
in Book V. Nevertheless, implicitly Book V provides only the necessary equilibrium, since if it were not there would be short-run incentives to
conditions for any equilibrium. That is, on the assumption that an economy change the givens which are the constraints in the determination of the
is in long-run equilibrium at a point in time, certain necessary relationships market price. Similarly, the short-run equilibrium presumes that the market
must hold whenever that assumption is true. It is a ‘statical’ method is in equilibrium. In other words, every long-run equilibrium must also be a
because it may be relevant only for that one equilibrium position at one short-run equilibrium and every short-run equilibrium must be a market-
point in time. In effect, Book V examines the local stability properties of run equilibrium. This ‘nesting’ of the forms of equilibrium is the essence of
the assumed long-run equilibrium that are the logical consequences of Marshall’s ‘statical method’.
definitions of equilibrium and of the long period. But it will be argued Although it is now very easy to list the necessary conditions for the
below that the stability properties are heavily dependent on the empirical existence of a long-run equilibrium, the key question still concerns the
assertions of Book IV. sufficient conditions for the existence of a long-run equilibrium, which
To be specific, before Book V can be considered relevant for anything, must be consistent with both a short-run equilibrium and a market
that is, before it can play a role in economic analysis, a key question must equilibrium. The question of consistency has been a major source of
be asked: why should there ever be a long-run equilibrium? Marshall controversy over the last sixty years. The logical problem is that the
approaches this question in two ways. The most familiar is in Book V absence of excess profits in conjunction with profit maximization in the
where he defines an ordering of the changeability of the variables with long period implies that the production function is locally linear-
respect to three periods of time – ‘the very short period’, ‘the short period’ homogeneous (constant returns to scale on the margin); but this implication
and ‘the long period’. The quickest variable in Marshall’s world is the appears to be inconsistent with a downward sloping demand curve, the
market-determined price. In fact, his definition of a market is not the ultimate constraint thought to be necessary to limit the size of the
producer.14
textbook one of a place where buyers and sellers meet to haggle over the
price. Marshall makes the existence of a market depend on whether the Marshall’s only line of defense is his other approach, which is based on
price clears quickly enough for all producers to face the same price the Principle of Continuity. Given the continuous operation of the Principle
regardless of their location. For Marshall then there is no market for any of Substitution, it is quite possible for the price to be above or below the
good whose price is either not uniform 12 or not quickly established. In long-run equilibrium price. When it is above there are positive excess
effect, this axiom about market prices makes all firms price-takers since it profits and when it is below there are losses and, logically, there must be a
takes longer to establish their (short-run) decisions than the price itself. (long-run equilibrium) point in between where excess profits are zero. The
Marshall’s definition of the market means that the market price (as apparent inconsistency is due only to the discussion of the hypothetical and
© LAWRENCE A. BOLAND
30 Principles of economics Marshall’s ‘Principles’ and the ‘element of Time’ 31
heuristic ‘stationary state’ – it is a very special type of long-run equilibrium Continuity, however, renders the desired result. This principle allows us to
which is supposed to hold for a specified period of time. The only conclude that, since returns change from increasing to decreasing, at some
inconsistency is between the previously mentioned nesting of equilibria point in between there must have been ‘constant’ returns. This point is a
and the stationary state. Specifically, the inconsistency is that the stability possible long-run equilibrium. Given the life-cycle hypothesis and
of each of the various equilibria that hold at the long-run equilibrium continuity, every firm must pass through this point. Once it is reached, the
depends necessarily on the consideration of different periods or lengths of ‘statical method’ can be used; but it remains merely a ‘snapshot’, relevant
time for each whereas in the stationary state they are all supposed to refer only for that one point (in the history of the firm).
to the same period of time. There is absolutely no reason why all the firms in an economy should
Leaving the stationary state aside, there is no reason why the stability of simultaneously reach the point of constant returns – that is, reach the
the various forms of equilibrium has to refer to the same set of ‘conditions’ ‘turning point,’ as Marshall calls it. It might be interesting for someone to
or variables or, equivalently, to the same period of time. Hence, the explore such a fantasy world, but nowhere does Marshall seem to be
stability relations (e.g. the necessary slopes of curves) for one form of suggesting that such a state of affairs is necessary. Book V nevertheless
equilibrium will not be ‘statically’ consistent with those relations necessary explores the nature of this turning point: Book V ‘is not descriptive, nor
for the stability of another form. If one ignores the element of time, it is does it deal constructively with real problems’ [p. 269]. However, Marshall
only too easy to ‘see’ an inconsistency where otherwise there is none. does say Book V ‘sets out the theoretical backbone of our knowledge of
the causes which govern value’ [pp. 269–70, emphasis added]. However,
this statement is qualified. He says, ‘it aims not so much at the attainment
The methodology of Book V vs a complete explanation
of knowledge [but rather] at the power to obtain and arrange knowledge
Once one recognizes the necessary element of time it might appear that with regard to two opposing sets of forces’ [p. 270, emphasis added].
there is no logical problem with Book V. But to the contrary, there still Marshall’s use of the words ‘theoretical’ and ‘arrange’ differs slightly
remains the matter of explaining why there should ever be a long-run from the usual modern usage. His usage is related to Milton Friedman’s as
equilibrium,15 and this is a question which must be tackled within an if approach to explanation. There is no claim that the method of analysis –
appropriate frame of reference. The essential element of the frame of of arranging the facts of business – is a true explanation. There is only the
reference of any behavioural explanation is the specification of exogenous claim that the nature of the inevitable turning point can be understood to be
and endogenous variables. All explanations must be based on something the result if the world were in a state of equilibrium at a moment in time –
being exogenous. In Marshall’s time-based view of the economy, it must or more properly, in a state where forces are balanced.
be something whose exogeneity extends to a longer period of time than the As in most economists’ adventures in methodology, Marshall wishes to
‘long period’ under consideration. Marshall deals with this issue first in be all things to all people; thus his is not a pure example of the
Instrumentalism we associate with Friedman. 16 Rather, the Introduction to
Book IV.
Particularly relevant to Marshall’s explanation of an economy is what is Book V gives a classic example of what we now call Conventionalist
sometimes called his ‘life-cycle’ hypothesis of the firm. In its most specific methodology. We are offered a way of looking at things. What is offered is
form it is an empirical assertion about the history of an individual firm with not claimed to be true; it can be judged only to the extent that it is better or
a life-span of three generations [cf. Hague 1958; Loasby 1978]. In its more worse than some other competing view. Book V is filled with conventions
general form it says that at the beginning of its life the firm benefits from with no claim to their truth status (e.g. the representative firm, the
learning so that its ability to produce increases with its size. Implicitly stationary state, the market, the long period, etc.). Only in those cases
Marshall is only concerned with growing firms – their size is irreversible, where we know that he thinks a particular convention is a fiction do we
hence time and size go together. At the end of its life every firm suffers have examples of the ‘as if’ methodology.
from diminishing returns. In either case, the life-cycle trajectory is the The methodology discussions of the Principles are not very interesting
needed long-run exogenous variable which provides the essential frame of today but his theory of the firm should be. The point at issue is that Book
reference. IV is a foundation for a complete theory of the firm: the firm is always to
By itself, this hypothesis about the beginning and the end of the life of a be found somewhere on its life-cycle trajectory. Its location on the
firm does not seem very relevant. The addition of the Principle of trajectory is determined completely by the time elapsed, [cf. p. 258], but
© LAWRENCE A. BOLAND
32 Principles of economics Marshall’s ‘Principles’ and the ‘element of Time’ 33
the value of that position can only be determined as a relative value, conjoining four statements whose individual truth status depends on
relative to its past and its future. There are simply too many contingencies different periods of time. They are the following:
to be able to determine the absolute value. But remember, the Principle of
(a) Prices are determined before the firm makes its supply choice; hence
Continuity is only concerned with relative values.
prices are given.
Book V does offer a way of seeing the absolute value as a consequence
(b) The Principle of Continuity applied to all inputs (all inputs are
of external forces, that is, of competitive market pressures. But there is no
variable) means that the production function of the firm is locally
reason why the actual, real-time values would ever be ‘long-period normal’
linear-homogeneous and that the level of output is always equal to
prices. The existence of long-period normal prices is merely, one might
the sum of the marginal productivities, each multiplied by the
suggest, a beautiful fiction which lends itself to simple mathematical
respective input (Euler’s theorem).
analysis having no bearing on ‘real problems’ [cf. p. 269].
(c) The Principle of Substitution (i.e. profit maximization) applied to all
variable inputs means that the marginal productivity of each input
INADEQUACIES OF MARSHALL’S METHOD VS PROBLEMS
multiplied by the product’s price will always equal the price of that
CREATED BY HIS FOLLOWERS
input.
Over the last sixty years there have been two major problems in the (d) The firm is at the ‘turning point’, that is, its excess profits are zero.
application of Marshall’s principles; both of them involve the element of
There is no difficulty with the conjunction of these four statements if they
time. The first concerns the meaning of increasing returns and the nature of
only refer to a single point in time. 17 Moreover, even over the short run,
the long-run equilibrium. The second concerns the artificial distinction
given statement (a) any two of the remaining statements imply the other

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