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Saturday, July 02, 2005

Alfred Marshall’s Ideological Defense of Capitalism

Alfred Marshall's theory of the firm led him to the belief that, in general, large-scale firms are more efficient.  But this created a problem for him because he also believed in the virtues of competition and large firms appeared inconsistent with the competitive model needed for markets to function properly.  To reconcile this, Marshall appealed to a long-run evolutionary view of nature and applied it to the business world. (There are bigger issues here that relate to the utilitarian foundations of the invisible hand and Marshall's beliefs, “Marshall did not realize that the utilitarian social ethic was utterly incompatible with an evolutionary approach to economic theory,” E.K. Hunt, History of Economic Thought, Wadsworth, pg. 283, but I'll let Brad DeLong cover the consistency of various social philosophies with utilitarianism - see here, here, and here - Marshall's philosophy discriminates among pleasures and thus contradicts the intellectual foundations of utlitarianism). This quote from Alfred Marshall (1842-1924), Principles of Economics, Book IV, Chapter VIII (1890) illustrates his evolutionary defense of capitalism:

But here we may read a lesson from the young trees of the forest as they struggle upwards through the benumbing shade of their older rivals. Many succumb on the way, and a few only survive; those few become stronger with every year, they get a larger share of light and air with every increase of their height, and at last in their turn they tower above their neighbours, and seem as though they would grow on for ever, and for ever become stronger as they grow. But they do not. One tree will last longer in full vigour and attain a greater size than another; but sooner or later age tells on them all. Though the taller ones have a better access to light and air than their rivals, they gradually lose vitality; and one after another they give place to others, which, though of less material strength, have on their side the vigour of youth.  And as with the growth of trees, so was it with the growth of businesses as a general rule before the great recent development of vast joint-stock companies, which often stagnate, but do not readily die. Now that rule is far from universal, but it still holds in many industries and trades. Nature still presses on the private business by limiting the length of the life of its original founders, and by limiting even more narrowly that part of their lives in which their faculties retain full vigour.

Competition will eventually topple even the tallest tree.  Marshall came to mind as I read this article from the NY Times:

The Next Heavyweight Champion of Banks, by Julie Creswell, NY Times:  This is a tale of two really, really big banks.  Both are heavyweights in financial services with trillions of dollars in assets and billions in market capitalizations. Both offer a cornucopia of products and services to consumers and large corporate customers. Both have exhibited voracious appetites in recent years, gobbling up competitors to establish themselves as megabanks with coast-to-coast and even international reach.  On the surface, the two financial giants, Citigroup and Bank of America, have business models that appear to be very similar. But there are significant differences. While Citigroup chased after the higher-fee businesses from corporations in the late 1990's, Bank of America focused on the more staid, boring business of serving retail customers.  That bet seems to have paid off. ... While it is still the nation's largest bank with $1.48 trillion in assets and a $240 billion market value, Citigroup these days seems stuck. ... Bank of America, from its base in North Carolina, is acting like the Citigroup of old. ... Some on Wall Street are fascinated by the role reversal. "Citigroup has been so traumatized by the events of the last five years that it is no more the wild-eyed risk taker," said Richard X. Bove, an analyst at Punk Ziegel & Company. "We're seeing one company shrink while the other expands. It's only a matter of time before Bank of America is bigger than Citigroup." ...

I can remember when people worried about IBM taking over the business world, "People in ... business would talk of "IBM and the seven dwarfs" ... IBM's success in the mid-1960s led to inquiries as to IBM antitrust violations by the U.S. Department of Justice, which filed a complaint ... in ... 1969."  Was Marshall right?  My own view follows Keynes, "In the long-run we're all dead," and I would prefer more vigilance against market power in the short-run than is currently in vogue among regulators.

    Posted by on Saturday, July 2, 2005 at 02:34 AM in Economics, History of Thought | Permalink  TrackBack (0)  Comments (4)


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