Alfred Marshall, the founder of the so-called neoclassical school, was also the first prominent economist to attempt a reconciliation of Ricardo with the marginalists. Following the Senior-Longfield school, as interpreted by Mill, Marshall treated the “abstinence” of capital (or “waiting”) as another form of disutility alongside labor. He thus fused them into a unified subjective theory of “real cost,” as the determining factor in supply price. As Mill said, profits were remuneration for the capitalist’s abstinence, in the same sense that wages were the remuneration of labor. This Marshallian synthesis adopted virtually the entire apparatus of marginalism, but was much closer in spirit to the cost of production theories of Ricardo and Mill. 
In regard to profit as the “cost” of capital, Marshall cast it in subjective terms: the return necessary to persuade the capitalist to bring his capital to market. “Everyone is aware that no payment would be offered for the use of capital unless some gain were expected from that use….” In contradiction to the surplus value theory of Rodbertus and Marx, Marshall said that exchange value was the result of both “labour and waiting.” Marshall distinguished, in much the same terms as Böhm-Bawerk, between gross interest, and net interest as the reward for waiting as such. 
Of this notion of profit or interest as a reward for “abstinence” or “waiting” (or “time preference,” as the Austrians preferred to put it), we will have much to say in the next two chapters. Suffice it for the present to say that the market value of abstinence, like the Austrian rate of time preference, varies a great deal with such factors as the distribution of property and the legal disabilities imposed on competition in the capital market.
Marshall recast Ricardo’s twin factors of price determination, labor and scarcity, as the two blades of his scissors. “We might as reasonably dispute whether it is the upper or the underblade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production…” 
Marshall believed Ricardo had erred in his overemphasis of the importance of cost or supply price at the expense of demand or utility. Regarding Ricardo’s neglect of demand, Marshall wrote that it had recently received increased attention as a result of
the growing belief that harm was done by Ricardo’s habit of laying disproportionate stress on the side of cost of production, when analysing the causes that determine exchange value. For although he and his chief followers were aware that the conditions of demand played as important a part as those of supply in determining value, yet they did not express their meaning with sufficient clearness, and they have been misunderstood by all but the most careful readers. 
As the last phrase suggests, Marshall believed the shortcomings of Ricardian economics were as much the fault of poor interpretation as of the theory itself.
More importantly, Marshall’s assertion that demand played “as important a part” as supply was qualified by his understanding of the time factor. For Marshall, the shorter the time period, the more it was possible to treat supply as fixed for the time being; and as a result, the more the blade of scarcity predominated over that of cost. Price was determined, at any given time, by the balance between the demand and supply that actually existed at that moment. As the time factor came into play, and supply could be treated as a dynamic variable, the cost blade gained in ascendancy until, at some hypothetical approach to a “pure” equilibrium price, price approached closer and closer to cost. Marshall concluded that, “as a general rule, the shorter the period which we are considering, the greater must be the share of our attention which is given to the influence of demand on value; and the longer the period, the more important will be the influence of cost of production on value.” 
In describing the hypothetical equilibrium toward which the market tended, Marshall used language quite similar to that of Mises concerning the value of “imaginary constructions”:
Our first step towards studying the influences exerted by the element of time on the relations between the cost of production and value may well be to consider the famous fiction of the “stationary state” in which those influences would be but little felt; and to contrast the results which would be found there with those in the modern world. 
And, bearing an uncanny resemblance to Böhm-Bawerk, he wrote that short-term prices “are governed by the relation of demand to stocks actually in the market” at any given time.  Existing stocks of goods are all that are available pending the time lapse required for further production, regardless of demand; and excess goods are a “sunken cost,” regardless of demand shortfall.
Again, there is no connection between cost of reproduction and price in the cases of food in a beleaguered city, of quinine the supply of which has run short in a fever-stricken island, of a picture by Raphael, of a book that nobody cares to read, of an armour-clad ship of obsolete pattern, of fish when the market is glutted, of fish when the market is nearly empty, of a cracked bell, of a dress material that has gone out of fashion, or of a house in a deserted mining village. 
Production cost is an influence on price only over time, as supply is adjusted in response to effective demand, and supply and demand approach equilibrium.
But as Marshall pointed out, supply is itself a dependent variable: “the current supply is itself partly due to the action of producers in the past; and this action has been determined on as the result of a comparison of the prices which the expect to get for their goods with the expenses to which they will be put in producing them.” The operation of supply and demand always operated, over time, to bring production into line with effective demand at the cost of production, and thus to equate price with production cost. Demand price was always signaling producers to reduce or increase production, until demand price equaled supply price.
The problem with this simple model, Marshall went on, was that demand and supply schedules were subject to change, so the equilibrium point toward which the market tended was itself in motion.
But in real life such oscillations are seldom as rhythmical as those of a stone hanging freely from a string; the comparison would be more exact if the string were supposed to hang in the troubled waters of a mill-race, whose stream was at one time allowed to flow freely, and at another partially cut off…. For indeed the demand and supply schedules do not in practice remain unchanged for a long time together, but are constantly being changed, and every change in them alters the equilibrium amount and the equilibrium price, and thus gives new positions to the centres about which the amount and the price tend to oscillate.
These considerations point to the great importance of the element of time in relation to demand and supply…. 
But regardless of such complicating factors, it was nevertheless true at any given time that market price was tending toward an equilibrium point at which the producer was just compensated for bringing his goods to market.
There is a constant tendency towards a position of normal equilibrium, in which the supply of each of these agents [i.e., factors of production] will stand in such a relation to the demand for its services, as to give to those who have provided the supply a sufficient reward for their efforts and sacrifices. If the economic conditions of the country remained stationary sufficiently long, this tendency would realize itself in such an adjustment of supply to demand, that both machines and human beings would earn generally an amount that corresponded fairly with their cost of rearing and training…. As it is, the economic conditions of the country are constantly changing, and the point of adjustment of normal demand and supply in relation to labour is constantly being shifted. 
If Ricardo had overstated his case in one direction, Marshall believed the fathers of the marginal revolution had overstated theirs even further in the opposite direction. Marshall held “that the foundations of the theory as they were left by Ricardo remain intact; that much has been added to them, and that very much has been built upon them, but that little has been taken from them.” 
As for Jevons, not only did he overstate his own doctrine, but it depended on a studious misreading of Ricardo and Mill.
There are few writers of modern times who have approached as near to the brilliant originality of Ricardo as Jevons has done. But he appears to have judged both Ricardo and Mill harshly, and to have attributed to them doctrines narrower and less scientific than those which they really held. And his desire to emphasize an aspect of value to which they had given insufficient prominence, was probably in some measure accountable for his saying, “Repeated reflection and inquiry have led me to the somewhat novel opinion that value depends entirely upon utility“…. This statement seems to be no less one-sided and fragmentary, and much more misleading, than that into which Ricardo often glided with careless brevity, as to the dependence of value on cost of production; but which he never regarded as more than a part of a larger doctrine, the rest of which he had tried to explain.
Jevons continues: — “we have only to trace out carefully the natural laws of variation of utility as depending upon the quantity of commodity in our possession, in order to arrive at a satisfactory theory of exchange of which the ordinary laws of supply and demand are a necessary consequence…. Labour is found often to determine value, but only in an indirect manner by varying the degree of utility of the commodity through an increase or limitation of the supply.” As we shall presently see, the latter of these two statements had been made before in almost the same form, loose and inaccurate as it is, by Ricardo and Mill; but they would not have accepted the former statement. For while they regarded the natural laws of variation of utility as too obvious to require detailed explanation, and while they admitted that cost of production could have no effect upon exchange value if it could have none upon the amount which producers brought forward for sale; their doctrines imply that what is true of supply, is true mutatis mutandis of demand, and that the utility of a commodity could have no effect upon its exchange value if it could have none on the amount which purchasers took off the market…. 
Regarding Jevons’ seemingly absolutist statement of the determination of price by utility, Marshall pointed out that “the exchange value of a thing is the same all over a market; but the final degrees of utility to which it corresponds are not equal at any two parts.” A trading body “gives up things which represent equal purchasing power to all its members, but very different utilities.”  Marshall had made the same point earlier in the book, using the illustration of a carriage ride: although the marginal utility of a carriage ride may be much greater for a poor than for a rich man; yet the price, in either case, is twopence. 
It is true that Jevons was himself aware of this; and that his account can be made consistent with the facts of life by a series of interpretations, which in effect substitute “demand-price” and “supply-price” for “utility” and “disutility”: but, when so amended, they lose much of their aggressive force against the older doctrines, and if both are to be held severely to a strictly literal interpretation, then the older method of speaking, though not perfectly accurate, appears to be nearer the truth than that which Jevons and some of his followers have endeavoured to substitute for it. 
In defense of the sophistication of Ricardo’s doctrine, as he understood it, Marshall pointed out the statement in Ricardo’s letter to Malthus: “it is supply which regulates value, and supply is itself controlled by comparative cost of production.” And in his next letter, “I do not dispute either the influence of demand on the price of corn or on the price of all other things: but supply follows close at its heels and soon takes the power of regulating price in his own hands, and in regulating it he is determined by cost of production.” He quoted Mill, likewise, to the effect that “the law of demand and supply… is controlled but not set aside by the law of cost of production, since cost of production would have no effect on value if it could have none on supply.” Thus, the “revolutionary” doctrine of Jevons, that the influence of cost of production made itself felt through the laws of supply and demand, was part of the doctrine of Ricardo and Mill. 
Summing up the conflict between Jevons and the classical political economists, Marshall criticized the former for neglecting the time element to the same degree as had Ricardo: “For they attempt to disprove doctrines as to the ultimate tendencies… of the relations between cost of production and value, by means of arguments based on the causes of temporary changes, and short-period fluctuations of value.” 
As we shall see in the section below, Jevons’ overemphasis of the short-term, and his treatment of existing stocks of supply as a static factor at any given time, was almost exactly mirrored by the later Austrians in their criticism of the cost principle.
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70. Dobb, Theories of Value and Distribution 112-3; Meek, Studies in the Labour Theory of Value 123, 245-6.
71. Alfred Marshall, Principles of Economics: An Introductory Volume. 8th ed. (New York: The MacMillan Company, 1948) 580, 587-8.
72. Ibid. 348.
73. Ibid. 84.
74. Ibid. 349.
75. Ibid. 366.
76. Ibid. 372.
77. Ibid. 402.
78. Ibid. 372.
79. Ibid. 346-7.
80. Ibid. 577.
81. Ibid. 503.
82. Ibid. 817.
83. Ibid. 818.
84. Ibid. 95.
85. Ibid. 818.
86. Ibid. 819.
87. Ibid. 821.