THE AGGREGATIVE STRAND OF MARSHALL'S THOUGHT

Though Marshall's attention was primarily directed to microeconomic problems, aggregative themes still occupied a place in his thought. In his view, the major microeconomic question was the determination of the general price level.

His analysis of the general price level was developed around a version of the 'quantity theory' of money. Much of the earlier discussion of this point of doctrine had proceeded from the tautological statement that the quantity of money multiplied by the number of times it was spent in a given time period (the velocity of circulation) would necessarily be equal to the average price level multiplied by the total number of transactions; this expression, after all,

amounted to no more than two ways of viewing total expenditure. Marshall modified this procedure by shifting the focus from the rate at which the money supply turned over to an examination of the money balances held by the community. In the hands of one of Marshall's pupils this way of viewing money was later to open up fresh analytical horizons. Marshall's own results from the use of this 'cash balance' approach however, were essentially no different from those that had been reached via the 'velocity of circulation' route. He maintained that the amount of money held was regulated by the institutional arrangements of the economy and, on ceteris paribus assumptions, could be treated as a constant. In his words:

... whatever the state of society, there is a certain volume of their resources which people of different classes taken one with another, care to keep in the form of currency; and, if everything else remains the same, then there is this direct relation between the volume of currency and the level of prices, that, if one is increased by ten per cent, the other also will be increased by ten per cent.21

The effect of this procedure was to reinforce the essential requirement of Say's Law: that all income would be spent.

This line of reasoning, while supporting a Say's Law interpretation of aggregative economic activity, did not preclude the possibility of economic instability. Though no disturbances of the scale experienced in the 1930s clouded the horizons of Marshall and his neo-classical contemporaries, they did observe modest cycles of boom and bust. How were these fluctuations to be explained? In Marshall's view the main answer was to be found in the psychology of the business community. Waves of optimism and pessimism seemed endemic to it. When business men were bullish the demand for loans increased.

The recent history of fluctuations of general credit shows much variety of detail, but a close uniformity of general outline. In the ascending phase, credit has been given somewhat boldly, and even to men whose business capacity has not been proved. For, at such times a man may gain a profit on nearly every transaction, even though he has brought no special knowledge or ability to bear on it; and his success may probably tempt others of like capacity with himself, to buy speculatively. If he is quick to get out of his ventures, he probably makes a profit. But his sales hasten a fall of prices, which must have come in the course of time. Though the fall is likely to be slight at first; yet each downward movement impairs the confidence which had caused the rise of prices, and is still giving them some support. The fall of a lighted match on some thing that smoulders has often started a disastrous panic in a crowded theatre.22

Credit cycles, however, were still incapable of converting ‘partial' over-production into ‘general' over-production. Given time, the economic system would adjust itself to its normal full employment level of operations. No special action on the part of government was required to accomplish this result and, indeed, direct government intervention might make matters worse. The tendency toward instability could, however, be moderated by anticipatory action on the part of the monetary authorities whose proper role was to minimize discrepancies between prevailing interest rates and the rate that would be established through the normal interplay of the supply of and demand for loanable funds.

The main thrust of Marshall's aggregative analysis thus buttressed faith in the capability of the economic system, if left alone, to eradicate involuntary idleness.

... every one understands generally the causes which have kept the supply of accumulated wealth so small relatively to the demand for its use, that that use is on balance a source of gain, and can therefore require payment when loaned. Everyone is aware that the accumulation of wealth is held in check, and the rate of interest so far sustained, by the preference which the great mass of humanity have for present over deferred gratifications, or, in other words, by their unwillingness to wait. And indeed the true work of economic analysis in this respect is, not to emphasize this familiar truth, but to point out how much more numerous are the exceptions to this general preference than would appear at first sight.23

He elaborated this point in a footnote with the words:

It is a good corrective of this error to note how small a modification of the conditions of our own world would be required to bring us to another in which the mass of the people would be so anxious to provide for old age and for their families after them, and in which the new openings for the advantageous use of accumulated wealth in any form were so small, that the amount of wealth for the safe custody of which people were willing to pay would

exceed that which others desired to borrow; and where in consequence even those who saw their way to make a gain out of the use of capital, would be able to exact a payment for taking charge of it; and interest would be negative all along the line.24

These heterodox afterthoughts did not mar the tranquillity of Marshall's grand design. They did foreshadow - far more than Marshall himself could possibly have suspected - the assault on neo-classical aggregative premisses launched by Keynes in the 1930s.

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