The four plates before this one built one blade of a pair of scissors. From the falling gradient of marginal utility and the rule that levels the margins of every use, they assembled the whole of the demand side of a market — the consumer's optimum, and the downward-sloping curve that shows how much he will buy at each price. But a price is not made by buyers alone. Facing them across every market are sellers, and the marginal principle that governs the one governs the other no less: a producer, too, weighs one more unit against what it costs him to make, and supplies up to the margin where the two come level, tracing as he does so an upward-sloping curve of his own. Two curves, then, two blades — and the question of how they together fix a price, and of which of them, if either, may be said to fix it, fell to the greatest of the second generation of marginalists to answer. His name was Alfred Marshall, and the instrument with which he gave the answer has been the working apparatus of economics ever since.
The question Marshall confronted was an old and surprisingly bitter one: what, at bottom, determines the value of a thing? The classical economists had answered, with great confidence, that value comes from cost — from the labour and the other expenses of producing a good, the side of supply; this was the doctrine of Smith and Ricardo, and the labour theory was its hardest form. The marginal revolutionaries had answered, with equal confidence and in flat contradiction, that value comes from utility — from the marginal usefulness of a good to the one who wants it, the side of demand; and Jevons in particular had pressed the point to its limit, announcing the labour theory dead and value a matter of utility and nothing besides. Each school had seized one side of the market and declared it the true and only source of value, and the swing from the classical answer to the marginalist one had been a swing from one extreme to the other — from cost alone to utility alone, from supply to demand, with the very same overconfidence on each side of the arc.
Marshall's reply, set down in the Principles of Economics of 1890, was that the whole quarrel rested on a false choice, and he disposed of it with the homely image that has carried his name ever since. To ask whether value is governed by cost or by utility, he said, is like asking whether it is the upper or the under blade of a pair of scissors that does the cutting: one may say, loosely, that the upper blade does it while the under is held still, but the remark is not strictly correct, and is tolerated only as a kind of shorthand, for in truth the paper is cut by the two blades together. So with price. It is fixed neither by demand alone nor by supply alone but by the two in conjunction — at the level where the quantity that buyers will take, governed by the marginal utility behind the demand curve, exactly equals the quantity that sellers will offer, governed by the marginal cost behind the supply curve. The marginalists' utility and the classicals' cost had never been rivals for the title of the real cause of value. They were the two blades of a single instrument, and value is what their meeting cuts.
To ask whether cost or utility governs value, Marshall said, is to ask which blade of the scissors does the cutting — the upper or the under — when plainly it is the two together, closing on the paper, that make the cut.
Yet Marshall did not leave the two blades in perfect symmetry, for he saw that their apparent importance shifts with the span of time one allows, and in this lay the subtlest part of his reconciliation. Consider, he said, a market of very short duration — the day's catch of fish brought to a town, the quantity already landed and unalterable. Here supply is simply fixed; no effort of the sellers can produce another fish before the market closes, and the price is therefore settled almost wholly by demand, by what the buyers happen to be willing to pay for the given stock. The marginalists' utility theory fits this short period exactly. But lengthen the span, and supply begins to move: if fish are dear, more boats are built and more men go to sea, and the quantity offered swells until the price is driven back down toward the cost of catching; over the long run it is cost, the classical blade, that rules. Marshall's resolution of the old quarrel was thus not merely that both sides operate, but that each predominates in its own frame of time — demand in the short run, when supply is frozen, cost in the long, when supply is free — so that both the classicals and the marginalists had been right, about different lengths of time, and wrong only in supposing that their answer was the whole of it.
There was a deliberate modesty in the way Marshall framed his apparatus, and it set his work apart from the grandest project of the revolution. Walras, in Lausanne, had drawn the entire economy as a single interlocking system, every price in every market depending upon every other, the whole to be solved together as one vast set of simultaneous equations — a general equilibrium of breathtaking ambition and almost no practical tractability. Marshall took the opposite path. He looked at one market at a time, holding the rest of the economy still by the device he made famous as other things being equal, and asked how price and quantity were settled in that single market alone. The supply-and-demand diagram that resulted — price rising up the vertical axis, quantity stretching along the horizontal, the demand curve sloping down to meet the supply curve sloping up, the equilibrium marked at the point where they cross — is the first picture every student of economics is now shown, and it is Marshall's. It buys its tractability at the cost of Walras's completeness, ignoring the ripples that any one market sends through all the others; but it can actually be used, on real questions, by ordinary people, and that was precisely Marshall's intent.
Walras had drawn the whole economy as one web of equations, every price hung upon every other; Marshall drew a single market with the rest of the world held still — less grand by far, but a thing a person could actually use.
Within that frame Marshall built the apparatus that the discipline still runs on. He gave the demand curve its firm derivation from diminishing marginal utility and the supply curve its derivation from marginal cost; he located equilibrium at their intersection and showed how it shifts as the curves move; he coined the notion of elasticity to measure how sharply the quantity responds to a change in price; he gave precise form to the consumer's surplus, the gap between what a buyer would have been willing to pay and what he actually pays, which a later volume of this table will take up in its own right. All of it he was able to write in the calculus, the marginal quantities being exactly the derivatives that the calculus is made to handle. And all of it he gathered into the Principles of Economics, a book that became the single dominant textbook of the subject for some forty years — the work through which the marginal apparatus passed from the founders' scattered and difficult statements into the orderly, teachable, usable form in which it has been handed down ever since.
The character of the man is written all over the work, and it is worth a moment, for it shaped the discipline as much as any theorem. Marshall was deeply learned in mathematics and deeply distrustful of its overuse in economics; he confined the algebra of the Principles to footnotes and appendices, holding that an economic argument worth making could be made in plain English, and he left behind a famous rule of method — translate the mathematics into English, illustrate it with examples drawn from real life, and then burn the mathematics. He thought of economics not as a pure calculus of equilibrium but as the study, in his own phrase, of mankind in the ordinary business of life, and he cared, sometimes to the edge of paralysis, about its bearing on the welfare of actual and especially of poor people. He took the motto of his great book from the naturalists — that nature makes no leaps — and meant by it that economic change, like the margin itself, proceeds by small continuous increments rather than by sudden jumps. He was slow, scrupulous, and humane; and through him the marginal revolution acquired not only its working apparatus but a temper: cautious, practical, and turned toward the world.
With Marshall the marginal revolution arrived at its mature and usable form. The scissors settled the long quarrel between cost and utility by showing them to be the two blades of one instrument; the partial-equilibrium diagram made the settlement teachable; and the whole was written cleanly enough in the calculus, and plainly enough in English, to become the common possession of the field. The margin, glimpsed by Gossen and discovered by three men at once, was now an apparatus a student could learn in an afternoon. But the supply blade that Marshall drew as a single smooth upward curve conceals, within that smoothness, distinctions that matter a great deal, and that the careful use of the margin requires one to keep straight — between the cost of one more unit and the cost of the average unit, between the costs that vary with output and the costs already sunk and gone beyond recall. To draw the cost blade properly, and to mark the errors that follow from drawing it wrong, is the work of the next plate. As the table says of every quantity, first to last: the argument remains open.