Alfred Marshall and the Growth of Wealth: A Short Microeconomic Analysis of Wealth Accumulation

Alfred Marshall was a pioneer in economics, even by today’s standards. In 1890 he published Principles of Economics which, compiled from years of study and contemplation, proved to be his magnum opus on economic thought. The work was so fastidiously compiled that it served as a standard in which all economic thought over the next century would respectfully consider. This essay will delve into the concept and history of the growth in wealth. A brief outline of Marshall’s descriptive analysis of wealth accumulation will provide a basic framework that can be used for comparing Marshall’s thoughts to that of other economists.

In chapter seven of his Principles of Economics: 8e Marshall showed how growth of wealth is achieved by providing a story within the historical context of progress. He begins by outlining the various stages of development by primitive civilizations and communities. These stages were marked by changes in population increase and technological progress which impacted which resources were held in value and esteem.

Marshall articulated different types of capital and how they were employed to earn wages, income, and the like. For Marshall (2009) the first resources of value were cultivated land, followed by real estate, livestock, and machinery such as boats and ships (183). Only later did auxiliary forms of capital such as furniture goods and appliances become a measure of wealth (184). Contemporary economists today differentiate these resources into various capital assets.

Vital to Marshall’s growth of wealth theory was the role of capital money savings. Marshall delineated various incentives that lead in an increase in savings. These include security as a chief incentive, particularly with regards to family affection; individuals accumulate stores of wealth for their family’s future. But drawbacks in early banking prevented this savings from occurring and until secure banks become a reliable means of accumulating monetary capital, many people spent all their money in fear of thievery or other misfortune. However, once secure banks appear, people began saving as a means of planning for future expenditures. To quote Marshall (2009) “The habit of distinctly realizing the future and providing for it has developed itself slowly and fitfully in the course of man’s history” (186). Marshall also pointed out that those who have no faculty of business can achieve wealth through saving.

The idea of planning for the future according to expectations and speculation has been retained throughout economic thought. Today this type of planning can be seen in forecasting stocks and bonds, as well as commodity futures. In 1960 economist Thomas Sargent (2008) proposed a derivation of this idea with his theory rational expectations. In sum the theory states that an individual’s beliefs about expectations are thought to be in line with the outcomes. The hidden premise of this theory is that people behave in ways so as to maximize utility or profits.

The appetite for wealth sometimes proved a hindrance to saving and growth of wealth. Marshall (2009) indicated that extravagant lifestyles meant paying more goods which caused a decrease in the proportion of money left to save.(188) Today the same holds true. Extravagant living now includes tastes and preferences for luxury goods that maintain a premium. However, Marshall reserved these types of lifestyles for those who were already wealthy.

Marshall (2009) indicated that savings is achieved as income increasingly exceeds subsistence level: excess income over necessary expenditure. For Marshall (2009), this is how wealth is accumulated, but the ways to go about accumulating wealth differ and vary among people place and time. (188-190)

Marshall (2009) was keen to see that human capital is a valuable commodity to be exchanged and noted that “older economists took too little account of the fact that human faculties are as important a means of production as any other kind of capital…” (191). As a result, increasing human capital through skill acquisition or education was a means of increasing income (191). For modern economists this is especially relevant, especially considering the division of labor on a global market. Human capital is a valuably traded resource that can provide a great deal of monetary gain.

Besides simply decreasing subsistence through abstinence or increasing income through developing human capital, there are various other sources from which an individual can secure wealth. Marshall goes on to discuss the role of real estate in wealth accumulation (191). By securing land and developing property, an individual could expect to increase property value and wealth.

Marshall (2009) then turns to the relations of gratification. He referred to interest rates as a reward for delayed gratification, or a reward for waiting. For Marshall (2009), interest rates offset the sacrifice because of the prospect of greater gain in the future (194). He notes that a higher interest rate generally corresponds to a higher rate of savings, but that there are exceptions, notably the Sargant effect (195). Higher interest rates result in easier wealth accumulation and earlier retirement, but Marshall mentions that the economist Sargant points out that there is decreased saving and more spending. On the other hand, lower rates cause individuals to save more and work longer thereby improving upon society and their family’s future. In this way Marshall says that a fall in interest “check the accumulation of wealth” (195). Ideally there is a point that the interest is low enough so that people do not spend their wealth indiscriminately, and high enough to that saving is encouraging and profitable (196). Marshall provides a model where interest rates are a function of both savings and investment. Equilibrium is reached at this check point when interest rates resulted in savings and investment being equal.

In his analysis of rates of interest and savings Marshall (2009) emphasized his study dealt primarily with the supply side. As a result, Marshall failed to draw a connection between savings and income. Keynes (Blinder 2008) later developed a more lucid model that reflected savings as a function of income where Y= C + S, with the saving function being S = -a + (1-b) Yd. In this way a is necessary expenditure and (1-b) is the amount of savings per dollar spent. This model presents a more lucid reflection of consumption and savings with regards to income.

Marshall summarizes his chapter on the growth of wealth by emphasizing the complex nature of human behavior which includes all their various customs and habits, expectations and speculations about the future, and influences of family affection. Additionally there is the role of security and knowledge and intelligence which provides an important foundation for the accumulation of wealth. Lastly, Marshall elucidates the role of rates of interest offered for capital with interest rates acting as a function of saving. He pointed that interest rates accordingly correspond with the desire and power to save.

Marshall’s analysis of the growth of wealth was a comprehensive starting point for further economic reflection. The additional contributions of other economists dealt with integrating microeconomic decisions with macroeconomic influences.

Works Cited

Alan S. Blinder. “Keynesian Economics.” The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved April 7, 2011 from the World Wide Web: http://www.econlib.org/library/Enc/KeynesianEconomics.html
Alfred Marshall. “Principles of Economics: Unabridged Eigth Edition”. 2009. Cosimo Classics: NYC.
“John Maynard Keynes.”The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved April 7, 2011 from the World Wide Web: http://www.econlib.org/library/Enc/bios/Keynes.html
Thomas J. Sargent. “Rational Expectations.” The Concise Encyclopedia of Economics”. 2008. Library of Economics and Liberty. Retrieved April 7, 2011 from the World Wide Web: http://www.econlib.org/library/Enc/RationalExpectations.html