Alfred Marshall and Economic Theory / by Todd Yarbrough

I am in the process of rereading Alfred Marshall's treatise "Principles of Economics" and was struck by how wonderful the Preface is. It's full of the nuance that many claim to be absent from economic theory, including among economists. At the core of the main criticism of economic theory is that models are made to be perfect representations of the economic and rational behavior that forms and maintains markets.

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Notably, the Theory of Supply and Demand suffers criticism because it cannot possibly capture all the nuance and complexity of actual markets. And yes, of course that is true. What is not true is the idea that economists don't understand this point. To illustrate what I mean, here are some passages from the Preface of 'Principles':

Not only does Marshall discuss the idea of economists penchant for creating ideal models that create preferred outcomes, but he also suggests that economic theory's goal isn't to try to explain every nuance. Altruism exists, in Marshall's eyes, and we can consider such a normal human incentive along side other selfish wants. 

In this next passage he directly criticizes the notion of shared equal value. He even sets economics up to consider non-market values --environmental amenities, leisure, etc-- by suggesting that such non-market values, what he calls occasional values, blend with market and normal values in economic markets. 

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One particularly sticky wicket in supply and demand theory is that it cannot, beyond shifting curves, to consider time. Supply and demand is a non-dynamic theory, and Marshall is very clearly making the argument to distinguish between the short and long-run, where so many economic theories behave differently. 

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One of the most common criticisms of supply and demand theory is it's reliance upon math. Now, since Marshall's time economics has become even more mathy and has at times shouldered much criticism because of it. Again, Marshall seems to have a keen eye for pointing out what would become general reservations folks would have with supply and demand theory. 

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It is crucially important for economists to be our most voracious critics. We should take from Marshall a willingness to be introspective about the theories that we throw around. Nevertheless, I believe it is a lasting tradition for economists to do this, as evidenced by Marshall, writing in what would become perhaps the most influential economics book of the Industrial Revolution.