Economics and the Self-Organisation Approach

8/18/2019 Economics and the Self-Organisation Approach

1/18

Economics and the Self-Organisation Approach: Alfred Marshall Revisited?Author(s): John Foster

Source: The Economic Journal , Vol. 103, No. 419 (Jul., 1993), pp. 975-991

Published by: Wiley on behalf of the Royal Economic Society

Stable URL: http://www.jstor.org/stable/2234714Accessed: 20-04-2016 21:11 UTC

R F R N S

Linked references are available on JSTOR for this article:

http://www.jstor.org/stable/2234714?seq=1&cid=pdf-reference#references_tab_contents

You may need to log in to JSTOR to access the linked references.

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at

http://about.jstor.org/terms

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted

digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about

JSTOR, please contact [email protected].

Wiley, Royal Economic Society are collaborating with JSTOR to digitize, preserve and extend access toThe Economic Journal

This content downloaded from 193.227.1.43 on Wed, 20 Apr 2016 21:11:29 UTCAll use subject to http://about.jstor.org/terms


2/18

The Economic Journal, 103 (July), 975-991. ? Royal Economic Society 1993. Published by Blackwell

Publishers, io8 Cowley Road, Oxford OX4 iJF, UK and 238 Main Street, Cambridge, MA 02142, USA.

ECONOMCS AND THE SELF-ORGANSATION

APPROACH:

ALFRED MARSHALL REVISITED?*

John Foster

Several recent contributions in the loosely-defined field of 'evolutionary

economics' have focussed upon time irreversibility as the primary source of

evolutionary change in economic systems (see, for example, Foster, I987;

David, I988; Arthur, I988; Dosi and Metcalfe, i99i). This interest in time

irreversibility has been, in part, stimulated by recent developments in the

natural sciences which seek to understand the order which is maintained in

systems which have chaotic potential. The second law of thermodynamics (the

entropy law) is seen by some as the fundamental source of time irreversibility.

However, it is the relatively new area of non-equilibrium thermodynamics

which is of interest, rather than traditional equilibrium thermodynamics.

'Dissipative structures' are viewed as being able to offset the impact of the

entropy law by importing free energy and exporting entropy. The mechanisms

developed to do this are, in turn, viewed as being subject to a degree of time

irreversibility, so that change becomes, necessarily, evolutionary in character.

Over the past two decades, what has become known as the 'self-organisation'

approach (Prigogine and Stengers, I984) has come to offer a non-equilibrium

thermodynamical- alternative to the traditional Newton/Boltzmann mech-

anical approach to understanding dynamic processes in the natural sciences.

The emergence of the non-equilibrium thermodynamical approach to self-

organisation ought to be of interest to those economists who, like natural

scientists before them, adopted the mechanical approach since:

it is clear that many empirical phenomena are not covered well by either

the theoretical or empirical analyses based on linear stochastic systems,

sometimes not by either. The presence and persistence of cyclical

fluctuations in the economy as a whole of irregular timing and amplitude

are not consistent with a view that an economy tends to return to

equilibrium states after any disturbance (Arrow, I988, p. 278).

Many economists, primarily of an institutionalist or Schumpeterian

persuasion, have been well aware of the time irreversible, nonlinear character

of economic processes for some time and, therefore, have avoided using models

based upon the conventional mechanical metaphor. However, the problem

with such a stance is that it often yields informal analysis of economic processes

* I am indebted to Geoff Harcourt, Geoff Hodgson and two anonymous referees for their valuable

comments on earlier versions of this paper. I would also like to thank Peter Burley and his colleagues at La

Trobe University for their very helpful discussions of a preliminary version of the paper at their

interdisciplinary conference entitled 'Thermodynamical Thinking in Economics' (4 October I99I). The

usual disclaimer applies.

[ 975 ]



3/18

976 THEECONOMCJOURNALJULY

and evidence which is historically descriptive. Economists who hold con-

ventional views as to what constitutes science tend to reject such evidence and,

thus, it has little impact in the mainstream of the discipline. Consequently,

some economists have preferred to adopt a pragmatic approach whereby the

mechanical approach is retained, because of its usefulness in the construction

of formal models, but heavily qualified to allow for time irreversibility and

evolutionary change.

It is argued in this paper that an outstanding example of the latter was

Alfred Marshall, despite his textbook reputation as one of the founding fathers

of time reversible, non-evolutionary neoclassical economics. This view is shared

by, for example, Rostow (I989) who, on reviewing several contributions to the

nonlinear dynamic perspective on economic processes states that:

For the purposes of this occasion, Alfred Marshall is the most important

economist of the past two and a half centuries. He, more than any of his

predecessors or successors, understood and lucidly articulated the inherent

tension between the use of the concept of stable equilibrium in economics

and the nonlinear, irreversible character of 'the conditions of real

economic life' (Rostow, i989, p. 36).

Economic historians are not generally as well-disposed towards Marshall's

economics as this. Furthermore, neoclassically-inclined economists have tended

to disagree with the proposition that Marshall was lucidly articulate. In this

paper, it is contended that Marshall has been widely misinterpreted by many

neoclassical economists, simply because they could not grasp the centrality of

time irreversibility in his economic analysis. Thus, progress in implementing

th'e scientific agenda set out by Marshall has been limited to only the early

stages which he identified as achievable in his own time. The subsequent stages,

in Marshall's view, were to involve the emergence of evolutionary approaches

in economics, drawing upon evolutionary biology. However, here again, it will

be contended that misinterpretation, this time by 'evolutionary' economists,

has been prevalent.

It will be argued that Marshall was neither a neoclassical economist nor an

evolutionary economist, in the contemporary usage of these terms, but one who

saw time irreversibility as the central problem with which economic science

must deal. To Marshall, the mechanical metaphor was a serviceable one to deal

with exogenous shocks and related homeostatic reactions in the short period,

but he saw evolutionary change as a logical implication of the presence of time

irreversibility in the long period. Over a century after the publication of the first

edition of the Principles, proponents of the self-organisation approach in the

natural sciences have reached a similar conclusion. In this paper this surprising

connection is explored and some assessment is made of the extent to which the

latter can help to offer the foundations of a new, post-Marshallian economic

science.

K Royal Economic Society 1993



4/18

1993] MARSHALL AND SELF-ORGANISATION 977

I. MARSHALL AND NEOCLASSICISM

Much of what is regarded as economic science today stems directly from Alfred

Marshall's Principles. Milton Friedman, Paul Samuelson and, of course,

Maynard Keynes all acknowledged that Marshall founded a science of

economics, but all three offer different views as to what it constituted. It is

argued here that Marshall's approach, influenced strongly by his background

and ongoing interest in the natural sciences, was not fully developed by any of

these three great disciples.

Most students of economics have been persuaded, since Samuelson (I946),

that Marshall was a founding father of neoclassical economics. However,

although Marshall appeared to defend neoclassical economics on many

occasions in the lectures that he delivered, it was really a defence of economic

science against political economy as he saw it in his time. Marshall did not see

economic science as being at the interface of economics and politics but, rather,

at the interface of economics and ethics (Reisman, I990). To him, economists

bore a heavy moral responsibility to apply economic science dispassionately

and fairly, with social welfare in mind, as a counter to the sectional interests

which dominated the political arena. This position was to have a considerable

influence on Keynes's economics and his view of the economist's role in society.

For Samuelson, at a much greater distance in time and space from Marshall,

this position was reduced to the simpler task of making economics more

scientific, in the sense that the term is used in the natural sciences. Undeterred

by Shove's (I942) authoritative assessment of Marshall's economic theory, he

set himself the task of developing what he saw as the most scientific aspects of

the Principles in its technical footnotes and appendices.

Samuelson was part of a wave of mathematicians and scientists who

colonised economics from the I 930S on and seemed to have little appreciation

of the historical origins of neoclassical thinking. In particular, they wasted little

time in asking why so many scientists, such as Jevons, Walras, Edgeworth,

Fisher and Pareto, who were all trained in physics, had entered the field of

political economy from about I 870 on, to develop a formal representation of

neoclassical economics. They all imported a particular physical metaphor into

neoclassical economics: that of equilibrium in a field of force and its purpose

was to give mathematical precision to the progressive, free-market ideas of

Adam Smith (I986). As Darwinians stirred controversy, in both biology and

sociology, and political economy spawned Marxism, with its disturbing picture

of social dynamics, economists were offered an approach which was ahistorical

and safe, offering ideological support to capitalism but no science of the

unfolding of economic events. Marginalism, with its abstract portrayal of

incremental precision, offered a stark contrast to the upheaval of political

revolutions and the bloody struggle of natural selection. It was a matter of taste

as to whether the resultant neoclassical general equilibrium system was viewed

as involving the invisible hand of God or of natural selection.

Today, mathematical economists, such as Debreu (i99i), offer little in the

way of an indication that it may have been economic ideology, more than

K Royal Economic Society I993



5/18


scientific requirements, which swept neoclassical economics to prominence in

the twentieth century. As Mirowski (i 99I ) reminds us, early marginalists were

soon taken to task with regard to their scientific pretensions, by other

mathematicians and physicists who pointed out the incorrectness, in a scientific

sense, of the application of the chosen physical metaphor to economics. As

ideology, of course, technical objections did not matter and, indeed, many in

the second wave of neoclassical economists in the early 20th century were not

trained in mathematics and even viewed formalism with some suspicion.

At around the turn of the century, Thorstein Veblen asked his famous

question: Why is economics not an evolutionary science? It was an

unreasonable question because biology itself had hardly become an evol-

utionary science at that time. All this was clear to Alfred Marshall who also

argued that economic science would have to become evolutionary, in the

Spencerian more than the Darwinian sense of the term (Hodgson, I993), but

that statical analogies of the physical kind would have to suffice until new

biological analogies could be operationalised satisfactorily in economics.

Marshall's solution was to adopt a pragmatic approach to the application of

the mechanical analogy, keeping it in the domain of real world application by

confronting the question, not of evolution, but of time irreversibility.

Milton Friedman seemed to understand, much better than Paul Samuelson,

Marshall's pragmatic approach to the application of theoretical principles in

scientific economics. However, Friedman did not dwell upon Marshall's

attempts to deal with the difficulties presented by time irreversibility for

neoclassical analysis. Instead, he adopted Marshall's time frames as a way of

dgfining partial equilibrium in an abstract short run, thus eliminating the

historical time in Marshall's period distinctions. Correspondingly, he accepted

the ideological construct of a timeless Walrasian general equilibrium. Marshall,

the scientist, did not:

in the first edition ... the titles of the books and chapters, a well as the text

itself, follow the mathematical framework very closely. In later versions,

the connection became somewhat blurred by the author's restless quest

after realism and the increasing prominence given to the element of time

and to the absence of anything which can be properly be called a position

of long-period equilibrium where increasing returns prevail (Shove, I942,

P. 300).

Because evolutionary economics was something for the future and

comparative static economics was his present, Marshall focussed on the

problem of time irreversibility rather than evolution. This was entirely sensible

because it was the inadequate treatment of time irreversibility in the mechanical

approach which caused so much difficulty in economic applications. Marshall

argued in his Principles that all systems could be viewed at different levels and

that the mechanical one was the firm backbone of reason and analysis (p. 769,

7th edn), but that the element of time ... is the centre of the chief difficulty of

almost every economic problem' (p. vii, 7th edn). The experience of historical

time meant that 'every plain and simple doctrine as to the relations between




6/18

1993] MARSHALL AND SELF-ORGANISATION 979

cost of production, demand and value is necessarily false' (p. 368, 8th edn).

Statical theory is so limited that there is a danger in throwing it into definite

form at all' (p. 46, 8th edn).

Samuelson would attribute these warnings to confusion and tend to ignore

them as he helped to develop the modern formal version of neoclassical

economics, even at a time when it was clear that physicists themselves had

become concerned with the validity of their time reversible approach to field

force equilibrium. Take, for example, Samuelson's (I972) view of the

applicability of hysteresis in economics: 'when the equilibrium of a system

depends on (and is dictated by) its path towards equilibrium, the scientist has

an uncomfortable feeling' (p. 441). Thus, modern neoclassical economics

gradually eliminated historical time and expunged Marshall's economics of its

most important element:

Marshall s endeavours to incorporate time as an essential component of his

analysis are responsible for much of the careful imprecision so charac-

teristic of the Principles... and it is no accident that the modern striving for

rigour has produced models which are strictly timeless. Even the recent

extensions of equilibrium theory to include markets distinguished by date

are devices for evading, rather than dealing with, the difficulties which

Marshall had in mind (Loasby, I978, p. 2).

Apart from the more obvious quotations from the Principles concerning habits

and other time-dependent processes, it is little appreciated that, even when

explaining the determinants of demand, using the example of tea, he is careful

not to use timeless marginal utility theory. Utility is derived from the act of

purchasing tea not consuming it. Thus, utility is related intimately to the time

spent upon purchase, juxtaposed against alternative uses of time, not to the

utility yielded by future consumption: 'if, instead of buying it he makes the

thing himself, then its marginal utility is the utility of that part which he thinks

only just worthwhile to make (Marshall, 7th edn, p. 93). If the unit in question

had been, say, a small packet of tea, the distinction between the utility of

purchase and that of future consumption could, perhaps, be overlooked.

However, Marshall deliberately selects the decision to buy annually, so his

demand curve is for a stock, not a flow (see, for example, the Principles, 4th edn,

pp. i69-72) and, in essence, involves a timing decision: 'The total utility of a

thing to anyone ... increases with every increase in his stock of it, but not as fast

as his stock increases' (Marshall, 7th edn, p. 93).

It is, of course, necessary for there to have been a past preference for a flow

of tea consumption per unit of time, the sum of which helps determine annual

stock demand, but Marshall proposes a very large range of stock demands at

different prices which would be very unlikely to be mirrored in everyday acts

of consumption. What he describes is a speculative decision within a process

which is occurring 'in' time, where a high price invokes a decision to buy a

small amount to 'get by' in the immediate future and, when prices are low,

stockpiling occurs. Notions of 'normal', historically determined, prices and

quantities loom large in such decision-making, as they do throughout the




7/18


Principles. Thus, even at the very heart of his treatment of demand, we see the

'careful imprecision' of Marshall, noted by Loasby (I978), at work to keep

historical time in his analysis. Marshall's desire to distance himself fromJevons

is well known and neoclassical economists can only turn legitimately to J. B.

Clark for theoretical support for flow demand analysis derived formally from

marginal utility theory.

II. MARSHALL AND HSTORICISM

Despite what has been said, the neoclassical economist can point to the fact

that Marshall did apply marginalism in the context of the firm's decisions.

However, Marshall did not apply marginalism in the conventional textbook

sense. Instead, he applied it in an evolutionary manner in his 'principle of

substitution ' which resulted in a ' tendency to variation [which] is a chief cause

of progress' (Marshall, 7th edn, p. 355). On p. 356, Marshall gave conventional

marginalism only a partial role to play. Nevertheless, because of the difficulties

in operationalising the principle, he retained conventional marginalism and

attempted to deal with the problem of time irreversibility and evolutionary

change by breaking up historical time into appropriate periods. Currie and

Steedman (I990) rally together convincing evidence that Marshall did not

define the neoclassical short run in terms of fixity of capital, as most textbooks

imply, rather he was attempting to deal with general decision problems faced

in actual historical periods. 'Bygones are bygones' because of time irre-

versibility. Fixity need not occur automatically in the short period, even

though limited scope for adaptation is a dominating feature of that period.

Furthermore, Currie and Steedman (i99o) go on to argue that Marshall did

not confine the problem of time irreversibility to the short period. They remind

us ofJoseph Schumpeter's assessment, made four decades ago, that Marshall's

falling long-run supply curves are not theoretical but, rather, historical

constructions which:

dealt with an irreversible process and are not at all like the ordinary

supply curves on which the firm can travel back and forth. They depict

historical processes in a generalised form (Schumpeter, I 954, p. 995, n. 9).

Marshall could not draw upon any coherent treatment of time irreversibility

in the natural sciences of his time so he adapted what was at his disposal,

namely, field force equilibrium. However, his depiction of the equilibration

process is concerned with the adjustment of variables to their 'normal' levels

and, therefore, deals with homeostasis rather than statics. This is the case

because the normal level of a variable is viewed as historically determined and,

therefore, not deducible from a static equilibrium model. Thomas (i99i)

provides a revealing quote from a letter to J. B. Clark in this regard:

I then [pre-i870] believed it was possible to have a coherent though

abstract doctrine of economics in which competition was the only

dominant force; and I then defined 'normal' as that which the

undisturbed play of competition would bring about: and now I regard

? Royal Economic Society I993



8/18

1993] MARSHALL AND SELF ORGANSATON98

that position as untenable from an abstract as well as from practical point

of view (quoted in Thomas, IggI, p. io).

This shift in Marshall's thinking has been missed by many economists, even

though it is clearly stated on p. io6, footnote i in the Principles (4th edn).

Modern economists often find the notion of a historically-determined 'normal'

level of a variable a puzzling concept and are apt to dismiss it as an ad hoc

construction. However, Marshall belonged to a Classical tradition where it was

assumed that any competent economist would have a good understanding of

the economic and social history of any period under consideration. Economic

analysis could only be undertaken if historical and institutional features were

taken as starting values. Thus, he devoted large parts of the main text of the

Principles to historical and institutional discussion. Given that mathematical

formalism was consigned to footnotes and appendices, we can only conclude,

as Shove (I942) did, that he thought history to be more important.

There has been a great deal of controversy concerning Marshall's treatment

of history, largely because of his debates with Cunningham. However, as

Maloney (I985) argues, this debate can only be understood in the context of

the power struggle which was going on in Cambridge between economists,

attempting to found an economic science, particularly through the extraction

of economics from the moral sciences Tripos, and economic historians, who had

been dominant in both teaching and research in the nineteenth century. The

future was to show that Cunningham was correct in his fears that the economic

science promoted by Marshall would lead to a deductive neoclassical economics

which would sweep away the historical method. However, this was never

Marshall's intention - the application of his science was conditional upon

historical circumstance at all times and he always attempted, in a proximate

manner, to allow for the historical reality of time irreversibility:

While Jevons fastened his hopes to the division of labour, a break-up of

science into separate branches or even separate sciences, Marshall's

counter measure was rather by way of a combination of methods - not

only history permeated by theory but theory... nourished, modified and

illustrated by historical and contemporary fact. If any school of thought

outside the Ricardian tradition set its mark on the Principles it was the

Historical School, rather than the marginal utility school, that did so

(Shove, I942, p. 309).

What Marshall objected to was pure historicism, where all economic co-

ordination is described in terms of institutional forces and change is viewed as

the province of political forces with the historian's subjective preferences

providing explanation. Instead, he argued that the systematic application of

economic principles, suitably calibrated for particular historical circum-

stances, provided a more scientific approach to understanding economic co-

ordination. The longer sweep of history must be analysed in evolutionary

terms. Describing and interpreting the minutiae of economic history was not

for Marshall. Interestingly, Veblen (I990) had a similar position with regard

to historicism to Marshall:




9/18

982 THE ECONOMCJOURNAL [JULY

the Historical School... have attempted an account of developmental

sequence, but they have followed the lines of pre-Darwin speculations on

development rather than lines which modern science would recognise as

evolutionary. They have given a narrative survey of phenomena, not a

genetic account of an unfolding process (Veblen, I990, p. 72).

However, in his famous article, Veblen studiously ignores Marshall's

preoccupation with time irreversibility and his related plea for an evolutionary

dimension to economic science. Instead, Veblen concentrates upon the

Marshall's static method because, like Cunningham, he feared, that its

quantitative nature would lead to a false scientism in economics.

Although many economic historians still blame Marshall for the near

elimination of history from economics (Snooks, i99i)), not all economic

historians have such a negative view of Marshall. Rostow (i989), as we have

seen, offers an example of an economic historian who understands clearly

Marshall's commitment to incorporating time irreversibility into economics.

Nonetheless, Marshall has been criticised by some evolutionary economists for

engaging in speculation rather than actual analysis of evolutionary processes

(Thomas, I99I). However, Marshall was all too aware that no evolutionary

economics could be possible until time irreversibility was properly understood.

III. GEORGESCU-ROEGEN AND THE ENTROPY LAW

It can be argued that Marshall's vision of an economic science which could deal

with time irreversibility and evolutionary change did not really begin to

materialise until Nicholas Georgescu-Roegen's (I97I; 1976) consideration of

economic processes in thermodynamic terms:

Mechanics distinguishes only mass, speed, and position, on which it bases

the concept of kinetic and potential energy. The result is that mechanics

reduces any process to locomotion and a change in the distribution of

energy. The constancy of total mechanical energy and the constancy of

mass are the earliest principles of conservation recognised by science. A

few careful economists, such as Marshall, did observe that man can create

neither matter nor energy. But in doing so, they apparently had in mind

only the mechanical principles of conservation, for they immediately added

that man can nevertheless produce utilities by moving and rearranging

matter. This viewpoint ignores a most important issue: how can man do

the moving? For anyone who remains at the level of mechanical

phenomena, every bit of mechanical energy which enters a process must

come out in exactly the same quantity and quality. Locomotion cannot alter

either (Georgescu-Roegen, 1976, p. 6).

Thus, Georgescu-Roegen argues that Marshall did not appreciate the

importance of invoking the second law of thermodynamics to provide support for

his arguments concerning time irreversibility in economic systems. Of course,

this is not surprising given that, in Marshall's time, there was only

thermodynamics of the equilibrium variety, with its gloomy prediction of an

irreversible tendency to maximal disorder in systems. This would have hardly

? Royal Economic Society 1993



10/18

I993] MARSHALL AND SELF-ORGANSATION 983

seemed to him a fruitful basis for understanding the economic co-ordination he

saw around him and the evolutionary process which economies seemed to

experience, particularly given the powerful influence of Herbert Spencer upon

his thinking (Hodgson, I993). Marshall was, of course, familiar with Jevons'

(i 865) dismal application of the entropy law to economics in The Coal Question

and duly ignored it in his Principles.

Georgescu-Roegen takes a different view of the entropy law. He uses its time

irreversible features to explain why time irreversibility must also be a feature

of structures which can absorb free energy to offset the entropy process, thus,

prevent rising disorder. Such structures do this as economically as possible:

thermodynamics is at bottom a physics of economic value - as Carnot

unwittingly set it going - and the Entropy Law is the most economic in

nature of all natural laws (Georgescu-Roegen, I976, pp. 87-9).

the Entropy Law is the taproot of economic scarcity (Georgescu-Roegen,

I976, p. 9).

However, time irreversibility in entropy-thwarting structures is not

inevitable or complete; it is a matter of marginal costs and benefits as historical

experience unfolds. All process can, in theory, be reversed if sufficient free

energy is used. However, the rise in free energy cost necessary to arrest entropy

growth is nonlinear and the resultant entropy barrier is such that some

irreversibility must prevail. The economics of entropy also, of course, applies in

the economic domain - economic structures are created with low entropy

characteristics, they are used in an economising manner through time and they

are scrapped when the opportunity cost of maintaining them becomes too high.

Thus, in Georgescu-Roegen's view, Marshall's economics is a necessary

consequence of the existence of the entropy law and cannot be intelligible from

any other perspective. In particular, he emphasises that Marshall's economics

makes no sense at all in a static neoclassical framework of perpetual motion

machines.

Although Georgescu-Roegen provides a thermodynamic basis for dealing

with time irreversibility in economics, his main quest was to emphasise the

finite nature of free energy in economic systems. Thus, he did not go on to

provide a formal analytical framework within which the evolutionary dynamics

of economic processes could be set. However, he did acknowledge that the

entropy law implies evolutionary processes, given that, if structures cannot

reverse easily, then they can only change by evolving. The evolutionary

dimension of Georgescu-Roegen's energy-based economics was taken up by

others, such as Boulding (I98I). However, it is fair to say that no consensus

view has emerged from the energy/entropy perspective as to the precise nature

of evolutionary dynamics in economic processes. Indeed, some evolutionary

economists have found the approach to be unconvincing. In particular,

Mirowski (I988), a member of the institutionalist school that has shown most

interest in the approach, has expressed some doubts, reminiscent of previous

institutionalist doubts concerning Marshall's evolutionism, about Georgescu-

Roegen's work:




11/18


Although he has periodically promised a work that would sketch the

outlines of that new bioeconomics, no such tome has issued from his pen.

Perhaps more disappointingly, Georgescu-Roegen often has seemed to

pull his punches, never extending his critiques to their most devastating

conclusions (Mirowski, i988, p. 825).

However, Georgescu-Roegen's (I984) tribute to the long neglected work of

Herman Heinrich Gossen seems to refute Mirowski's criticism. He makes it

very clear as to why he feels that time irreversibility dismantles neoclassical

economics entirely and, also, why the contribution of Marshall was not a

narrow neoclassical one:

Marshall's aim was to show how important novelties make their way into

the system, a very important part of economic evolution. It is for this

reason that Marshall s argument (in contrast to that of Hicks and

Lundberg) was fully dialectical, as is best seen in his notions of short and

long periods. It was by the same method that Marshall proved the

irreversibility of time, an issue that still puzzles some of the most illustrious

physicists (Georgescu-Roegen, I984, p. I 4).

What this paper also makes clear is that the 'conundrum as to why his

criticisms have not simply been extended to the neoclassical concept of utility'

(Mirowski, I 988, p. 826) is not a conundrum at all. The concept of utility used

is not a strictly neoclassical one: Georgescu-Roegen's subscribes to a Gossenian,

not a Jevonian, view of utility maximisation. The latter neglects time, the

former incorporates time and can deal, explicitly, with time irreversibility and

evolutionary change. Here we get another link with Marshall: Gossen is cited

twice by Marshall in successive editions of his Principles along with Jevons.

Jevons' utilitarianism is questioned, Gossen's is not.

Georgescu-Roegen saw the orthodox economist's neglect of time irre-

versibility as a much more serious deficiency than neoclassical thinking about

optimisation. As Lozada (i 99 i) has pointed out, Georgescu-Roegen is strongly

opposed to statistical mechanics of the Boltzmann/Newton variety in

modelling dynamics, both in the natural sciences and in economics, and, again,

adopts a position similar to Marshall:

Marshall's conception of economic change as 'organic growth' almost

certainly explains why he never developed a mathematical theory of

economic dynamics (Shove, I942, p. 3I2).

There is little doubt that Georgescu-Roegen believes, like Marshall did, that a

formal representation of economising behaviour can still be of use in time

irreversible contexts. Neoclassical formalism is not viewed as inadmissible per se

but simply misapplied when set in non-existent, timeless equilibrium situations.

In developing a new bio-economics, he confronted the same problem which

had troubled Marshall, evolutionary biology could still not provide a formal

basis to understand the unfolding of historical processes in economic contexts.

In the i 960s and I 970s, when Georgescu-Roegen was making his most

prominent contributions, biologists were only beginning to consider how non-

(? Royal Economic Society I993



12/18

I993] MARSHALL AND SELF-ORGANISATION 985

equilibrium thermodynamics could be applied, formally, in evolutionary

biology, through a radical reorientation of statistical mechanics. Georgescu-

Roegen, like Marshall, was ahead of his time.

IV SELF-ORGANSATION AND ORGANSATIONAL ECOLOGY

Since the late I 940S, Ilya Prigogine, along with a number of co-researchers at

the Solvay Institute in Brussels have been pioneers in the application of non-

equilibrium thermodynamics to understand the behaviour of structures

considered to be 'dissipative' in character (see Prigogine and Stengers, I984;

Nicholis and Prigogine, I977). Since all types of structure, whether chemical,

biological or socio-economic, include dissipative examples in the face of the

entropy law, Prigogine and his associates lay claim to have discovered a general

scientific paradigm, capable of displacing the prevailing mechanical approach

to dynamics in the natural and social sciences. Prigogine challenges

conventional attempts to model processes as 'clockwork' mechanisms that obey

timeless functional laws and are discoverable using a reductionist experimental

method. However, he also attacks the kind of thermodynamics developed in the

nineteenth century, characterising all structure as tending irreversibly towards

a thermodynamic equilibrium state of maximum disorder. This 'heat death'

view, Prigogine argues, had a profoundly pessimistic effect, in both science and

art, which has lingered on up to the present day.

In Prigogine's view, there are many examples, both in the natural and social

worlds, which contradict both the static mechanical and the thermodynamic

disordering notions of process. Processes at all levels, he argues, often seem to

be characterised by increasing, not static or decreasing organisation. Dissipative

structures, far from thermodynamic equilibrium, are able to achieve a degree

of' self-organisation' (or autopoiesis) which enables them to export entropy and

import free energy to maintain themselves and, in the biological domain, to

facilitate development and reproduction. Thus, the irreversibility implied by

the entropy law is -countered by organisation, which leads to the formation of

complex structure that also contains irreversible features. Because of the

entropy law, a structure must acquire a degree of inflexibility in a spatial sense

and a degree of irreversibility in a temporal case. Consequently, a dissipative

structure cannot always go into reverse in the face exogenous shocks, as is the

case in mechanical models, it may have to either evolve or face destruction.

Prigogine defines a dissipative structure as a thermodynamic system, whose

behaviour is determined by its boundary conditions, in contrast to what he

defines as a dynamic system which is determined by its initial conditions.

Thermodynamic systems are open, yet partially closed by boundary conditions.

The exportation of entropy alters the boundary conditions and creates an

'entropy barrier' (time irreversibility) which ensures that past history

influences the future behaviour of the structure. Such a dissipative structure

can only be understood macroscopically because it contains initial conditions

which are random. Only structures which are dynamic, with non-random

initial conditions, can be analysed microscopically.

( Royal Economic Society I993



13/18


Prigogine s characterisation of structure and process echoes Georgescu-

Roegen s independently developed energy/entropy approach. However,

Prigogine's priority has been to seek an understanding of the development of

organisation and attendant complexity in systems. Although this has been very

successful in chemical applications, Brooks and Wiley (I986) argue that the

Prigoginian approach to self-organisation is inadequate in biological and, by

inference, socio-economic contexts. By identifying a state of maximum entropy

with a state of minimum information, they develop a self-organisation

approach suitable for biological application by emphasising information flow

rather than energy flow. Increasing complexity is viewed as inducing a rise in

entropy, internally, in a dissipative structure. This tendency is not degenerative

because of the parallel increase in organisation, which requires increasing

numbers of information connections. Organisation is hierarchical, so in-

formation becomes embedded in structure. Thus, a biological system is affected

by its past history for developmental reasons. Initial historical conditions

matter as well as externally-imposed conditions, stressed by Prigogine.

There is still controversy in evolutionary biology as to the validity of the

applying the entropy law in an informational context. However, as Wicken

(i 986) stresses, this is largely a semantic debate as to whether the term

'entropy' should be used to describe 'complexity'. As Dyke (I992) points out,

this debate should not be allowed to diminish in importance the fact that a

general entropy-like irreversible tendency has been discovered which can be

used to understand the dynamics of all types of self-organised systems. There is

little doubt that, in socio-economic contexts, informational considerations are

even more important than they are in biological contexts (see Clark, i99i, for

an assessment of the relevance of the Brooks/Wiley approach for economics).

Indeed, the independent studies of socio-economic evolution by mathematical

sociologists, Hannan and Freeman (i 989), in the organisational ecology

tradition, identify similar processes to those identified by Brooks and Wiley

(I986).

Once we de-emphasise energy/entropy processes in favour of information/

complexity processes in self-organising systems we move away from the insights

of Georgescu-Roegen (I97I) but, at the same time, we move closer to the

intuitions of Marshall concerning organisational behaviour. The interaction of

information (or knowledge) and organisation is a central element in Marshall's

economics, although widely unacknowledged as such:

Capital consists in a great part of knowledge and organisation; and of this

some part is private property and other part is not. Knowledge is our most

powerful engine of production; it enables us to subdue Nature and force

her to satisfy our wants. Organisation aids knowledge; it has many forms,

that of various businesses in the same trade, that of various trades

relatively to one another, and that of the State providing security for all

and help for many (Marshall, gth edn, pp. I38-9).

Loasby (i 990) explains how Marshall saw increased organisation and greater

complexity (through the division of labour) as complementary and heavily




14/18


influenced by the availability of knowledge. He argues that the importance of

knowledge in Marshall's thinking has been largely ignored. Loasby (I990)

emphasises the distinctiveness of Marshall's approach, in comparison with

conventional treatments of knowledge in economics, and points to its similarity

to the Austrian treatment of knowledge. Both are juxtaposed against the

conventional neoclassical view:

Jevons' definition of 'the economic problem' which has become the

commonplace of microeconomic textbooks, ignores the growth of

knowledge; indeed it ignores the location of knowledge. It is the definition

of a planning problem, subsequent analysis of which not surprisingly leads

to the isomorphism of perfect competition and perfect planning. It is

remarkable how few of our cleverest economists have been able to see that

this isomorphism demonstrates the irrelevance of both (Loasby, I990,

Pp . 5-6 .

Marshall offers a multi-faceted vision of organisational interactions in the

economic system and they form an essential basis for his arguments concerning

increasing returns and the related historicalness, or time irreversibility, of long

run supply curves. The notion of a self-organisational process was clearly

formed in Marshall's mind:

The increased subdivision of functions, or 'differentiation', as it is called,

manifests itself with regard to industry in such forms as the division of

labour, and the development of specialised skill, knowledge and

machinery: while 'integration', that is, as growing intimacy and firmness

of the connections between the separate parts of the industrial organism,

shows itself in such forms as the increase of security of commercial credit,

and of the means and habits of communication by sea and road, by

railway and telegraph, by post and printing-press (Marshall, 7th edn,

p 24 .

The similarity of such depictions of organisational development to those found

in both Brooks and Wiley (I986) and Hannah? and Freeman (I989) is not

surprising given that Marshall was acutely aware of the socio-economic

relevance of organisational analogies drawn from biology:

economists have, in their turn, owed much to the many profound

analogies which have been discovered between social and especially

industrial organisation on the one side and the physical organisation of the

higher animals on the other (Marshall, 7th edn, p. 24I).

A key aspect of both the self-organisation and organisational ecology

approaches is the prediction that system growth is nonlinearly density

dependent. Hannah and Freeman (i 989) offer persuasive empirical support for

this prediction in various socio-economic contexts. Marshall's argument

concerning economies of scale in the long period also emphasises organisational

factors:

The law of increasing return may be worded thus: an increase of labour and

capital leads generally to improved organization which increases the

efficiency of the work of labour and capital (Marshall, 7th edn, p. 318).

C Royal Economic Society I993



15/18

988 THE ECONOMCJOURNAL [JULY

This 'law' can be viewed as a density dependence proposition, although

Marshall did not, of course, operationalise it terms of the typical nonlinear

logistic specification favoured by Hannan and Freeman (i989). However, he

was certainly aware of the fact that scale economies would be most marked at

low densities and that they would peter out at high densities:

In turning... wool into blankets [in an old country], an increase in the

volume of production brings some new economies, but not many; ... any

new economies are more likely to be the result of new inventions than of

improved organisation. In a country however in which the blanket trade

is but slightly developed, these latter may be important; and it then may

happen that an increase in the production of blankets diminishes the

proportionate difficulty of manufacturing... and ... where the cost of raw

materials counts for little ... the law of increasing returns acts almost

unopposed (Marshall, 7th edn, p. 3I9).

Once we re-orientate our thinking in terms of self-organisational systems

which develop, survive and change in ways which can be modelled using non-

equilibrium thermodynamic constructs, we can see that the neoclassical

economist s notion of equilibrium is an impossible full-information steady state.

Marshall's steady states are different, they are homeostatic states in the

presence of some degree of time irreversibility, induced by the forces of life and

decay which we can now formalise in non-equilibrium thermodynamic terms.

Such steady states are not states of imperfect information but states where

information is greater than zero, as evidenced by the existence of irreversible

processes. In biological and socio-economic circumstances, identified by Brooks

arid Wiley (i986), where there is a mixture of dynamic and non-equilibrium

thermodynamic forces at work, the field force equilibrium notion can be used

to capture homeostasis, if non-equilibrium abstractions, such as Marshall's

'representative' firm (Moss, i984), are derived to avoid dealing with the

nonlinear ranges that an actual firm's parameters can enter. Marshall

preferred to deal with the latter on a case by case basis rather than to allow

nonlinearities, which he could not accommodate, to enter his mathematical

framework. He was clearly dissatisfied with such a limited framework, but it

still enabled him to depict states much more comparable to those to be derived

using the self-organisational approach of the future, rather than those of

equilibrium neoclassical economics.

The self-organisation approach in the natural sciences has shown us that

order can exist where entropy-like time irreversibility prevails. Thus, we can,

as biologists and chemists do routinely, generate tractable nonlinear models of

dynamic processes applying, in the economic case, Marshallian-style ceteris

paribus assumptions and Marshallian thinking about marginalist optimisation

and opportunity cost in the use of time. Because such processes always have

chaotic potential, empirical studies of them must always be pragmatic and

conducted with a fully-informed understanding of the historical and systemic

features of the economic process under consideration. Hannan and Freeman

(I989) provide an example of this kind of background preparation, which




16/18


economists might wish to follow in certain respects. They also show how self-

organising behaviour in socio-economic contexts seems to be much less subject

to chaotic outcomes at the macroscopic level than in chemical or biological

contexts. Inertial forces are found to be extremely powerful in the cases which

they consider. Marshall's natura non facit saltum seems to apply.

V BACK TO THE FUTURE?

Today, some of our most eminent mainstream economic theorists are beginning

to see evolutionary economics as the future:

History dependence stares us in the face but it is not the stuff of pure

theory... Evolutionary theories are beginning to flourish, and they are not

the sort of theories we have had hitherto ... But while there will be work for

the computer scientist, I very much doubt that economists will be able to

establish general propositions in any but very special examples (Hahn,

I99I, p. 48).

However, this rather pessimistic view is not derived from the largely non-

technical literature on evolutionary economics but, instead, from the work of

mathematicians interested in nonlinear dynamics who have found chaotic

complexity to be a feature of even very simple nonlinear dynamic systems.

Computer simulation offers the only route to discover the hidden attractors to

which chaotic dynamics tend. However, even though chaotic systems with

determinate, but unpredictable, features are of interest to economists, a cursory

glance at the historical dynamics of actual economic variables tells us that,

despite the fact that we observe a great deal of chaotic-like behaviour at the

microscopic level, there is also much order and predicability at the macroscopic

level at any point in time. In other words, it is not axiomatic that the complex

chaotic potential of economic dynamics renders them unanalysable using

theoretical constructs. The order we see and, indeed, have sometimes modelled

successfully using simple linear models and methods, ought to be amenable to

theoretical expression.

Hahn (i 99 i) is correct in his view that chaotic dynamics offer an impossible

context for the kind of theorising to which he is accustomed but it does not

necessarily follow that economic processes are, in fact, very chaotic, despite

their chaotic potential. In socio-economic systems, many of the homeostatic

mechanisms we observe are designed, explicitly, to prevent chaotic dynamics

from occurring. This has been understood intuitively by many economists in

the past, a good recent example being Leijonhufvud (I98I) with his 'corridor

hypothesis'. With historical data, it is possible to capture these 'well-behaved'

nonlinear economic processes in statistical form and to assign probabilities as

to the limits of homeostatic mechanisms in absorbing exogenous shocks, as

well as the capacity of structures to continue to take opportunities presented on

their boundaries. If we view 'dissipative structures' in the economic domain as

inertially forward-looking, rather than reactive, much in the manner of

Marshall, then density dependent models, which can be stable over long




17/18


periods, can be estimated econometrically. In economics, we are privileged in

that we can often measure the informational complexity embodied in economic

organisation in terms of monetary valuation. Provided irreversibility and

reproducibility of organisation are in evidence to some degree, then we can

discover statistical representations of such processes.

However, as economists, there is a limit to the extent that we can probe into

the evolutionary change which accompanies time irreversibility in self-

organising systems. We can make some assessment as to the influence of

historical conditions on the future of an economic structure from the statistical

evidence we have (see, for example, Foster, I992). We can be alerted to the fact

that, for example, over-faithful reproducibility and insufficient absorption of

micro-novelty is rendering an economic structure increasingly vulnerable to

being selected out. However, the non-equilibrium thermodynamical approach

offers us only a statistical viewfinder set to observe the stable interplay of self-

organisation and entropy-like processes, not evolutionary nonlinearities,

imperfectly accounted for in the homeostatic mechanisms of the economic

structures which we choose to study. Like Marshall we must be pragmatic

about such nonlinearities, allowing for non-economic influences, such as

political instabilities, in qualitative ways.

In conclusion, the self-organisation approach, suitably adapted to the

economic context, seems to offer scientific foundations for a post-Marshallian

re-orientation of economics. The parallels with Marshall s economics have

been explored and it has been argued that his insights concerning economic

processes are highly compatible with this new approach. In attempting to deal

with time irreversibility, Marshall devised methods which were difficult to

digest by both neoclassical economists and their evolutionary opponents. It is

only now that we can see how remarkably far-sighted he was. Because of this,

his writings still offer one of the best starting points in any attempt to

understand how the self-organisation approach can be adapted for use in

economics. One suspects that Marshall would have -been disappointed with the

slowness with which economics has moved beyond his 'backbone' mechanical

approach. However, he would have also been capable of understanding why

ideological and ethical factors have had such a powerful influence on the

direction and extent of scientific development in economics.

University of Queensland

Date of receipt offinal typescript: September I992

REFERENCES

Arrow, K. J. (1 988). 'Workshop on the economy as an evolving complex system: summary.' In The Economy

as an Evolving Complex System (ed. P. W. Anderson, K. J. Arrow and D. Pines), pp. 275-82. Redwood

City: Addison Wesley.

Arthur, W. B. (i988). 'Self reinforcing mechanisms in economics.' In The Economy as an Evolving Complex

System (ed. P. W. Anderson, K. J. Arrow and D. Pines), pp. 9-32. Redwood City: Addison Wesley.

Boulding, K. E. (I98I). Evolutionary Economics. London: Sage.

Brooks, D. R. and Wiley, E. 0. (I986). Evolution as Entropy: Toward a Unified Theory of Biology. Chicago:

Chicago University Press.

(D Royal Economic Society I993



18/18

I993] MARSHALL AND SELF ORGANSATON99

Clark, N. (i99i). 'Organisation and information in the evolution of economic systems.' In Evolutionary

Theories of Economic and Technological Change (ed. P. P. Saviotti and S. Metcalfe). London: Harwood

Press.

Currie, M. and Steedman, I. (I990). Wrestling with Time. Manchester: Manchester University Press.

Debreu, G. (I991). 'The mathematization of economics.' American Economic Review, vol. 8I, pp. I-7.

David, P. (i 988). 'Putting the past into the future of economics.' Institute for Mathematical Studies in the

Social Sciences, Stanford University, Technical Report No. 533.

Dosi, G. and Metcalfe, J. S. (i 99 I). 'On some notions of irreversibility in economics.' In Evolutionary Theories

of Economic and Technological Change (ed. P. P. Saviotti and J. S. Metcalfe). London: Harwood Press.

Dyke, C. (I992). From entropy to economy: a thorny path. Advances in Human Ecology, vol. I, pp. I49-76.

Foster, J. (i987). Evolutionary Macroeconomics. London: Allen and Unwin.

Foster, J. (I 992). 'The determination of Sterling M3: an evolutionary macroeconomic approach.' ECONOMIC

JOURNAL, vol. I02, pp. 48I-96.

Georgescu-Roegen, N. (I97I). The Entropy Law and the Economic Process. Cambridge, Mass.: Harvard

University Press.

Georgescu-Roegen, N. (I976). Energy and Economic Myths: Institutional and Analytical Economic Essays. New

York: Pergamon.

Georgescu-Roegen, N. (i 984). 'Time and value in economics and in Gossen's system.' Mimeo (December).

Hannan, M. T. and Freeman, J. (i 989). Organisational Ecology. Cambridge, Mass.: Harvard University Press.

Hahn, F. (i99I). 'The next hundred years.' ECONOMIC JOURNAL, vol. 10I, pp. 47-5I.

Hodgson, G. M. (I993). 'The mecca of Alfred Marshall.' ECONOMIC JOURNAL, vol. I03, pp. 406-I5.

Jevons, S. (i865). The Coal Question. London: Macmillan.

Leijonhufvud, A. (i98i). Information and Co-ordination: Essays in Macroeconomic Theory. Oxford: Oxford

University Press.

Loasby, B.J. (1978). 'Whatever happened to Marshall's Theory of Value?' Scottish Journal of Political

Economy, vol. 25, pp. I-I2.

Loasby, B.J. (I990). 'Knowledge and organisation: a post-Marshallian research programme.' Mimeo,

Department of Economics, University of Stirling June).

Lozada, G. A. ( I990). 'Georgescu-Roegen's critique of statistical mechanics revisited.' Mimeo, Energy and

Resources Group, University of California, Berkeley (December).

Maloney, J. (i985). Marshall, Orthodoxy and the Professionalization of Economics. Cambridge: Cambridge

University Press.

Marshall, A. (I898, I9I6, I920, i96i). Principles of Economics (4th, 7th, 8th and gth edns). London:

Macmillan.

Mirowski, P. (1 988). Energy and energetics in economic theory: a review essay. Journal of Economic Issues,

vol. 22, pp. 8I I-32.

Mirowski, P. (i99i). 'The when and how and why of mathematical expression in the history of economic

analysis.' Journal of Economic Perspectives, vol. 5, pp. I47-57.

Moss, S. (i984). 'The history of the theory of the firm from Marshall to Robinson and Chamberlin: the

source of positivism in economics. Economica, vol. 5I, pp. 307-I8.

Nicholis, G. and Prigogine, I. (i977). Self-Organisation in Non-equilibrium Systems: From Dissipative Structures to

Order through Fluctuations. New York: John Wiley.

Prigogine, I. and Stengers, I. (i984). Order Out of Chaos: Man's New Dialogue With Nature. London:

Heinemann.

Reisman, D. (I990). Alfred Marshall's Mission. New York: St Martin's.

Rostow, W. (i989). 'Non-linear dynamics: implications for economics in historical perspective.' Paper

presented to an International Symposium on Evolutionary Economics and Nonlinear Dynamics, I 6-I 9

April i989, IC Institute, Austin, Texas.

Schumpeter, J. A. (I 954). History of Economic Analysis. London: Allen Unwin.

Samuelson, P. A. (I 946). Foundations of Economic Analysis. Cambridge, Mass.: Harvard University Press.

Samuelson, P. A. (I972). 'What classical and neoclassical monetary theory really was.' Reprinted in The

Collected Scientific Papers of Paul A. Samuelson, vol. III (ed. R. C. Merton). Cambridge, Mass.: MIT Press.

Shove, G. F. (I942). 'The place of Marshall's Principles in the development of economic theory.' ECONOMIC

JOURNAL, vol. 52, pp. 294-329.

Smith, A. (I986). The Wealth of Nations. London: Penguin.

Snooks, G. D. (I99I). 'The lost dimension: economics without time.' Australian National University,

Mimeo July).

Thomas, B. (I99I). 'Alfred Marshall on economic biology.' Review of Political Economy, vol. 3, pp. I-I4.

Veblen, T. B. (i 990). Why is economics not an evolutionary science? Quarterly Journal of Economics, vol. I 2,

pp. 373-97. Reprinted in T. B. Veblen, The Place of Science in Modern Civilisation. London: Transaction.

Wicken,J. S. (1 986). Evolutionary self organisation and entropic dissipation in biological and socioeconomic

systems.' Journal of Social and Biological Structures, vol. 9, pp. 26I-73.

-( Royal Economic Society I993

Economics and the Self-Organisation Approach

Documents

Transcript of Economics and the Self-Organisation Approach