Marshall's Dilemma: Equilibrium versus Evolution
Hart, Neil, Journal of Economic Issues
Alfred Marshall remains somewhat of an enigmatic figure in the evolution of economic analysis. Historians of economic thought almost invariably accord Marshall a prominent role in the early development of "neoclassical" economics and in partial equilibrium analysis in particular. However, as Gerald Shove's (1942) and Joseph Schumpeter's (1941) semi-centennial appraisals observed more than fifty years ago, despite the prominent position designated to him, little in fact remains of Marshall's theoretical structure and methodological approach. Paul Samuelson, who was to play a prominent role in the subsequent development of mainstream economic analysis, placed the demise of Marshall's theoretical structure in the following context:
Although harsh, these are my well-considered judgments on the matter, and I mention them only because no one can understand the history of the subject if he does not realize that much of the work from 1920 to 1933 was merely the negative task of getting Marshall out of the way. (1967, 111)
Contrary to the judgment of Samuelson and others, the central argument developed in this paper is that the nature of the difficulties that Marshall had unsuccessfully attempted to resolve was fundamentally misunderstood by many of Marshall's critics, supporters, and subsequent contributors to the development of mainstream economics. This misunderstanding emerges largely from a misinterpretation of the intended role of Marshall's Representative Firm concept, which was at the center of the cost controversies of the 1920s.
In particular, it is essential to understand that Marshall's difficulties were far removed from the contortions of the mind that characterized the attempts at preserving a notion of competitive equilibrium when confronted with the damaging implications of increasing returns. It could indeed be argued that this was a "false problem"; however, it was not concocted by Marshall. Rather, the chief source of Marshall's difficulties in Principles of Economics (1) arose from an unsuccessful attempt to construct an equilibrium concept that could be used to shed light on the outcomes of processes that are recognized as being continuous and irreversible in time. In this context the Representative Firm plays an indispensable role in terms of the analysis Marshall was attempting to construct in successive editions of Principles. It was an avenue through which Marshall conjectured a notion of equilibrium at a point in time for the industry as a whole, while at the same time individual firms were in disequilibrium, being subject to an "organic" process of change. The Representative Firm therefore meets at the junction of Marshall's biological and mechanical notions of opposed forces described in the introductory comments in book 4 of Principles.
Marshall's dilemma essentially involved a struggle of ascendancy between conflicting metaphors. As Warren Gramm (1996) has observed, metaphors' origins and initial significance are often sublimated or forgotten with casual and habitual use. (2) Metaphors and associated analogies are not simply literary ornaments; they form the foundations for the thought processes that develop theories directed at explaining complex systems. A metaphor is not taken literally, and unlike a theory or hypothesis it is not directly refutable. The cognitive powers of a metaphor arise from the context in which it is applied, and it is in this respect that the legitimacy and usefulness of a metaphor is to be evaluated. While Marshall is associated with the popularization of the mechanical equilibrium metaphor in economics, his own writings suggest that the application of biological analogies represented the best way forward. The Representative Firm emerges from an attempt to reconcile the inconsistencies arising from the, at times, conflicting metaphors introduced in Principles. The Marshallians who followed instead abandoned the biological pathways and transformed Marshall's Representative Firm into the now familiar Equilibrium Firm. …