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Alfred Marshall’s Mecca: Reconciling the Theories of Value and Development

CRIC Discussion Paper No. 78

Stan Metcalfe

This paper explores the evolutionary nature of Marshall’s theory of value and its relation to his theory of growth and development. For, the two theories are inextricably linked and the subsequent attempt to separate them has not only marginalised Marshall’s rich analysis but also made it impossible to appreciate the role he gave to innovation and its corollary the growth of knowledge and organisation, in the workings of a market economy (Loasby, 1989). To further this claim, the paper will construct a Marshallian evolutionary model to help understand and take seriously Marshall’s evolutionary credentials in general and the concept of the representative firm in particular. At its core is the relation between the growth of firms and the growth of markets but this is not steady state growth theory rather it is the differential, mutually determined and changing growth rates of firms that is at the centre of attention. Indeed we might say that one of Marshall’s definitive questions is ‘Why do firms (activities) grow differently?’ The answer is closely connected to, indeed indistinguishable from, Marshall’s managerial explanation of firm differentiation and innovation and his claim that “Variation is the chief source of progress” (P, V, 4, p355). Quite how variation is linked to progress is the central topic of this essay.

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