LECTURE 7. ANGLO-AMERICAN ECONOMIC SCHOOL

1. The theory of marginal productivity of J. Clark

In the theory of production costs of the Austrian school, within the framework of the concept of opportunity costs, the value of productive goods was equated to the value of the goods sacrificed to them, which bring immediate satisfaction. However, the question remained open as to what part of their value should be attributed to one or another factor of production. A similar problem arises if we adhere to the concept of not subjective, but objective costs in the version given by the French economist J. B. Say. Let me remind you that Say’s view is that all factors of production (labor, capital, land) participate equally in the process of creating value and receive their share of the created product. But even here the question remains unresolved: how the share of this factor in the cost of the created product is determined. An answer to this question was given only at the end of the nineteenth century by the American economist J.B. Clark (1847-1938) in his work “The Distribution of Wealth” (1899). Taking Say's theory of "three factors of production" as a basis, Clark also relied on the works of D. Ricardo and T. Malthus in his main postulates. He extended the law of “diminishing soil fertility” they formulated to all other factors of production, formulating in general terms the law of “diminishing marginal productivity.” The law states that in conditions where, although one factor of production remains unchanged, an additional increase in other factors gives a smaller and smaller increase in production. In other words, the marginal product of a variable factor is constantly decreasing.

In determining the size of the contribution of a factor of production to the created product, and, accordingly, the share of remuneration of each factor, Clark borrowed the principle that Ricardo applied in his theory of land rent. It was here that Ricardo first used the principle of marginal increments to illustrate that a fixed factor (in this case, land) gets a residual profit determined by the difference between the average and marginal product of a variable factor.

Using the foregoing propositions, Clarke attempted to determine precisely the proportions that could be attributed to the specific productivity of labor and capital. Why did Clark focus on these factors of production? This will become clear if we quote from his work. “The right of society to exist in its present form,” writes Clark, “is disputed. The accusation weighing on society is that it exploits labor. If this accusation were proven, then every honest person would have to become a socialist. It is the duty of every economist to test this accusation." And Clark does create a version of the theory where the exploitation of labor by capital is called into question.

In Clark's theory, each factor of production is characterized by a specific productivity and generates income, and each owner receives his share of the income, which is created by the factor belonging to him.

Based on the law of diminishing marginal productivity, Clark concludes that with the same amount of capital, each additional worker produces less output than the previously accepted one. The productivity of the last worker is called the marginal productivity of labor. According to Clark, only the product that is created by the marginal worker can be attributed to labor and considered the product of labor, while the rest of the output, that is, the difference between the "product of industry" and the "product of labor" is a product of capital.

Fundamental to Clarke's theory is the assertion that marginal product in monetary form determines the fair, natural level of income paid to each factor of production. The natural, fair wage rate of the workers in our example will be the price of the marginal product produced by the last worker, that is, the price of eight units of output. If we accept Clarke's assumption that wages are determined by the marginal productivity of labor, that is, the marginal productivity of the last worker, then it is easy to explain the extremely low wages in developing countries, because in conditions of an excess supply of labor in relation to the total capital of society, the marginal product of the last unit of social labor will tend to the minimum. However, Clark extends the statement about the reward of a factor in accordance with the value of its marginal product to other factors of production. In particular, in his theory, the value of interest as a product of capital is determined by the unit of capital that gives the smallest increase in production. Ceteris paribus, under conditions of diminishing marginal productivity, the greater the value of the total capital of the company, the lower the interest rate. Thus both the capitalist and the worker are victims of "natural laws", namely the law of diminishing marginal productivity. According to Clarke, if there are no barriers to competition, wages, interest, and rent will be the prices of factors of production that are equal in magnitude to their marginal product, or their marginal productivity. It is interesting to note that in Clark's model of pricing for factors of production, for the first time after the classics of political economy, the process of production and distribution have a single basis - the marginal product of factors.

Since its publication, Clarke's theory has been criticized on several fronts. First, the postulate of a fair distribution of income based on the marginal productivity of production factors is questioned. Let me remind you that Clark himself considered the theory of marginal productivity as a mechanism that provides each production factor with an income that meets the requirements not only of "efficiency", but also of "fairness". Of course, it must be borne in mind that Clark developed this theory in relation to the conditions of perfect competition, perfect foresight, and absolute mobility of factors of production. But even under these conditions, the results of market mechanisms can hardly be considered fair. If a factor is relatively scarce, it will result in a high price for it, and there is no reason to believe that this efficiency-driven price will meet our notions of fairness. Secondly, the theory of marginal productivity can hardly be called a theory of distribution, since a true theory of distribution should tell us about the distribution of income in society. The theory of marginal productivity is more of a theory of the pricing of factors of production. But even here it is not a pricing theory in the full sense of the word, since it does not affect the supply in the respective markets at all. To get out of this difficulty, it is necessary to accept the assumption of perfect inelasticity, the predetermined volumes of factors of production.

In connection with the foregoing, we must conclude that the theory of marginal productivity is nothing more than a theory of the formation of demand prices for factors of production. This is precisely the modern status of the theory of marginal productivity, and it is in this form that it entered the theory of the behavior of the firm. We already know that a perfectly competitive firm maximizes profit by equating marginal cost with price. Profit maximization implies cost minimization, and the latter is tantamount to rewarding the factors of production in accordance with their marginal productivity. If a perfectly competitive firm follows the weighted margin rule, it will hire just enough labor to equalize the monetary marginal product of labor at the established wage rate. As you can see, in the modern interpretation, Clarke's theory no longer claims to justify the fairness of the distribution of the created product, but is considered as a model of the pattern of income generation under conditions of production optimization and reflecting the movement of prices for production factors in the real conditions of a market economy.

As for the applicability of the theory of marginal productivity at the macroeconomic level, it must be said that models of production functions were subsequently created on the basis of this theory. The most famous is the Cobb-Douglas function, named after the American economist Douglas and the mathematician Cobb, developed by them in 1928 based on the ratio of the dynamics of the physical volume of the gross product, the amount of capital and the number of man-hours worked by workers and employees of the US manufacturing industry. This function has the following form:

where К - the amount of capital (used means of production);

L - the amount of labor;

a - power exponents, which show how many percent the gross product will increase if the amount of capital and labor are increased by 1%, respectively, each time leaving the amount of the other factor fixed;

А - coefficient of proportionality; it can also be interpreted as a value that takes into account all the qualitative factors of production that are not expressed in quantities of capital and labor.

As a result of calculations (for the period under review), the function took the form:

in other words, a 1% increase in labor input expands output three times as much as a 1% increase in capital. Subsequently, the coefficients "a" and "b" began to be interpreted as natural, fair indicators of the distribution of national income.

2. Economic views of A. Marshall

A. Marshall (1842-1924), Englishman, founder of the Cambridge school in political economy, whose name is associated with the formation of the neoclassical trend in economic theory. In 1890, he published the work “Principles of Political Economy,” which formed the basis of economic education until the 40s of the twentieth century. The long-lasting and powerful impact of A. Marshall's work is partly associated with the compromise unification in his theory of views of both representatives of classical political economy in the person of Smith and Ricardo, and representatives of the marginalist movement, in particular, the “Austrian school”. Paying tribute to classical political economy, Marshall recognizes that the subject of economics is wealth. But if Smith and Ricardo analyzed the nature of a nation’s wealth and the sources of its increase, Marshall is interested in wealth and money primarily because, in his opinion, they serve as the only suitable means for measuring the motives of human activity. He writes that “... the most stable incentive for economic activity is the desire to receive payment for it. It can then be spent on selfish or altruistic, noble or base purposes, and here the versatility of human nature is manifested. However, the incentive is a certain amount of money and therefore the main motives of economic activity can be indirectly measured in money." Thus, in Marshall we see a transition from the study of macroeconomic problems to microeconomics, to the study of the motivations of human behavior, which constitutes one of the essential aspects of the “marginalist revolution.”

Polemicizing with the classics who believed that the wealth of a nation is created only in the sphere of material production and hence their recommendations to reduce the sphere of unproductive labor (the service sector), Marshall puts forward the thesis that a person cannot create material objects as such - he creates utility. Rehabilitating unproductive labor, Marshall insists that there is no difference between productive and unproductive labor, between the work of a trader and a carpenter - the trader moves matter so that it is fit for use, the carpenter does the same. Thus both produce utilities.

It is not difficult to assume that the basis of Marshall's theoretical constructions is the law of saturable needs or the law of diminishing marginal utility. He formulates it as follows: "The total utility for a person (the totality of the pleasure or other benefit brought) increases with each increment of the good, but not at the same rate as this stock increases." This law formed the basis of his concept of pricing, perhaps the most famous part of Marshall's economic teachings. But the position that the price of a commodity is determined solely by its marginal utility has already been formulated by representatives of the "Austrian school". What is the novelty of Marshall's approach?

Marshall developed a theory of price in which he tried to reconcile the pricing concept of the classical and Austrian schools. As you know, in classical political economy there was a proposition about the natural and market price of a commodity, where the latter was explained by a temporary deviation from the natural price of a commodity under the influence of various random circumstances. The natural price, on the other hand, was determined by the costs of production and varied along with the natural rate of each of its constituent parts. According to the representatives of classical political economy, the natural price, as it were, was the central price to which the prices of all commodities constantly gravitate, and this price was determined in the long run by production costs.

Marshall also developed the theory of price, which was a symbiosis of production costs, marginal utility, supply and demand. It was Marshall who introduced the concepts of "demand price" and "supply price" into economic theory. "The price of demand", according to Marshall, is determined by the utility of the product, while he considers the utility itself as the maximum price that the buyer is willing to pay for the product. In other words, the demand function for a commodity depends on marginal utility, and the demand price is nothing but the monetary value of desire. As we can see, in contrast to the "Austrian school", Marshall connects the category of marginal utility only with the demand function. Developing the problem of demand, Marshall introduced the concept of "elasticity of demand". Under the elasticity of demand, he understands the functional dependence of demand on price changes. Marshall defines "elasticity" as the ratio between a change in the stock of goods available and a change in price. The demand for a good is elastic if it changes more than the price of the good. If the change in demand for a good occurs to a lesser extent than the change in price, demand will be inelastic. Analyzing various degrees of elasticity, Marshall introduces the concept of high elasticity, low elasticity, unit elasticity, indicating that the elasticity is large for high prices and disappears at the level of full saturation. It should be noted that the concept of "elasticity" later began to be used not only in the development of problems of price and demand, but also in the analysis of the relationship between price and supply of goods, interest and supply of capital, wages and labor supply, as well as in analyzing the effectiveness of the firm's pricing policy.

In the analysis of the "offer price" Marshall takes the position that the latter is determined solely by costs. However, unlike classical political economy, Marshall's costs are determined not by real costs, but by the amount of suffering that is caused by labor and abstention from the unproductive consumption of capital. This position is rooted in the views of the English economist Senior, whom we have already discussed above. Based on it, Marshall notes that both the worker and the entrepreneur make sacrifices in the production process. The victim on the part of the worker is the subjective negative emotions associated with labor efforts; the victim of the employer is the delayed pleasures of personal consumption or the need to wait for them. The emphasis on the psychological justification of production costs will become more understandable if we consider that this statement sounds in opposition to Marx, who considered the unpaid labor of workers to be the source of profit and interest. Marshall makes no secret of this when he writes that any attempt to defend the premise that interest is unpaid labor silently implies that the services rendered by capital are a free good. And if we assume that the commodity is only the product of labor, and not labor and waiting, then we will inevitably come to the logical conclusion that interest and remuneration for waiting have no justification.

From the above reasoning, Marshall concludes that the offer price must provide compensation for all negative sensations: wages - compensation for fatigue, interest - compensation for waiting, entrepreneurial income - payment for risk. This is the essence of Marshall's methodological approach to costing. With this approach, although the curve of increasing supply prices is determined by rising costs, the latter represent the subjective experiences of producers. At the same time, considering the mechanism of cost dynamics at the firm level, Marshall makes them dependent on changes in production volumes. He considers three possible models of cost dynamics. The first model considers industries where marginal cost (respectively, the supply price) does not depend on the volume of output. In these industries, the law of constant returns or the law of constant productivity operates. The second model considers industries in which the marginal cost of producing a unit of output decreases with an increase in output. This is the law of increasing returns or the law of increasing productivity. And, finally, the third model considers industries where, as they expand, there is an increase in marginal costs and, accordingly, supply prices. In this case, the law of diminishing returns or diminishing productivity applies. In the second and third versions, Marshall connects the bid price of firms with the volume of production and determines the marginal cost of production. Thus, the theory of price includes not only the psychological concept of production costs, but also a much more important in practical terms the provision on the dependence of the supply price on production volumes.

Having given a theoretical analysis of the "demand price" and "supply price", Marshall comes to the definition of the equilibrium price, which is the intersection point of the supply and demand curves (demand dynamics is determined by diminishing marginal utility, and supply dynamics is determined by increasing production costs). Within the framework of the Marshallian analysis, the question of what is the ultimate basis of prices - utility or costs - is removed. Both factors are equally important, and the argument about this is analogous, in Marshall's words, to the argument about "whether a piece of paper cuts the upper or lower blade of the scissors." However, if we introduce a time factor into the analysis of the equilibrium price (and Marshall was the first to do this) and analyze the situation of instantaneous, short-term and long-term equilibrium, then the impact of supply and demand on the equilibrium price will not be the same. Marshall analyzed these situations in detail, coming to the conclusion that in conditions of instantaneous equilibrium, the price is exclusively influenced by demand, in conditions of long-term equilibrium, the price is regulated by costs. In other words, the shorter the period under consideration, the more the influence of demand on the price should be taken into account in the analysis, and the longer this period, the greater the impact on the price of costs.

Analyzing the situation of instantaneous and short-term equilibrium, Marshall concludes that under these conditions, demand receives priority, because supply is more inertial and does not keep pace with the fluctuations of the first. This is understandable, since changing supply takes time to build additional production capacity. In this time period, an increase in demand leads to an increase in prices. Under these conditions, the entrepreneur receives temporary additional income (quasi-rent, as defined by Marshall), which is the difference between the new, higher price of the product and production costs. However, it is temporary, since the high additional income attracts new producers, as a result of which the supply increases, the price falls, and in the long run the quasi-rent disappears.

It should be noted that the “Principles of Political Economy” analyzes spontaneous price regulation in conditions of free competition. At the same time, during the period Marshall was writing his work, production monopolies were rapidly developing, and he, naturally, could not ignore the problem of monopoly and its impact on pricing processes. In this matter, Marshall relied on the theoretical heritage of the French economist A. Cournot (1801-1877), who back in 1838, in his work “A Study of the Mathematical Principles of Wealth,” explored the problem of setting prices under monopoly conditions. Cournot, using a mathematical model, examined pricing for the case when one firm concentrates the production and supply of a product and showed that such a firm sets a price significantly higher than that which, under the same production conditions, would be established in the presence of competitors. Cournot explained the excess of the monopoly price over the competitive one by the fact that the increase in the first price meets only a single limitation in the form of demand, while the increase in the second price has another limitation in the form of the price policy of competitors.

Marshall also allows that the monopoly will limit the volume of production of a good, looking for such a volume at a price level that will provide it with the maximum discrepancy between gross receipts and gross costs. The monopolist will lose all his monopoly income if he produces such a large quantity that his supply price equals his demand price; the amount that will provide the maximum monopoly income is always much less than this. However, Marshall considers monopoly as a special case against the general background of unlimited competition, in which pricing patterns remain dominant. In other words, Marshall's theory is a theory of prices under competitive conditions.

When talking about other aspects of Marshall's theory of pricing, it is important to mention the “consumer rent” that Marshall introduced into his theory of demand. This rent represents the excess of the total utility of the goods purchased over the amount of money actually paid for them, that is, the difference between what buyers are willing to pay and the actual price of the goods. Marshall defined this kind of consumer surplus as "...the surplus over and above the price actually paid by the consumer, which he would rather pay than be left without the thing." Marshall gives the following example: a box of matches costs 1 pence, but it is so expensive for a smoker that he is willing to pay much more for the pleasure of smoking immediately. The difference between what a smoker is willing to pay for matches and the penny he actually pays is, according to Marshall, the gain or “consumer rent.”

Marshall formulates not only the law of diminishing marginal utility, but also the law of diminishing marginal productivity, considering it as a theory of demand for factors of production, in particular arguing that wages tend to be equal to the net product of labor. At the same time, paying tribute to classical political economy, he writes that at the same time, wages tend to be in a close, albeit very complex relationship with the costs of reproduction, training and maintenance of productive workers. As for the supply of labor, here Marshall shares the concept of W. Jevons (1835-1882), who is considered the founder of the English version of the theory of marginal utility. Let me remind you that the essence of Jevons' concept is that human effort has a positive value, and work will be offered as long as a person feels an excess of satisfaction over dissatisfaction. It is the hardships of labor, according to both Jevons and Marshall, that control the supply of productive effort. It is interesting to note that Marshall extends Gossen's second law to the production process, where he views the distribution of investments among alternative possibilities as an illustration of the equality of the ratios of marginal utilities to prices.

In general, Marshall's work made a significant contribution not only to the development of the theory of equilibrium price, but also to the study of the theory of interest, profit and rent. In particular, Marshall attributes profit to the fourth factor of production - the organization, and includes it in the normal supply price, in contrast to quasi-rent. In the theory of interest, he considers it from the side of supply and demand of capital, where the rate of interest on the side of the supply of capital depends on the preference of present goods over the future, and on the side of the demand for capital - on its productivity.

Author: Agapova I. I.

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