a.pdf - Review of Economic Analysis 4(2012 165-174...

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The Marshallian Consumer By TAPAN BISWAS University of Manchester Ever since the publication of Principles (Marshall, 1890), the Marshallian assumption that the marginal utility of money is constant has been the source of many debates and confusions. Consequently, the Marshallian demand function has been interpreted in different ways by different authors. Some of the exponents of the Marshallian demand theory (e.g. Samuelson, 1942; Green, 1971) assume a Paretian framework, in which the consumer shops for the day with a predetermined expenditure level. They derive the form of the utility function that is consistent with the assumption that the marginal utility of mone'y (expenditure) is invariant with respect to the prices the consumer has to pay. This is essentially a Paretian exercise, the origin of which may be traced back to Pareto (1892). Although the exercise is interesting, it is hard to believe that Marshall built his demand theory on the weak foundation of a highly restricted class of utility functions. There are, of course, well-known alternative 'interpretations (e.g. Friedman, 1949; Bailey, 1954). In his discussion on the nature of the demand function (and the theory of consumer's surplus), Marshall assumed "other things" to be equal. In other words, the "conjuncture" or the circumstances are to be considered as invariant with respect to the change in price. Friedman (1949) interpreted this as implying a movement along the indifference surface. However, this interpretation is not very satisfactory. Friedman himself admitted that the case of Giffen good does not fit in his interpretation of Marshall. Moreover, the marginal utility of money does not, in general, remain constant when the consumer shifts his position on the indifference curve accompanied by a compensated variation in income. In this paper we provide an alternative interpretation of the Marshallian assumption that the marginal utility of money is constant. We support our exegesis by proper textual documentation. It seems- that most of the confu- sions arose in trying to interpret Marshall in the Paretian framework of a budget-constraint model. The literature talks about Walras-Marshall-Pareto demand theory (see Wilson, 1939) without realizing that, even in the last edition of his Principles, Marshall never cited any work of Walras or Pareto in the context of the demand theory although he referred to their works in other contexts. I A few years after the first edition of Principles was published, Sanger (1895) wrote a survey article on the recent contributions to mathematical economics. Towards the end of the article he was explaining Barone's (1894) interpretation of the difference between the Walrasian consumer's surplus and the Marshallian consumer's surplus. Barone proved that they Review of Economic Analysis 4 (2012) 165-174 1973-3909/2012165 Originally published in Economica (1977) 44, 47-56 165
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change by an equal amount if the variation in prices is small. Quoting directly from Sanger (1895, p. 125): Professor Marshall assumes that m remains constant .... According to Professor Walras, the individual
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