What the U.S. and Sweden have in common is a pretty good environment for business, and they always have had that. That was the basic insight of Alfred Marshall.
S+B: So Marshall was the first person to completely grasp that idea, and systematize it in his Principles of Economics in 1890, which became the most influential book in the field for many decades.
NASAR: Right. Marshall’s idea was that it’s businesses that drive increases in productivity. Obviously, that’s not what stockholders or managers are thinking about, but from a social point of view, the purpose of corporations is to raise the standard of living by raising productivity. His corollary to that, which was a matter of great debate that has continued to this day, was that the productivity gains that business drove would be shared out to workers — that competition in the labor market would force businesses to share the gains — and that wages would thus rise over time. It’s since been substantiated by 100-plus years of empirical data. It’s still true today, as it was then, that the share of the national income that went to wages would not decline as some people, like Marx, believed, but would stay steady or rise, even as the national income grew.
S+B: What were some of the experiences that led Marshall to develop this line of thought?
NASAR: The first was his experiences with poverty. He grew up in a lower-middle-class household of very modest means, and when his father arranged for him to attend a private school, he had a long commute through some of London’s worst slums. After studying mathematics at Cambridge, he made the decision to study economics one day when he was on vacation and wound up walking through the appalling slums of Manchester, which existed within a few hundred yards of luxurious neighborhoods. He began to question whether poverty was a necessity of nature, which is what had been believed by earlier economists — including many who were very liberal in a political sense, like John Stuart Mill, who was a socialist at the end of his career. Marshall felt that humanity could work its way out of what was then almost universal poverty, and he decided to understand why it existed, and how things could change.
Learning from Business
S+B: And one of the ways he did that was by actually spending time visiting factories and learning about business.
NASAR: Marshall spent his summers traveling to factory towns and interviewing businessmen, along with his wife and partner [Mary Paley Marshall], who was one of the first women to be educated in economics at Cambridge. He spent hours observing, recording manufacturing techniques, pay scales, and workplace layouts. He questioned everyone, from the company owners to the workers on the shop floor. He knew many businessmen and trade union leaders. He knew a lot about technology. Marshall felt that he needed this knowledge to inform his scholarly work. In fact, he could have written his theoretical insights 20 years before he produced his great work, Principles of Economics, but he felt an obligation to assure himself that his ideas and assumptions were grounded in reality. He also understood that to persuade others that economics had something to say about the real world, he, the economist, had to understand it.
S+B: Which is in real contrast to Marx, who did none of those things.
NASAR: I don’t know that I’m the very first person to discover that Marx had never been in a factory at the time that he published Das Kapital, but it blew me away. In fact, he only ever visited one factory: a porcelain factory when he was at a spa in Czechoslovakia.