“But though men have the power to purchase they may not choose to use it. For when confidence has been shaken by failures, capital cannot be got to start new companies or extend old ones. Projects for new railways meet with no favour, ships lie idle, and there are no orders for new ships. There is scarcely any demand for the work of navies, and not much for the work of the building and the engine-making trades. In short there is but little occupation in any of the trades which make Fixed capital. Those whose skill and capital is Specialised in these trades are earning little, and therefore buying little of the produce of other trades. Other trades, finding a poor market for their goods, produce less; they earn less, and therefore they buy less; the diminution of the demand for their wares makes them demand less of other trades. Thus commercial disorganization spreads, the disorganization of one trade throws others out of gear, and they react on it and increase its disorganization.It seems to me that Marshall’s remarks about “confidence” in business life are a direct precursor to Keynes’ ideas about subjective expectations in relation to investment: although Marshall did need to understand the role of fundamental uncertainty and a few other steps before he could advance to the views that Keynes eventually held.
The chief cause of the evil is a want of confidence. The greater part of it could be removed almost in an instant if confidence could return, touch all industries with her magic wand, and make them continue their production and their demand for the wares of others. If all trades which make goods for direct consumption agreed to work on and to buy each other’s goods as in ordinary times, they would supply one another with the means of earning a moderate rate of profits and of wages. The trades which make Fixed capital might have to wait a little longer, but they too would get employment when confidence had revived so far that those who had capital to invest had made up their minds how to invest it. Confidence by growing would cause itself to grow; credit would give increased means of purchase, and thus prices would recover. Those in trade already would make good profits, new companies would be started, old businesses would be extended; and soon there would be a good demand even for the work of those who make Fixed capital. There is of course no formal agreement between the different trades to begin again to work full times and so make a market for each other’s wares. But the revival of industry comes about through the gradual and often simultaneous growth of confidence among many various trades; it begins as soon as traders think that prices will not continue to fall: and with a revival of industry prices rise.” (Marshall and Marshall 1879: 154–155).
In a footnote to this passage from The Economics of Industry Marshall even hints at a possible solution to the lack of business confidence proposed by “socialists” of his day:
“The most plausible of all the plans that have been suggested by Socialists for the artificial organization of industry is one which aims at the ‘abolition of commercial risk.’ They propose that in times of depression Government should step forward, and, by guaranteeing each separate industry against risk, cause all industries to work, and therefore to earn and therefore to buy each other’s products. Government, by running every risk at once, would, they think, run no risk. But they have not yet shewn how Government should tell whether a man’s distress was really due to causes beyond his own control, nor how its guarantee could be worked without hindering that freedom on which energy and the progress of invention depend.” (Marshall and Marshall 1879: 155, n. 1).Admittedly, I am not quite sure whether the “socialists” whom Marshall was thinking of here were really Marxists or communists (that is, advocates of a command economy). The word “socialist,” as in our day, was frequently abused by conservatives or advocates of free markets and stripped of any coherent meaning and used of anyone on the left in 19th century.
Perhaps Marshall’s “socialists” were what we would now call social democrats/progressive liberals who were advocating government spending and public works in a depression. If the latter, then clearly proto-Keynesian solutions to recession were a part of public discourse even in the 1870s.
Marshall, A. and Marshall, M. P. 1879. The Economics of Industry. Macmillan, London.