Monday, August 15, 2016

Alfred Marshall and the Origin of Ceteris Paribus

When non-economists ask me questions, they often seem to be jumping from topic to topic. A question about the effects of raising the minimum wage, for example, shifts from how it will affect jobs, and earnings, and companies that hire minimum wage workers, and work effort, and automation, and the the overall income distribution, and children of minimum wage earners, and so on. The questions are all reasonable. But I become self-aware that economists have trained themselves into a one-thing-at-a-time method of analysis, and so bouncing from one topic to another can feel somehow awkward.

The ceteris paribus or "other things equal" assumption involves an intellectual approach, common among economists, of trying to focus on one thing at a time. After all, many economic issues and policies have a number of possible causes and effects. Rather than hopscotching among them, economists often try to discuss isolate one factor at a time, and then to move on to other factors, before combining it all into an overall perspective. The use of this approach in economic analysis traces back to trace back to Alfred Marshall's 1890 classic Principles of Economic Analysis.

The Library of Economics and Liberty provides a useful place for finding searchable editions of many classic works in economics. The site provides the 8th edition of Marshall's Principles, published in 1920. In Book V, Chapter V, "Equilibrium of Normal Demand and Supply, Continued, With Reference To Long and Short Periods," Marshall described the overall logic of looking at one thing at a time, offers some hypothetical examples from a discussion of supply and demand shocks in fish markets, and points out that longer the time period of analysis, the harder it becomes to assume that everything else is constant. Marshall writes:
"The element of time is a chief cause of those difficulties in economic investigations which make it necessary for man with his limited powers to go step by step; breaking up a complex question, studying one bit at a time, and at last combining his partial solutions into a more or less complete solution of the whole riddle. In breaking it up, he segregates those disturbing causes, whose wanderings happen to be inconvenient, for the time in a pound called Cœteris Paribus. The study of some group of tendencies is isolated by the assumption other things being equal: the existence of other tendencies is not denied, but their disturbing effect is neglected for a time. The more the issue is thus narrowed, the more exactly can it be handled: but also the less closely does it correspond to real life. Each exact and firm handling of a narrow issue, however, helps towards treating broader issues, in which that narrow issue is contained, more exactly than would otherwise have been possible. With each step more things can be let out of the pound; exact discussions can be made less abstract, realistic discussions can be made less inexact than was possible at an earlier stage. ...

The day to day oscillations of the price of fish resulting from uncertainties of the weather, etc., are governed by practically the same causes in modern England as in the supposed stationary state. The changes in the general economic conditions around us are quick; but they are not quick enough to affect perceptibly the short-period normal level about which the price fluctuates from day to day: and they may be neglected [impounded in cœteris paribus] during a study of such fluctuations.

Let us then pass on; and suppose a great increase in the general demand for fish, such for instance as might arise from a disease affecting farm stock, by which meat was made a dear and dangerous food for several years together. We now impound fluctuations due to the weather in cœteris paribus, and neglect them provisionally: they are so quick that they speedily obliterate one another, and are therefore not important for problems of this class. And for the opposite reason we neglect variations in the numbers of those who are brought up as seafaring men: for these variations are too slow to produce much effect in the year or two during which the scarcity of meat lasts. Having impounded these two sets for the time, we give our full attention to such influences as the inducements which good fishing wages will offer to sailors to stay in their fishing homes for a year or two, instead of applying for work on a ship. We consider what old fishing boats, and even vessels that were not specially made for fishing, can be adapted and sent to fish for a year or two. The normal price for any given daily supply of fish, which we are now seeking, is the price which will quickly call into the fishing trade capital and labour enough to obtain that supply in a day's fishing of average good fortune; the influence which the price of fish will have upon capital and labour available in the fishing trade being governed by rather narrow causes such as these. This new level about which the price oscillates during these years of exceptionally great demand, will obviously be higher than before. Here we see an illustration of the almost universal law that the term Normal being taken to refer to a short period of time an increase in the amount demanded raises the normal supply price.  ...

Relatively short and long period problems go generally on similar lines. In both use is made of that paramount device, the partial or total isolation for special study of some set of relations. In both opportunity is gained for analysing and comparing similar episodes, and making them throw light upon one another; and for ordering and co-ordinating facts which are suggestive in their similarities, and are still more suggestive in the differences that peer out through their similarities. But there is a broad distinction between the two cases. In the relatively short-period problem no great violence is needed for the assumption that the forces not specially under consideration may be taken for the time to be inactive. But violence is required for keeping broad forces in the pound of Cateris Paribus during, say, a whole generation, on the ground that they have only an indirect bearing on the question in hand. For even indirect influences may produce great effects in the course of a generation, if they happen to act cumulatively; and it is not safe to ignore them even provisionally in a practical problem without special study. Thus the uses of the statical method in problems relating to very long periods are dangerous; care and forethought and self-restraint are needed at every step. The difficulties and risks of the task reach their highest point in connection with industries which conform to the law of Increasing Return; and it is just in connection with those industries that the most alluring applications of the method are to be found.
For those who want more on the history of ceteris paribus (the modern spelling no longer uses the ligature version that ties together the o and e), Joseph  Persky offers a nice introduction in his 1990 article "Retrospectives: Ceteris Paribus," which appeared in the Journal of Economic Perspectives (4: 2, pp. 187-193). Persky finds early uses of the term back in the 1600s, including a 1662 passage by the economist William Petty that was often quoted in the 19th century--and thus may have inspired Marshall's use of the term. 

Persky notes the dueling concerns that economists may in some cases feel that they should avoid big-picture subjects in the global economy or historical analysis because the ceteris are not always paribus, or in other cases that economic research may be focusing on one factor while other important factors are also changing. But as Persky points out, the ceteris paribus assumption is not meant as a literal statement that nothing else has changed, but only to remind the reader that the analysis may be leaving something out. As Persky writes: "Economists could do much worse than to flag our fallibility with a bit of Latin."