Principles of Economics

Marshall, Alfred
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First Pub. Date
London: Macmillan and Co., Ltd.
Pub. Date
8th edition
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§ 1. The argument of the preceding ten chapters may now be summarized. It falls far short of a complete solution of the problem before us: for that involves questions relating to foreign trade, to fluctuations of credit and employment, and to the influences of associated and collective action in its many forms. But yet it extends to the broad action of the most fundamental and permanent influences which govern distribution and exchange. In the summary at the end of Book V. we traced a continuous thread running through and connecting the applications of the general theory of equilibrium of demand and supply to different periods of time; from those so short that cost of production could exercise no direct influence on value, to those so long that the supply of the appliances of production could be fairly well adjusted to the indirect demand for them, which is derived from the direct demand for the commodities which they produce. In the present Book we have been concerned with another thread of continuity, which lies transversely to the thread connecting different periods of time. It connects the various agents and appliances for production, material and human; and establishes a fundamental unity between them, in spite of their important differences of outward feature.


Firstly, wages and other earnings of effort have much in common with interest on capital. For there is a general correspondence between the causes that govern the supply prices of material and of personal capital: the motives which induce a man to accumulate personal capital in his son's education, are similar to those which control his accumulation of material capital for his son. There is a continuous transition from the father who works and waits in order that he may bequeath to his son a rich and firmly-established manufacturing or trading business, to one who works and waits in order to support his son while he is slowly acquiring a thorough medical education, and ultimately to buy for him a lucrative practice. Again, there is the same continuous transition from him to one who works and waits in order that his son may stay long at school; and may afterwards work for some time almost without pay while learning a skilled trade, instead of being forced to support himself early in an occupation, such as that of an errand-boy, which offers comparatively high wages to young lads, because it does not lead the way to a future advance.


It is indeed true that the only persons, who, as society is now constituted, are very likely to invest much in developing the personal capital of a youth's abilities are his parents: and that many first-rate abilities go for ever uncultivated because no one, who can develop them, has had any special interest in doing so. This fact is very important practically, for its effects are cumulative. But it does not give rise to a fundamental difference between material and human agents of production: for it is analogous to the fact that much good land is poorly cultivated because those who would cultivate it well have not access to it.


Again, since human beings grow up slowly and are slowly worn out, and parents in choosing an occupation for their children must as a rule look forward a whole generation, changes in demand take a longer time to work out their full effects on supply in the case of human agents than of most kinds of material appliances for production; and a specially long period is required in the case of labour to give full play to the economic forces which tend to bring about a normal adjustment between demand and supply. Thus on the whole the money cost of any kind of labour to the employer corresponds in the long run fairly well to the real cost of producing that labour*133.


§ 2. The efficiency of human agents of production on the one hand, and that of material agents on the other, are weighed against one another and compared with their money costs; and each tends to be applied as far as it is more efficient than the other in proportion to its money cost. A chief function of business enterprise is to facilitate the free action of this great principle of substitution. Generally to the public benefit, but sometimes in opposition to it, business men are constantly comparing the services of machinery, and of labour, and again of unskilled and skilled labour, and of extra foremen and managers; they are constantly devising and experimenting with new arrangements which involve the use of different factors of production, and selecting those most profitable for themselves*134.


The efficiency as compared with the cost of almost every class of labour, is thus continually being weighed in the balance in one or more branches of production against some other classes of labour: and each of these in its turn against others. This competition is primarily "vertical": it is a struggle for the field of employment between groups of labour belonging to different grades, but engaged in the same branch of production, and inclosed, as it were, between the same vertical walls. But meanwhile "horizontal" competition is always at work, and by simpler methods: for, firstly, there is great freedom of movement of adults from one business to another within each trade; and secondly, parents can generally introduce their children into almost any other trade of the same grade with their own in their neighbourhood. By means of this combined vertical and horizontal competition there is an effective and closely adjusted balance of payments to services as between labour in different grades; in spite of the fact that the labour in any one grade is mostly recruited even now from the children of those in the same grade*135.


The working of the principle of substitution is thus chiefly indirect. When two tanks containing fluid are joined by a pipe, the fluid, which is near the pipe in the tank with the higher level, will flow into the other, even though it be rather viscous; and thus the general levels of the tanks will tend to be brought together, though no fluid may flow from the further end of the one to the further end of the other; and if several tanks are connected by pipes, the fluid in all will tend to the same level, though some tanks have no direct connection with others. And similarly the principle of substitution is constantly tending by indirect routes to apportion earnings to efficiency between trades, and even between grades, which are not directly in contact with one another, and which appear at first sight to have no way of competing with one another.


§ 3. There is no breach of continuity as we ascend from the unskilled labourer to the skilled, thence to the foreman, to the head of a department, to the general manager of a large business paid partly by a share of the profits, to the junior partner, and lastly to the head partner of a large private business: and in a joint-stock company there is even somewhat of an anti-climax when we pass from the directors to the ordinary shareholders, who undertake the chief ultimate risks of the business. Nevertheless business undertakers are to a certain extent a class apart.


For while it is through their conscious agency that the principle of substitution chiefly works in balancing one factor of production against another; with regard to them it has no other agency than the indirect influence of their own competition. So it works blindly, or rather wastefully; it forces many to succumb who might have done excellent work if they had been favoured at first: and, in conjunction with the tendency to increasing return, it strengthens those who are strong, and hands over the businesses of the weak to those who have already obtained a partial monopoly.


But on the other hand there is also a constant increase in the forces which tend to break up old monopolies, and to offer to men, who have but little capital of their own, openings both for starting new businesses and for rising into posts of command in large public and private concerns; and these forces tend to put business ability in command of the capital required to give it scope.


On the whole the work of business management is done cheaply—not indeed as cheaply as it may be in the future when men's collective instincts, their sense of duty and their public spirit are more fully developed; when society exerts itself more to develop the latent faculties of those who are born in a humble station of life, and to diminish the secrecy of business; and when the more wasteful forms of speculation and of competition are held in check. But yet it is done so cheaply as to contribute to production more than the equivalent of its pay. For the business undertaker, like the skilled artisan, renders services which society needs, and which it would probably have to get done at a higher cost if he were not there to do them.


The similarity between the causes that determine the normal rewards of ordinary ability on the one hand, and of business power in command of capital on the other, does not extend to the fluctuations of their current earnings. For the employer stands as a buffer between the buyer of goods and all the various classes of labour by which they are made. He receives the whole price of the one and pays the whole price of the others. The fluctuations of his profits go with fluctuations of the prices of the things he sells, and are more extensive: while those of the wages of his employees come later and are less extensive. The earnings at any particular time of his capital and ability are sometimes large, but sometimes also a negative quantity: whereas those of the ability of his employees are never very large, and are never a negative quantity. The wage-receiver is likely to suffer much when out of work; but that is because he has no reserve, not because he is a wage-receiver*136.


That part of a man's income which he owes to the possession of extraordinary natural abilities is a free boon to him; and from an abstract point of view bears some resemblance to the rent of other free gifts of nature, such as the inherent properties of land. But in reference to normal prices, it is to be classed rather with the profits derived by free settlers from the cultivation of new land, or again with the find of the pearl-fisher. The plot of one settler turns out better and that of another worse than was expected; the good find of one dive of the pearl-fisher compensates for many others that are fruitless: and the high income which one barrister, or engineer, or trader earns by his natural genius has to be counted with the comparative failures of many others; who perhaps appeared of no less promise when young and received as costly an education and start in life, but whose services to production were less than his in proportion to their cost. The ablest business men are generally those who get the highest profits, and at the same time do their work most cheaply; and it would be as wasteful if society were to give their work to inferior people who would undertake to do it more cheaply, as it would be to give a valuable diamond to be cut by a low waged but unskilled cutter.


§ 4. Returning to the point of view of the second Chapter of this Book, we may call to mind the double relation in which the various agents of production stand to one another. On the one hand they are often rivals for employment; any one that is more efficient than another in proportion to its cost tending to be substituted for it, and thus limiting the demand price for the other. And on the other hand they all constitute the field of employment for each other: there is no field of employment for any one, except in so far as it is provided by the others: the national dividend which is the joint product of all, and which increases with the supply of each of them, is also the sole source of demand for each of them.


Thus an increase of material capital causes it to push its way into new uses; and though in so doing it may occasionally diminish the field of employment for manual labour in a few trades, yet on the whole it will very much increase the demand for manual labour and all other agents of production. For it will much increase the national dividend, which is the common source of the demand for all; and since by its increased competition for employment it will have forced down the rate of interest, therefore the joint product of a dose of capital and labour will now be divided more in favour of labour than before.


This new demand for labour will partly take the form of the opening-out of new undertakings which hitherto could not have paid their way; while a new demand will come from the makers of new and more expensive machinery. For when it is said that machinery is substituted for labour, this means that one class of labour combined with much waiting is substituted for another combined with less waiting: and for this reason alone, it would be impossible to substitute capital for labour in general, except indeed locally by the importation of capital from other places.


It remains true, however, that the chief benefit which an increase of capital confers upon labour is not by opening out to it new employments, but by increasing the joint product of land, labour and capital (or of land, labour and waiting), and by reducing the share of that product which any given amount of capital (or of waiting) can claim as its reward.


§ 5. In discussing the influence which a change in the supply of work of any one industrial group exerts on the field of employment for other kinds of labour, there was no need to raise the question whether the increase of work came from an increase in the numbers or in the efficiency of those in the group: for that question is of no direct concern to the others. In either case there is the same addition to the national dividend: in either case competition will compel them to force themselves to the same extent into uses in which their marginal utility is lower; and will thus lessen to the same extent the share of the joint product which they are able to claim in return for a given amount of work of a given kind.


But the question is of vital importance to the members of that group. For, if the change is an increase of one-tenth in their average efficiency, then each ten of them will have as high an aggregate income as each eleven of them would have if their numbers had increased by one-tenth, their efficiency remaining unchanged*137.


This dependence of the wages of each group of workers on the numbers and efficiency of others is a special case of the general rule that the environment (or Conjuncture) plays a part at least coordinate with a man's energy and ability in governing that net product to which his wages ever approximate under the influence of competition.


The net product to which the normal wages of any group of workers approximate, must be estimated on the assumption that production has been pushed to that limit at which the output can be just marketed with normal profits, but not more: and it must be estimated with reference to a worker of normal efficiency; whose additional output repays an employer of normal ability and normal good fortune and normal resources with normal profits, but not more. (Something must be added to or subtracted from this net product to find the normal wages of a worker whose efficiency is more or less than normal.) The time chosen must be one of normal prosperity; and when the supplies of different kinds of labour are relatively appropriate. For instance if the building trade is exceptionally depressed, or exceptionally prosperous: or if its development is checked by an inadequate supply of bricklayers or carpenters, while the supply of other classes of building operatives is superabundant, then the occasion is one which does not afford a convenient opportunity for estimating the relations of net product to normal wages of either bricklayers or carpenters*138.

Notes for this chapter

Comp. IV. V. VI. and VII. and XII.; and VI. IV. V. and VII.
Compare V. III. 3; and VI. VII. 2.
Compare IV. VI. 7; and VI. V. 2.
Compare V. II. 3, and VI. IV. 6, and VIII. 7-9.
Suppose, for instance, that an increase in the supply of work of the group by one-tenth forced them into work in which their marginal uses were lower, and thus lowered by a thirtieth their wages for any given amount of work; then, if the change came from an increase in their numbers, their average wages would fall by a thirtieth. But if it came from an increase in their efficiency, their wages would rise by about a sixteenth. (More exactly they would be 11/10 × 29/30 = 1 19/300 of what they were before.)
As regards the relation between wages and the marginal net product of labour see VI. I. and II. and especially pp. 516-7 and 537-540: the matter is further discussed in VI. XIII. especially p. 706 n. As regards the need to seek a truly representative margin see V. VIII. 4, 5: where it is argued (p. 409 n.) that when that has been reached, the influence of the supply of any group of workers on the wages of others has already been reckoned: and that the influence which any one individual worker exerts on the general economic environment of the industries of a country is infinitesimal, and is not relevant to an estimate of his net product in relation to his wages. In V. XII. and Appendix H something is said of the hindrances to a rapid increase of output even where such an increase would theoretically yield great economies; and of the special care needed in the use of the term "margin" in regard to them.

End of Notes

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