Price Theory Pioneer

His textbook Principles of Economics (1890), and the doctrines that it discussed, became the standard for the teaching of that subject until well into the 1940"s. Marshall spent most of his adult life as a professor of economics at Cambridge University. His most famous pupil, John Maynard Keynes, described Marshall as «the greatest economist of the 19th century.» Interestingly, Keynes went on to become the most influential economist of the 20^th century.

Marshall is best known for the order that he made out of the theories of the earlier «classical economists» like Adam Smith, David Ricardo and John Stuart Mill. («Classical» is the name given by modern economists to the theories of those whose views were most widely held during the 75 years following the publication of The Wealth of Nations.) Despite the passage of 100 years since the publication of his Principles, his analysis of market forces is still relied upon to explain economic events.

In Marshall's world, economic events could be explained in terms of the equilibrium market price resulting from the interaction of supply and demand. One of Marshall's lasting contributions was differentiating between supply and demand in the short run and the long run. Comparing the two forces to the blades of a scissors, he argued that neither could function without the other. But, just as (depending on how the scissors is held) one blade can be more active than the other, so supply and demand vary in importance in the long and short run. In the short run, the quantity of available goods is more or less fixed (because crops have been planted, production schedules set, etc.). Therefore it is the demand for those items that will be most influential in determining their price. In the long run, he went on, the opposite is true. Both farmers and businesses can add to or reduce their production facilities as the needs dictate. In that way the supply side of the market becomes most influential in determining price.

TEXT 16: JOHN MAYNARD KEYNES (1883-1946)

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