Smith and Marshall and Wealth and Poverty

by Don Boudreaux on September 28, 2006

in Standard of Living

Greg Mankiw’s recent post on the origins of supply-and-demand analysis — and his mention of Alfred Marshall‘s role in the history of making this valuable tool such a central part of economics — recalled to my mind another interesting feature of Marshall’s Principles of Economics.  I was going to blog on this other feature when I vaguely remembered doing so earlier.  Here’s that earlier post, from August 2004, which points out a telling difference in the great Alfred Marshall’s perspective on the world compared to the perspective of the great Adam Smith:

The Causes of Poverty?

1776 saw the publication of Adam Smith’s great book An Inquiry Into the Nature and Causes of the Wealth of Nations. [An on-line version is here.]

Note carefully the full title (as opposed to the more frequently used abbreviation The Wealth of Nations).
Written just as the booster rockets for humanity’s great wealth
explosion were being ignited, Smith inquired into the nature and the
causes of wealth. Smith understood that the phenomenon to be explained
is wealth. Wealth doesn’t just happen; it is not humanity’s default
mode. Wealth must be created; therefore, wealth has causes.

Writing a mere 114 years later, another illustrious economist, Alfred Marshall, wrote on page two of his justly celebrated Principles of Economics
of “the causes of poverty.” Marshall wrote these words as part of his
explanation of why the study of economics is useful. But writing after
the fruits of the wealth explosion began raining down widely, even as
astute a mind as Marshall missed the fact that poverty has no causes.
Poverty is humankind’s default mode. It’s what exists if we do nothing.
“Creating” poverty — causing poverty — is no challenge whatsoever.

Escaping poverty has causes – that is, wealth has causes.

This point bears repeating.  Poverty has no causes.  Wealth has causes.

But capitalism has been so enormously successful at producing
widespread material abundance that we today — like Alfred Marshall in
1890 — regard wealth as innate to our existence, as our default mode.
It is not. The set of institutions that will promote the creation of
widespread prosperity is minuscule in number compared to those that
prevent people from creating material prosperity.

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Bill Conerly September 28, 2006 at 6:04 pm

Don, why don't you repeat this post weekly until we all have it memorized?

Truthocracy September 28, 2006 at 11:18 pm

Poverty is caused by the exploitation of the working class by the wealthy. The rich obtained their exaulted status by stealing their money from everyone else. The solution is simple: the confiscation and redistribution of existing wealth, followed by high taxation and a strong social safety net to keep such inequalities from re-occuring. No one in Sweeden is poor, and no one would be poor in America if we had the same laws and protections here.

Jack September 29, 2006 at 12:29 am

An interesting play of words. It does reveal to some degree the difference of Smith from Marshall.

However, there is a cause to poverty if you recognize that Smith's invisible hand would have made everyone wealthy. ;)

Randy September 29, 2006 at 9:55 am


"Re; "The rich obtained their exaulted status by stealing their money from everyone else."

Prove it. Show me the evidence. Anyone on the Forbes 100 wealthiest list will do. Because unless you can show me evidence of a crime, I will continue to assume that the wealth was earned.

Noah Yetter September 29, 2006 at 11:34 am

thanks, I needed a good laugh!

Rex Pjesky September 29, 2006 at 12:27 pm

I think Truthocracy is right. I am (as everyone else reading this) easily in the top one percent of wealth and I stole all my stuff from poor folks.

I swiped my new minivan from an exploited person in Sudan.

Steve-o September 29, 2006 at 4:37 pm

That comment by Truthocracy was satire, right? That was really IowaHawk, methinks, or one of the folks from Scrappleface. Great stuff!

Randy September 29, 2006 at 5:00 pm


You could be right. It did seem a little over the top. And I went for it, hook, line, and sinker :P

Truthiness September 29, 2006 at 8:37 pm

No, it's not a joke. I'll give you an example: Google. Google has created a fine search engine, which has made many of its employees rich. However, Google hordes its source code. I would benefit tremendously if Google would share its source code with me. Therefore, by hoarding its source code, Google has made me worse off, in effect stealing from me. The same holds for all the money Google's employees made. I'd be better off if all that wealth were redistributed, so by keeping it, Google's employees have stolen that money from the me that would have had it had that money been redistributed.

It's the same any time wealth is created and hoarded rather than shared immediately with all equally. Any time the rich get richer, they are stealing from those poorer than them.

Randy September 29, 2006 at 11:05 pm


I'd be better off if I got the government to force you to give me $100. Don't be greedy. Give it to me. I need it to get this hook out of my mouth…

Russell Nelson September 30, 2006 at 2:32 am

Google isn't making you any worse off than if they never created that source code. In fact, by writing that code and running it on their servers, they are making you better off …. just not as well off as you would be if Google gave the code away.

cpurick September 30, 2006 at 3:23 am

"The international poverty figures we hear cited all the time do not measure poverty at all! (245) The only thing they measure is inequality. For example, by calculating the percentage of people below 50% of the median income (median is middle not average [mean]), the Syracuse study found poverty rates of 6.6% for Sweden and 16.9% for the United States. But this says nothing about what the median income is"

CATO citation:
"Recall that by the early 1950s Sweden was by far the richest country in Europe. Its per capita GNP was twice the European average and 25 percent above that of Switzerland, which ranked second.
Sweden's dismal economic performance from 1970 to 1990 was no less striking than its high growth from 1870 to 1930.
After the collapse of communism, some Swedes (especially the Social Democrats) thought the Swedish model would be an attractive choice for the newly emerging democracies of Central Europe. But it has not been. Poland, Hungary, and Czechoslovakia have wisely chosen to look for free-market solutions. Other nations in that region show little interest in the Swedish model.
What should be recommended to anyone who hopes to succeed with the Swedish model? Follow the first hundred years of capitalist growth and avoid the subsequent mistakes."

mrsizer September 30, 2006 at 8:46 pm

Truth-puppet is kidding. No one can possibly be that stupid.

gene berman October 1, 2006 at 10:11 am

There are a few simple reasons for Sweden's relative prosperity, especially in the '50s (immediately post WWII).

Sweden had been, for quite some time, a nation of energetic, imaginative, industrious folk in both the agricultural and industrial areas. But the wide differential between their fortunes and the rest of Europe has to be seen in their good fortune not to have been actively involved in WW II. Everywhere else, the devastation, particularly of industry, was extensive. Not only did Sweden profit handsomely from the war demands of others, such demand for their goods and services continued in the rebuilding aftermath.

The fact is that the Swedish economic policies have been for some time steadily impoverishing that nation (and continue to do so).

If a nation changes in any way (insofar as its economic freedom is concerned), it is either progressing toward greater freedom and abundance or regressing toward greater government coercion and poverty. There is no "third way"–anywhere.

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