MARSHALL AND ECONOMIC POLICY
By his own account, Marshall was originally attracted to the serious study of economics by a desire to understand the causes of poverty and the means by which it could be alleviated.
He emerged from his investigations convinced that:the social and economic forces already at work are changing the distribution of wealth for the better: that they are persistent and increasing in strength; and that their influence is for the greater part cumulative; that the socio-economic organism is more delicate and complex than at first sight appears; and that large ill-considered changes might result in grave disaster.26
His sympathy for the sufferings of the mass of humanity had by no means diminished. But these impulses were now substantially tempered by the belief that radical measures to alter the existing economic order would be unwise. In particular, he opposed a socialistic programme on the grounds that:
the collective ownership of the means of production would deaden the energies of mankind, and arrest economic progress; unless before its introduction the whole people had acquired a power of unselfish devotion to the public good which is now relatively rare. And...
it might probably destroy much that is most beautiful and joyful in the private and domestic relations of life. These are the main reasons which cause patient students of economics generally to anticipate little good and much evil from schemes for sudden and violent reorganization of the economic, social and political conditions of life.27
While the market system as portrayed by Marshall was largely benevolent, his analysis also demonstrated that in certain situations unregulated markets could not be relied upon to yield socially desirable results. Prominent among the exceptions were the cases in which - for technical reasons - competition would prove to be wasteful and inefficient, if not a practical impossibility.
The 'natural monopolies' (a term which Marshall associated primarily with such public services as water supply, power generation, etc.) could not usefully be organized in accordance with the competitive plan and the case for government regulation (if not public ownership) in these instances was clear. He was reluctant, however, to recommend government intervention in those sectors of the economy in which increasing returns to scale threatened to produce industrial concentrations, even though these circumstances implied that individual firms could enjoy considerable market power and that prices would not be competitively determined. This problem, he contended, deserved continuing study. His general position on the life cycle of firms led him to the conclusion that the potential market power of large business units was unlikely to be abused for long.Though he was disposed to view the market as a sensitive instrument through which an economy's resources could be efficiently allocated, he also recognized that its performance could be improved. For this purpose, improvements in public education were particularly important. Consumers and producers could then conduct their affairs more intelligently by enhancing the rationality of their choices. Moreover, improved economic education would do much to eradicate one of the blights of an unregulated market system - the bouts of speculation which gave rise to harmful fluctuations.
Marshall was also prepared to entertain the possibility that governments could play a useful role in improving the allocative efficiency of markets. Would not the sum of social satisfactions be increased, he asked, if the productive resources of society were shifted in favour of lines of production subject to increasing returns and away from those in which decreasing returns prevailed? Greater outputs could then be obtained from the existing stock of resources. Governments could encourage a re-allocation of resources along these lines through appropriate taxes and subsidies.
He advanced this suggestion, however, with the utmost caution, pointing out that such policies could be justified only when it could be shown that the gains in satisfactions arising from expanded outputs in the subsidized sectors more than offset the losses in utility associated with higher tax levies on others. He recognized that this criterion would be difficult to apply to practical cases.Conceivably the introduction of maximization of aggregate utility as a goal of public policy could also be used to support recommendations for a redistribution of income. If it could be assumed that the marginal utility of money was likely to be greater for a poor man than for a rich one, it followed that society's aggregate satisfactions would be enlarged through a redistribution from rich to poor. Marshall did not draw this conclusion. He did
recommend a less systematic scheme of income redistribution for further study when he wrote of the possibilities of ‘economic chivalry'. Such a regime would tax the rich to ameliorate the distress of those still trapped in poverty.