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Marshall on Marx and the Labor Theory of Value
This practical conclusion [that interest on capital oppresses the working classes] has been supported by other arguments which will claim our attention; but at present we are only concerned with the doctrine that has been used by William Thompson, Rodbertus, Karl Marx, and others in support of it. They argued that labour always produces a “Surplus” above its wages and the wear-and-tear of capital used in aiding it: and that the wrong done to labour lies in the exploitation of this surplus by others. But this assumption that the whole of this Surplus is the produce of labour, already takes for granted what they ultimately profess to prove by it; they make no attempt to prove it; and it is not true. It is not true that the spinning of yarn in a factory, after allowance has been made for the wear-and-tear of the machinery, is the product of the labour of the operatives. It is the product of their labour, together with that of the employer and subordinate managers, and of the capital employed; and that capital itself is the product of labour and waiting: and therefore the spinning is the product of labour of many kinds, and of waiting. If we admit that it is the product of labour alone, and not of labour and waiting, we can no doubt be compelled by inexorable logic to admit that there is no justification for Interest, the reward of waiting; for the conclusion is implied in the premiss. Rodbertus and Marx do indeed boldly claim the authority of Ricardo for their premiss; but it is really as opposed to his explicit statement and the general tenor of his theory of value, as it is to common sense.
To put the same thing in other words; if it be true that the postponement of gratifications involves in general a sacrifice on the part of him who postpones, just as additional effort does on the part of him who labours; and if it be true that this postponement enables man to use methods of production of which the first cost is great; but by which the aggregate of enjoyment is increased, as certainly as it would be by an increase of labour; then it cannot be true that the value of a thing depends simply on the amount of labour spent on it. Every attempt to establish this premiss has necessarily assumed implicitly that the service performed by capital is a “free” good, rendered without sacrifice, and therefore needing no interest as a reward to induce its continuance; and this is the very conclusion which the premiss is wanted to prove. The strength of Rodbertus’ and Marx’s sympathies with suffering must always claim our respect: but what they regarded as the scientific foundation of their practical proposals appears to be little more than a series of arguments in a circle to the effect that there is no economic justification for interest, while that result has been all along latent in their premisses; though, in the case of Marx, it was shrouded by mysterious Hegelian phrases, with which he “coquetted,” as he tells us in his Preface.
— Marshall - Principles of Economics (8th Ed.), book VI, ch. 6, §3
"Ricardo’s theory of cost of production in relation to value occupies so important a place in the history of economics that any misunderstanding as to its real character must necessarily be very mischievous; and unfortunately it is so expressed as almost to invite misunderstanding. In consequence there is a widely spread belief that it has needed to be reconstructed by the present generation of economists. Cause is shown in Appendix I for not accepting this opinion; and for holding on the contrary that the foundations of the theory as they were left by Ricardo remain intact; that much has been added to them, and that very much has been built upon them, but that little has been taken from them. It is there argued that he knew that demand played an essential part in governing value, but that he regarded its action as less obscure than that of cost of production, and therefore passed it lightly over in the notes which he made for the use of his friends, and himself; for he never essayed to write a formal treatise: also that he regarded cost of production as dependent—not as Marx asserted him to have done on the mere quantity of labour used up in production, but—on the quality as well as quantity of that labour; together with the amount of stored up capital needed to aid labour, and the length of time during which such aid was invoked."
Marshall - Principles of Economics (8th Ed.), book V, ch. 15, §5
A summary of Marshall’s interpretation of Ricardo.
Marshall on some technical details of increasing returns to scale
This leads to the consideration of some difficulties of a technical character connected with the marginal expenses of production of a commodity that obeys the law of increasing return. The difficulties arise from the temptation to represent supply price as dependent on the amount produced, without allowing for the length of time that is necessarily occupied by each individual business in extending its internal, and still more its external organization; and in consequence they have been most conspicuous in mathematical and semi-mathematical discussions of the theory of value. For when changes of supply price and amount produced are regarded as dependent exclusively on one another without any reference to gradual growth, it appears reasonable to argue that the marginal supply price for each individual producer is the addition to his aggregate expenses of production made by producing his last element; that this marginal price is likely in many cases to be diminished by an increase in his output much more than the demand price in the general market would be by the same cause.
The statical theory of equilibrium is therefore not wholly applicable to commodities which obey the law of increasing return.
"So far it has been assumed that the monopolist can buy and sell freely. But in fact monopolistic combinations in one branch of industry foster the growth of monopolistic combinations in those which have occasion to buy from or sell to it: and the conflicts and alliances between such associations play a rôle of ever increasing importance in modern economics. Abstract reasoning of a general character has little to say on the subject. If two absolute monopolies are complementary, so that neither can turn its products to any good account, without the other’s aid, there is no means of determining where the price of the ultimate product will be fixed. Thus if we supposed, following Cournot’s lead, that copper and zinc were each of them useless except when combined to make brass: and if we supposed that one man, A, owned all the available sources of supply of copper; while another, B, owned all those of zinc; there would then be no means of determining beforehand what amount of brass would be produced, nor therefore the price at which it could be sold. Each would try to get the better of the other in bargaining; and though the issue of the contest would greatly affect the purchasers, they would not be able to influence it."
Marshall - Principles of Economics (8th Ed.), book V, ch. 14, §9
To anyone who’s interested, there’s a conference next week at Pompeu Fabra University (in Barcelona, Catalonia) entitled “The Sraffian Program: Approach, Achievements and Prospects.” As far as I can tell, the lecture itself will be in Spanish. Their website is here, & you can download a copy of the lecture here.
Marshall on quasi-rent
Thus the rate of interest is a ratio: and the two things which it connects are both sums of money. So long as capital is “free,” and the sum of money or general purchasing power over which it gives command is known, the net money income, expected to be derived from it, can be represented at once as bearing a given ratio (four or five or ten per cent.) to that sum. But when the free capital has been invested in a particular thing, its money value cannot as a rule be ascertained except by capitalizing the net income which it will yield: and therefore the causes which govern it are likely to be akin in a greater or less degree to those which govern rents.
We are thus brought to the central doctrine of this part of economics, viz.:—”That which is rightly regarded as interest on ‘free’ or ‘floating’ capital, or on new investments of capital, is more properly treated as a sort of rent—a Quasi-rent—on old investments of capital. And there is no sharp line of division between floating capital and that which has been ‘sunk’ for a special branch of production, nor between new and old investments of capital; each group shades into the other gradually. And thus even the rent of land is seen, not as a thing by itself, but as the leading species of a large genus; though indeed it has peculiarities of its own which are of vital importance from the point of view of theory as well as of practice.”
— Marshall - Principles of Economics (8th Ed.), book V, ch. 8, §1
He spends a large portion of the next chapter talking about similar difficulties in drawing a line between different economic concepts. In ch. 9, §3 he notes:
Biology tends to show that the animal and vegetable kingdoms have a common origin. But yet there are fundamental differences between mammals and trees; while in a narrower sense the differences between an oak tree and an apple tree are fundamental; and so are in a still narrower sense those between an apple tree and a rose bush, though they are both classed as rosaceæ. Thus our central doctrine is that interest on free capital and quasi-rent on an old investment of capital shade into one another gradually; even the rent of land being not a thing by itself, but the leading species of a large genus.
"The part played by the net product at the margin of production in the modern doctrine of Distribution is apt to be misunderstood. In particular many able writers have supposed that it represents the marginal use of a thing as governing the value of the whole. It is not so; the doctrine says we must go to the margin to study the action of those forces which govern the value of the whole: and that is a very different affair."
Marshall - Principles of Economics (8th Ed.), book V, ch. 8, §5
"This principle of substitution is closely connected with, and is indeed partly based on, that tendency to a diminishing rate of return from any excessive application of resources or of energies in any given direction, which is in accordance with general experience. It is thus linked up with the broad tendency of a diminishing return to increased applications of capital and labour to land in old countries which plays a prominent part in classical economics. And it is so closely akin to the principle of the diminution of marginal utility that results in general from increased expenditure, that some applications of the two principles are almost identical."
Marshall - Principles of Economics (8th Ed.), book V, ch. 4, §4
Marshall trying to connect his work to classical political economy.
He defines ‘principle of substitution’ in these terms (ch. 3, §3):
As far as the knowledge and business enterprise of the producers reach, they in each case choose those factors of production which are best for their purpose; the sum of the supply prices of those factors which are used is, as a rule, less than the sum of the supply prices of any other set of factors which could be substituted for them; and whenever it appears to the producers that this is not the case, they will, as a rule, set to work to substitute the less expensive method.
He illustrates this more concisely later on (ch. 4, §3):
[T]he alert business man strives so to modify his arrangements as to obtain better results with a given expenditure, or equal results with a less expenditure.
