in economics and political science

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Ineconomicsandpolitical science,fiscal policy is the use of government revenue collection(taxation) and expenditure (spending) to influence the economy.[1]The two main instruments offiscal policy are government taxation and changes in the level and composition of taxation andgovernment spending can affect the following variables in the economy:

Aggregate demandand the level of economic activity; The pattern of resource allocation; The distribution of income.

Fiscal policy refers to the use of the government budget to influence economic activity.

Stances of fiscal policy

The three main stances of fiscal policy are:

Neutral fiscal policy is usually undertaken when an economy is in equilibrium.

Government spendingis fully funded bytaxrevenueand overall the budget outcome hasa neutral effect on the level ofeconomic activity.

Expansionary fiscal policy involves government spending exceeding tax revenue, and isusually undertaken during recessions.

Contractionary fiscal policy occurs when government spending is lower than tax revenue,and is usually undertaken to pay down government debt.

However, these definitions can be misleading because, even with no changes in spending or taxlaws at all, cyclic fluctuations of the economy cause cyclic fluctuations of tax revenues and of

some types of government spending, altering the deficit situation; these are not considered to bepolicy changes. Therefore, for purposes of the above definitions, "government spending" and"tax revenue" are normally replaced by "cyclically adjusted government spending" and"cyclically adjusted tax revenue". Thus, for example, a government budget that is balanced overthe course of the business cycle is considered to represent a neutral fiscal policy stance.

Methods of funding

Governmentsspend moneyon a wide variety of things, from the military and police to serviceslike education and healthcare, as well astransfer paymentssuch as welfare benefits. Thisexpenditure can befundedin a number of different ways:

Taxation Seigniorage, the benefit from printingmoney Borrowingmoney from the population or from abroad Consumptionof fiscal reserves Saleof fixed assets (e.g.,land)

Borrowing
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A fiscal deficit is often funded by issuingbonds, liketreasury billsorconsolsandgilt-edgedsecurities. These pay interest, either for a fixed period or indefinitely. If the interest and capitalrequirements are too large, a nation maydefaulton its debts, usually to foreign creditors. Publicdebt or borrowing refers to the government borrowing from the public.

Consuming prior surpluses

A fiscal surplus is often saved for future use, and may be invested in either local currency or anyfinancial instrument that may be traded later once resources are needed; notice, additional debt isnot needed. For this to happen, the marginal propensity to save needs to be strictly positive.

Economic effects of fiscal policy

Governments use fiscal policy to influence the level of aggregate demand in the economy, in aneffort to achieve economic objectives of price stability, full employment, and economic growth.Keynesian economicssuggests that increasing government spending and decreasing tax rates are

the best ways to stimulateaggregate demand, and decreasing spending & increasing taxes afterthe economic boom begins. Keynesians argue this method be used in times of recession or loweconomic activity as an essential tool for building the framework for strong economic growthand working towards full employment. In theory, the resulting deficits would be paid for by anexpanded economy during the boom that would follow; this was the reasoning behind theNewDeal.

Governments can use abudget surplusto do two things: to slow the pace of strong economicgrowth, and to stabilize prices when inflation is too high. Keynesian theory posits that removingspending from the economy will reduce levels of aggregate demand and contract the economy,thus stabilizing prices.

Economistsdebate the effectiveness of fiscal stimulus. The argument mostly centers oncrowding out: whether government borrowing leads to higherinterest ratesthat may offset thestimulative impact of spending. When the government runs a budget deficit, funds will need tocome from public borrowing (the issue of government bonds), overseas borrowing, ormonetizingthe debt. When governments fund a deficit with the issuing of government bonds,interest rates can increase across the market, because government borrowing creates higherdemand for credit in the financial markets. This causes a lower aggregate demand for goods andservices, contrary to the objective of a fiscal stimulus. Neoclassical economists generallyemphasize crowding out while Keynesians argue that fiscal policy can still be effectiveespecially in aliquidity trapwhere, they argue, crowding out is minimal.

Someclassicalandneoclassical economistsargue that crowding out completely negates anyfiscal stimulus; this is known as theTreasury View[citation needed], which Keynesian economicsrejects. The Treasury View refers to the theoretical positions of classical economists in theBritish Treasury, who opposed Keynes' call in the 1930s for fiscal stimulus. The same generalargument has been repeated by some neoclassical economists up to the present.
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In the classical view, the expansionary fiscal policy also decreases net exports, which has amitigating effect on national output and income. When government borrowing increases interestrates it attracts foreign capital from foreign investors. This is because, all other things beingequal, the bonds issued from a country executing expansionary fiscal policy now offer a higherrate of return. In other words, companies wanting to finance projects must compete with their

government for capital so they offer higher rates of return. To purchase bonds originating from acertain country, foreign investors must obtain that country's currency. Therefore, when foreigncapital flows into the country undergoing fiscal expansion, demand for that country's currencyincreases. The increased demand causes that country's currency to appreciate. Once the currencyappreciates, goods originating from that country now cost more to foreigners than they didbefore and foreign goods now cost less than they did before. Consequently, exports decrease andimports increase.[2]

Other possible problems with fiscal stimulus include the time lag between the implementation ofthe policy and detectable effects in the economy, and inflationary effects driven by increaseddemand. In theory, fiscal stimulus does not cause inflation when it uses resources that would

have otherwise been idle. For instance, if a fiscal stimulus employs a worker who otherwisewould have been unemployed, there is no inflationary effect; however, if the stimulus employs aworker who otherwise would have had a job, the stimulus is increasing labor demand while laborsupply remains fixed, leading to wage inflation and therefore price inflation.

Fiscal straitjacket

The concept of a fiscal straitjacket is a general economic principle that suggests strict constraintson government spending and public sector borrowing, to limit or regulate the budget deficit overa time period. The term probably originated from the definition ofstraitjacket(anything thatseverely confines, constricts, or hinders).[3]Various states in theUnited Stateshave various

forms of self-imposed fiscal straitjackets.

Neoclassical economics is a term variously used for approaches toeconomicsfocusing on the

determination of prices, outputs, and incomedistributionsin markets throughsupply and demand,

often mediated through a hypothesized maximization ofutilityby income-constrained individuals and of

profitsby cost-constrained firms employing available information and factors of production, in

accordance withrational choice theory.[1]Neoclassical economics dominates microeconomics, and

together withKeynesian economicsforms theneoclassical synthesiswhich dominatesmainstream

economicstoday.[2]Although neoclassical economics has gained widespread acceptance by

contemporary economists, there have been many critiques of neoclassical economics, often

incorporated into newer versions of neoclassical theory as awareness of economic criteria changes.

The term was originally introduced byThorstein Veblenin 1900, in his article 'Preconceptions ofEconomic Science', to distinguishmarginalistsin the tradition ofAlfred Marshallfrom those intheAustrian School.[3][4]

"No attempt will here be made even to pass a verdict on the relative claims of the recognized twoor three main "schools" of theory, beyond the somewhat obvious finding that, for the purpose in
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hand, the so-called Austrian school is scarcely distinguishable from the neo-classical, unless it bein the different distribution of emphasis. The divergence between the modernized classicalviews, on the one hand, and the historical and Marxist schools, on the other hand, is wider, somuch so, indeed, as to bar out a consideration of the postulates of the latter under the same headof inquiry with the former." - Veblen[5]

It was later used byJohn Hicks,George Stigler, and others[6]to include the work ofCarl Menger,William Stanley Jevons,John Bates Clarkand many others.[3]Today it is usually used to refer tomainstream economics, although it has also been used as anumbrella termencompassing anumber of otherschools of thought,[7]notably excludinginstitutional economics, varioushistorical schools of economics, andMarxian economics, in addition to various otherheterodoxapproaches to economics.

Neoclassical economics is characterized by several assumptions common to manyschools ofeconomic thought. There is not a complete agreement on what is meant by neoclassicaleconomics, and the result is a wide range of neoclassical approaches to various problem areas

and domainsranging from neoclassical theories of labor to neoclassical theories ofdemographic changes. As expressed byE. Roy Weintraub, neoclassical economics rests on threeassumptions, although certain branches of neoclassical theory may have different approaches:[8]

1. People haverational preferencesamong outcomes that can be identified and associatedwith a value.

2. Individualsmaximize utilityand firmsmaximize profits.3. People act independently on the basis offull and relevant information.

From these three assumptions, neoclassical economists have built a structure to understand theallocation of scarce resources among alternative endsin fact understanding such allocation is

often considered the definition of economics to neoclassical theorists. Here's howWilliamStanley Jevonspresented "the problem of Economics".

"Given, a certain population, with various needs and powers of production, in possession ofcertain lands and other sources of material: required, the mode of employing their labour whichwill maximize the utility of their produce."[9]

From the basic assumptions of neoclassical economics comes a wide range of theories aboutvarious areas of economic activity. For example, profit maximization lies behind the neoclassicaltheory of the firm, while the derivation ofdemandcurves leads to an understanding ofconsumergoods, and thesupplycurve allows an analysis of thefactors of production. Utility maximizationis the source for the neoclassical theory of consumption, the derivation of demand curves forconsumer goods, and the derivation of labor supply curves andreservation demand.[10]Marketsupply and demand are aggregated across firms and individuals. Their interactions determineequilibrium output and price. The market supply and demand for each factor of production isderived analogously to those for marketfinal outputto determine equilibrium income and theincome distribution. Factor demand incorporates themarginal-productivityrelationship of thatfactor in the output market.[6][11][12][13]
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Neoclassical economics emphasizes equilibria, where equilibria are the solutions ofagentmaximization problems. Regularities in economies are explained bymethodologicalindividualism, the position that economic phenomena can be explained by aggregating over thebehavior of agents. The emphasis is onmicroeconomics. Institutions, which might be consideredas prior to and conditioning individual behavior, are de-emphasized.Economic subjectivism

accompanies these emphases. See alsogeneral equilibrium.

Origins

This section does notciteanyreferences or sources. Please help improve this sectionbyadding citations to reliable sources. Unsourced material may be challenged andremoved.(August 2011)

Classical economics, developed in the 18th and 19th centuries, included avalue theoryanddistributiontheory. The value of a product was thought to depend on the costs involved inproducing that product. The explanation of costs in Classical economics was simultaneously anexplanation of distribution. A landlord received rent, workers received wages, and a capitalisttenant farmer received profits on their investment. This classic approach included the work ofAdam SmithandDavid Ricardo.

However, some economists gradually began emphasizing the perceived value of a good to theconsumer. They proposed a theory that the value of a product was to be explained withdifferences in utility (usefulness) to the consumer. (In England, economists tended toconceptualize utility in keeping with theUtilitarianismofJeremy Benthamand later ofJohnStuart Mill.)

The third step from political economy to economics was the introduction ofmarginalismand theproposition that economic actors made decisions based onmargins. For example, a persondecides to buy a second sandwich based on how full they are after the first one, a firm hires anew employee based on the expected increase in profits the employee will bring. This differsfrom the aggregate decision making of classical political economy in that it explains how vitalgoods such as water can be cheap, while luxuries can be expensive.

The marginal revolution

The change in economic theory from neoclassical economics has been called the 'marginalrevolution', although it has been argued that the process was slower than the term suggests .[14]It

is frequently dated fromWilliam Stanley Jevons's Theory of Political Economy (1871),CarlMenger's Principles of Economics (1871), andLon Walras's Elements of Pure Economics(18741877). Historians of economics and economists have debated:

Whetherutilityor marginalism was more essential to this revolution (whether the noun orthe adjective in the phrase "marginal utility" is more important)
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Whether there was a revolutionary change of thought or merely a gradual developmentand change of emphasis from their predecessors

Whether grouping these economists together disguises differences more important thantheir similarities.[15]

In particular, Jevons saw his economics as an application and development ofJeremy Bentham'sutilitarianism and never had a fully developedgeneral equilibrium theory. Menger did notembrace this hedonic conception, explained diminishing marginal utility in terms of subjectiveprioritization of possible uses, and emphasized disequilibrium and the discrete; further Mengerhad an objection to the use of mathematics in economics, while the other two modeled theirtheories after 19th century mechanics.[16]Walras' conception of utility, like that of Menger, wasthat ofusefulness in general,[17]rather than the hedonic conception of Bentham or of Mill; andWalras was more interested in the interaction of markets than in explaining the individualpsyche.[15]

Alfred Marshall's textbook, Principles of Economics (1890), was the dominant textbook inEngland a generation later. Marshall's influence extended elsewhere; Italians would complimentMaffeo Pantaleoniby calling him the "Marshall of Italy". Marshall thoughtclassical economicsattempted to explain prices by thecost of production. He asserted that earlier marginalists wenttoo far in correcting this imbalance by overemphasizing utility and demand. Marshall thoughtthat "We might as reasonably dispute whether it is the upper or the under blade of a pair ofscissors that cuts a piece of paper, as whether value is governed by utility or cost of production".

Marshall explained price by the intersection of supply and demand curves. The introduction ofdifferent market "periods" was an important innovation of Marshalls:

Market period. The goods produced for sale on the market are taken as given data, e.g. ina fish market. Prices quickly adjust to clear markets. Short period. Industrial capacity is taken as given. The level of output, the level of

employment, the inputs of raw materials, and prices fluctuate to equatemarginal costandmarginal revenue, where profits are maximized.Economic rentsexist in short periodequilibrium for fixed factors, and the rate of profit is not equated across sectors.

Long period. The stock ofcapitalgoods, such as factories and machines, is not taken asgiven. Profit-maximizing equilibria determine both industrial capacity and the level atwhich it is operated.

Very long period. Technology, population trends, habits and customs are not taken asgiven, but allowed to vary in very long period models.

Marshall took supply and demand as stable functions and extended supply and demandexplanations of prices to all runs. He argued supply was easier to vary in longer runs, and thusbecame a more important determinant of price in the very long run.

Further developments
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An important change in neoclassical economics occurred around 1933.Joan RobinsonandEdward H. Chamberlin, with the near simultaneous publication of their respective books, TheEconomics of Imperfect Competition (1933) and The Theory of Monopolistic Competition(1933), introduced models ofimperfect competition. Theories ofmarket formsandindustrialorganizationgrew out of this work. They also emphasized certain tools, such as themarginal

revenuecurve.Joan Robinson's work on imperfect competition, at least, was a response to certain problems ofMarshallianpartial equilibriumtheory highlighted byPiero Sraffa. Anglo-American economistsalso responded to these problems by turning towardsgeneral equilibriumtheory, developed onthe European continent by Walras andVilfredo Pareto.J. R. Hicks'sValue and Capital(1939)was influential in introducing his English-speaking colleagues to these traditions. He, in turn,was influenced by theAustrian SchooleconomistFriedrich Hayek's move to theLondon Schoolof Economics, where Hicks then studied.

These developments were accompanied by the introduction of new tools, such as indifference

curvesand the theory of ordinalutility. The level of mathematical sophistication of neoclassicaleconomics increased.Paul Samuelson'sFoundations of Economic Analysis(1947) contributed tothis increase in mathematical modelling.

The interwar period in American economics has been argued to have been pluralistic, withneoclassical economics andinstitutionalismcompeting for allegiance.Frank Knight, an earlyChicago schooleconomist attempted to combine both schools. But this increase in mathematicswas accompanied by greater dominance of neoclassical economics in Anglo-Americanuniversities after World War II.

Hicks' book,Value and Capitalhad two main parts. The second, which was arguably not

immediately influential, presented a model of temporary equilibrium. Hicks was influenceddirectly by Hayek's notion of intertemporal coordination and paralleled by earlier work byLindhal. This was part of an abandonment of disaggregated long run models. This trend probablyreached its culmination with theArrow-Debreu modelofintertemporal equilibrium. The Arrow-Debreu model has canonical presentations in Grard Debreu's Theory of Value (1959) and inArrow and Hahn's "General Competitive Analysis" (1971).

Many of these developments were against the backdrop of improvements in botheconometrics,that is the ability to measure prices and changes in goods and services, as well as their aggregatequantities, and in the creation ofmacroeconomics, or the study of whole economies. The attemptto combine neo-classical microeconomics andKeynesianmacroeconomics would lead to theneoclassical synthesis[18]which has been the dominant paradigm of economic reasoning inEnglish-speaking countries since the 1950s. Hicks and Samuelson were for example instrumentalin mainstreaming Keynesian economics.

Macroeconomics influenced the neoclassical synthesis from the other direction, underminingfoundations of classical economic theory such asSay's Law, and assumptions aboutpoliticaleconomysuch as the necessity for a hard-money standard. These developments are reflected in
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neoclassical theory by the search for the occurrence in markets of the equilibrium conditions ofPareto optimalityand self-sustainability.

Criticisms

Main article:Criticisms of neoclassical economics

Neoclassical economics is sometimes criticized for having anormativebias. In this view, it doesnot focus on explaining actual economies, but instead on describing a "utopia" in whichParetooptimalityapplies.

The assumption that individuals act rationally may be viewed as ignoring important aspects ofhuman behavior. Many see the "economic man" as being quite different from real people. Manyeconomists, even contemporaries, have criticized this model of economic man.Thorstein Veblenput it most sardonically. Neoclassical economics assumes a person to be,

"a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule ofdesire of happiness under the impulse of stimuli that shift about the area, but leave himintact."[19]

Large corporations might perhaps come closer to the neoclassical ideal of profit maximization,but this is not necessarily viewed as desirable if this comes at the expense of neglect of widersocial issues. The response to this is that neoclassical economics is descriptive and notnormative. It addresses such problems with concepts of private versus social utility.

Problems exist with making the neoclassicalgeneral equilibriumtheory compatible with aneconomy that develops over time and includes capital goods. This was explored in a major

debate in the 1960sthe "Cambridge capital controversy"about the validity of neoclassicaleconomics, with an emphasis on theeconomic growth,capital, aggregate theory, and themarginal productivity theoryof distribution. There were also internal attempts by neoclassicaleconomists to extend the Arrow-Debreu model to disequilibrium investigations of stability anduniqueness. However a result known as theSonnenschein-Mantel-Debreu theoremsuggests thatthe assumptions that must be made to ensure that the equilibrium is stable and unique are quiterestrictive.

Neoclassical economics is also often seen as relying too heavily on complex mathematicalmodels, such as those used ingeneral equilibriumtheory, without enough regard to whetherthese actually describe the real economy. Many see an attempt to model a system as complex as

a modern economy by a mathematical model as unrealistic and doomed to failure. A famousanswer to this criticism isMilton Friedman's claim that theories should be judged by their abilityto predict events rather than by the realism of their assumptions.[20]Mathematical models alsoinclude those ingame theory,linear programming, andeconometrics. Critics of neoclassicaleconomics are divided into those who think that highly mathematical method is inherently wrongand those who think that mathematical method is potentially good even if contemporary methodshave problems.
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In general, allegedly overly unrealistic assumptions are one of the most common criticismstowards neoclassical economics. It is fair to say that many (but not all) of these criticisms canonly be directed towards a subset of the neoclassical models (for example, there are manyneoclassical models where unregulated markets fail to achieve Pareto-optimality and there hasrecently been an increased interest in modeling non-rational decision making).

Alfred Marshall (26 July 184213 July 1924) was one of the most influential economists ofhis time. His book,Principles of Economics(1890), was the dominant economic textbook inEngland for many years. It brings the ideas ofsupply and demand, marginal utility, and costs ofproduction into a coherent whole. He is known as one of the founders ofeconomics. Marshallwas born in Clapham, England, July 26, 1842. His father was a bank cashier and a devoutEvangelical. Marshall grew up in the London suburb ofClaphamand was educated at theMerchant Taylors' SchoolandSt John's College, Cambridge, where he demonstrated an aptitudein mathematics, achieving the rank ofSecond Wranglerin the 1865Cambridge MathematicalTripos.[1][2]Marshall experienced a mental crisis that led him to abandon physics and switch tophilosophy. He began with metaphysics, specifically "the philosophical foundation of

knowledge, especially in relation to theology.".

[3]

Metaphysics led Marshall to ethics, specificallyaSidgwickianversion of utilitarianism; ethics, in turn, led him to economics, because economicsplayed an essential role in providing the preconditions for the improvement of the working class.Even as he turned to economics, his ethical views continued to be a dominant force in histhinking.

Marshall took a broad approach to social science in which economics plays an important butlimited role. He recognized that in the real world, economic life is tightly bound up with ethical,social and political currentscurrents he felt economists should not ignore. Marshall envisioneddramatic social change involving the elimination of poverty and a sharp reduction of inequality.He saw the duty of economics was to improve material conditions, but such improvement wouldoccur, Marshall believed, only in connection with social and political forces. His interest inliberalism, socialism, trade unions, women's education, poverty and progress reflect the influenceof his early social philosophy to his later activities and writings.

Marshall was elected in 1865 to a fellowship at St John's College at Cambridge, and becamelecturer in the moral sciences in 1868. In 1885 he became professor of political economy atCambridge, where he remained until his retirement in 1908. Over the years he interacted withmany British thinkers includingHenry Sidgwick,W.K. Clifford,Benjamin Jowett,WilliamStanley Jevons,Francis Ysidro Edgeworth,John Neville KeynesandJohn Maynard Keynes.Marshall founded the "Cambridge School" which paid special attention to increasing returns, thetheory of the firm, and welfare economics; after his retirement leadership passed to Arthur CecilPigouandJohn Maynard Keynes.

Economics

He desired to improve the mathematical rigor of economics and transform it into a morescientific profession. In the 1870s he wrote a small number of tracts on international trade andthe problems of protectionism. In 1879, many of these works were compiled into a work entitled
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The Theory of Foreign Trade: The Pure Theory of Domestic Values . In the same year (1879) hepublished The Economics of Industry with his wifeMary Paley.

Although Marshall took economics to a more mathematically rigorous level, he did not wantmathematicsto overshadow economics and thus make economics irrelevant to the layman.

Accordingly, Marshall tailored the text of his books to laymen and put the mathematical contentin the footnotes and appendices for the professionals. In a letter toA. L. Bowley, he laid out thefollowing system:

(1) Use mathematics as shorthand language, rather than as an engine of inquiry. (2) Keep to themtill you have done. (3) Translate into English. (4) Then illustrate by examples that are importantin real life (5) Burn the mathematics. (6) If you cant succeed in 4, burn 3. This I do often. "[4]

Marshall had been Mary Paley's professor of political economy at Cambridge and the two weremarried in 1877, forcing Marshall to leave his position as aFellow (college)ofSt John's College,Cambridgein order to comply with celibacy rules at the university. He became the first principal

atUniversity College, Bristol, which was the institution that later became theUniversity ofBristol, again lecturing on political economy and economics. He perfected his Economics ofIndustry while at Bristol, and published it more widely in England as an economic curriculum;its simple form stood upon sophisticated theoretical foundations. Marshall achieved a measure offame from this work, and upon the death ofWilliam Jevonsin 1882, Marshall became theleading British economist of the scientific school of his time.

Marshall returned to Cambridge, via a brief period atBalliol College, Oxfordduring 18834, totake the seat asProfessor of Political Economyin 1884 on the death ofHenry Fawcett. AtCambridge he endeavored to create a newtriposfor economics, a goal which he would onlyachieve in 1903. Until that time, economics was taught under the Historical and Moral Sciences

Triposes which failed to provide Marshall the kind of energetic and specialized students hedesired.

Principles of Economics (1890)

Main article:Principles of Economics (Marshall)

Marshall began his economic work, the Principles of Economics, in 1881, and spent much of thenext decade at work on the treatise. His plan for the work gradually extended to a two-volumecompilation on the whole of economic thought. The first volume was published in 1890 toworldwide acclaim that established him as one of the leading economists of his time. The second

volume, which was to address foreign trade, money, trade fluctuations, taxation, andcollectivism, was never published.

Principles of Economics established his worldwide reputation. It appeared in 8 editions, startingat 750 pages and growing to 870 pages. It decisively shaped the teaching of economics inEnglish-speaking countries. Its main technical contribution was a masterful analysis of the issuesof elasticity, consumer surplus, increasing and diminishing returns, short and long terms, and
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marginal utility; many of the ideas were original with Marshall, others were improved version ofideas byW. S. Jevonsand others.

In a broader sense Marshall hoped to reconcile the classical and modern theories of value. JohnStuart Millhad examined the relationship between the value of commodities and their production

costs, on the theory that value depends on effort expended in manufacture. Jevons and theMarginal Utilitytheorists had elaborated a theory of value based on the idea of maximizingutility, holding that value depends on demand. Marshall's work used both these approaches, buthe focused more on costs. He noted that, in the short run, supply cannot be changed and marketvalue depends mainly on demand. In an intermediate time period, production can be expanded byexisting facilities, such as buildings and machinery; but since these do not require renewal withinthis intermediate period their costs (called fixed, overhead, or supplementary costs) have littleinfluence on the sale price of the product. Marshall pointed out that it is the prime or variablecosts, which constantly recur, that influence the sale price most in this period. In a still longerperiod, machines and buildings wear out and have to be replaced, so that the sale price of theproduct must be high enough to cover such replacement costs. This classification of costs into

fixed and variable and the emphasis given to the element of time probably represent one ofMarshall's chief contributions to economic theory. He was committed to partial equilibriummodels over general equilibrium on the grounds that the inherently dynamical nature ofeconomics made the former more practically useful.

Alfred Marshall's supply and demand graph.

Much of the success of Marshall's teaching and Principles book derived from his effective use ofdiagrams, which were soon emulated by other teachers worldwide.[5]

Alfred Marshall was the first to develop the standard supply and demand graph demonstrating anumber of fundamentals regarding supply and demand including the supply and demand curves,market equilibrium, the relationship between quantity and price in regards to supply and demand,
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law of marginal utility, law diminishing returns, and the ideas of consumer and producersurpluses. This model is now used by economists in various forms using different variables todemonstrate several other economic principles. Marshall's model allowed a visual representationof complex economic fundamentals where before all the ideas and theories were only capable ofbeing explained through words. These models are now critical throughout the study of

economics because it allows a clear and concise representation of the fundamentals or theoriesbeing explained.

Later career

He served asPresidentof the first day of the 1889Co-operative Congress.[6]

Over the next two decades he worked to complete the second volume of his Principles, but hisunyielding attention to detail and ambition for completeness prevented him from mastering thework's breadth. The work was never finished and many other, lesser works he had begun workon - a memorandum on trade policy for theChancellor of the Exchequerin the 1890s, for

instance - were left incomplete for the same reasons.

His health problems had gradually grown worse since the 1880s, and in 1908 he retired from theuniversity. He hoped to continue work on his Principles but his health continued to deteriorateand the project had continued to grow with each further investigation. The outbreak of theFirstWorld Warin 1914 prompted him to revise his examinations of the international economy and in1919 he publishedIndustry and Trade at the age of 77. This work was a more empirical treatisethan the largely theoretical Principles, and for that reason it failed to attract as much acclaimfrom theoretical economists. In 1923, he publishedMoney, Credit, and Commerce, a broadamalgam of previous economic ideas, published and unpublished, stretching back a half-century.

From 1890 to 1924 he was the respected father of the economic profession and to mosteconomists for the half-century after his death, the venerable grandfather. He had shied awayfrom controversy during his life in a way that previous leaders of the profession had not,although his even-handedness drew great respect and even reverence from fellow economists,and his home atBalliol Croftin Cambridge had no shortage of distinguished guests. His studentsat Cambridge became leading figures in economics, includingJohn Maynard KeynesandArthurCecil Pigou. His most important legacy was creating a respected, academic, scientificallyfounded profession for economists in the future that set the tone of the field for the remainder ofthe 20th century.

Having died aged 81 at his home in Cambridge, Marshall is buried in theAscension Parish

Burial Ground.[7]The library of the Department of Economics at Cambridge University (TheMarshall Library of Economics), the Economics society at Cambridge (The Marshall Society)[8]as well as theUniversity of BristolEconomics department are named for him.

His home, Balliol Croft, was renamedMarshall Housein 1991 in his honour when it was boughtbyLucy Cavendish College, Cambridge.[9]
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Theoretical contributions

Marshall is considered to be one of the most influential economists of his time, largely shapingmainstream economic thoughtfor the next fifty years, and being one of the founders of theschool ofneoclassical economics. Although his economics was advertised as extensions and

refinements of the work ofAdam Smith,David Ricardo,Thomas Robert MalthusandJohnStuart Mill, he extended economics away from itsclassicalfocus on the market economy andinstead popularized it as a study of human behavior. He downplayed the contributions of certainother economists to his work, such asLon Walras,Vilfredo ParetoandJules Dupuit, and onlygrudgingly acknowledged the influence ofStanley Jevonshimself.

Marshall's influence on codifying economic thought is difficult to deny. He popularized the useofsupply and demandfunctions as tools of price determination (previously discoveredindependently byCournot); modern economists owe the linkage between price shifts and curveshifts to Marshall. Marshall was an important part of the "marginalistrevolution;" the idea thatconsumers attempt to adjust consumption untilmarginal utilityequals the price was another of

his contributions. Theprice elasticity of demandwas presented by Marshall as an extension ofthese ideas. Economic welfare, divided intoproducer surplusandconsumer surplus, wascontributed by Marshall, and indeed, the two are sometimes described eponymously as'Marshallian surplus.' He used this idea of surplus to rigorously analyze the effect of taxes andprice shifts on market welfare. Marshall also identifiedquasi-rents.

Marshall's brief references to the social and cultural relations in the "industrial districts" ofEngland were used as a starting point for late twentieth-century work ineconomic geographyandinstitutional economicsonclusteringandlearning organizations.

Gary Becker(b. 1930), the 1992 Nobel prize winner in economics, has mentioned that Milton

Friedman and Alfred Marshall were the two greatest influences on his work.

Another contribution that Marshall made was differentiating concepts of internal and externaleconomies of scale. That is that when costs of input factors of production go down, it's a positiveexternality for all the firms in the market place, outside the control of any of the firms.[10]

The Marshallian industrial district

A concept based on a pattern of organization that was common in late nineteenth centuryBritainin which firms concentrating on the manufacture of certain products were geographicallyclustered. Comments made by Marshall in Book 4, Chapter 10 of Principles of Economics[11]have been used by economists and economic geographers to discuss this phenomenon.

The two dominant characteristics of a Marshallian industrial district[12]are high degrees ofvertical and horizontal specialisation and a very heavy reliance on market mechanism forexchange. Firms tend to be small and to focus on a single function in the production chain. Firmslocated in industrial districts are highly competitive in theneoclassicalsense, and in many casesthere is little product differentiation. The major advantages of Marshallian industrial districts
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