Monday, October 13, 2014

Alfred Marshall on the Natural Rate of Interest

Joan Robinson (1969: 397) noted that Alfred Marshall had developed something analogous to the concept of a “natural rate of interest,” though this appears to have been independently of Wicksell.

On 19 December 1887, Alfred Marshall gave evidence before a British “Royal Commission on the Value of Gold and Silver,” which was instituted in 1887 to investigate the question of changes in the value of gold and silver and the effects of this on trade and production.

The relevant quotation is as follows:
“9651. The evidence that has been put by some witnesses before us has been intended to show that so far from any connexion being traceable between plentiful money and a low rate of discount and a plentiful supply of the precious metals, the evidence was just the other way?—[sc. Marshall’s answer:] Oh yes, that is certainly true as regards permanent results; the supply of gold exercises no permanent influence over the rate of discount. The average rate of discount permanently is determined by the profitableness of business. All that the influx of gold does is to make a sort of ripple on the surface of the water. The average rate of discount is determined by the average level of interest in my opinion, and that is determined exclusively by the profitableness of business, gold and silver merely acting as counters with regard to it.”
(Final Report of the Royal Commission Appointed to Inquire into the Recent Changes in the Relative Values of the Precious Metals; With Minutes of Evidence and Appendixes. Eyre and Spottiswoode, London, 1888. p. 4).
The notion that the level of interest is determined “exclusively by the profitableness of business” appears quite similar to the way in which Wicksell defined the natural rate in “The Influence of the Rate of Interest on Prices” (1907):
“According to the general opinion among economists, the interest on money is regulated in the long run by the profit on capital, which in its turn is determined by the productivity and relative abundance of real capital, or, in the terms of modern political economy, by its marginal productivity. This remaining the same, as, indeed, by our supposition it is meant to do, would it be at all possible for the banks to keep the rate of interest either higher or lower than its normal level, prescribed by the simultaneous state of the average profit on capital?” (Wicksell 1907: 214).
Final Report of the Royal Commission Appointed to Inquire into the Recent Changes in the Relative Values of the Precious Metals; With Minutes of Evidence and Appendixes. Eyre and Spottiswoode, London, 1888.

Robinson, Joan. 1969. The Accumulation of Capital (3rd edn.). Macmillan, London.

Wicksell, K. 1907. “The Influence of the Rate of Interest on Prices,” The Economic Journal 17.66: 213–220.


  1. Yes, Cambridge monetary theory is generally seen as arising out of Marshall's practical work. And the report was the most important component of that. You can read all about this in Keynes' biography of Marshall.

    1. Thanks very much for that link! -- very interesting.

    2. Alfred Marshall on Mathematics in Economics

      Balliol Croft, Cambridge
      27. ii. 06

      My dear Bowley,
      I have not been able to lay my hands on any notes as to Mathematico-economics that would be of any use to you: and I have very indistinct memories of what I used to think on the subject. I never read mathematics now: in fact I have forgotten even how to integrate a good many things.

      But I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules---(1) Use mathematics as a short-hand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can't succeed in 4, burn 3. This last I did often.

      I believe in Newton's Principia Methods, because they carry so much of the ordinary mind with them. Mathematics used in a Fellowship thesis by a man who is not a mathematician by nature---and I have come across a good deal of that---seems to me an unmixed evil. And I think you should do all you can to prevent people from using Mathematics in cases in which the English language is as short as the Mathematical. ....
      I find mathematicians almost invariably follow what I regard as Jevons' one great analytical mistake, his eulogy of the Geometric mean in general: and do not see that, according to his use, erroneous weighting may do far more mischiefwith the Geometric Mean than with the Arithmetic Mean. I always have to spend some time in convincing them of the danger.

      Your emptyhandedly,

      Alfred Marshall

      Pages 427-428 of Memorials of Alfred Marshall, edited by A. C. Pigou. One edition is: New York, A. M. Kelley, 1966, HB103 .M3 1966.

  2. My dear Lord Keynes, I think you might find my new post interesting:

    1. A great post -- very interesting!

      I have linked to it here: