1. Informal rules and economic behaviour

The influence of social norms and ethical values that prevail in different socio-economic contexts upon economic behaviour is nowadays broadly recognised. Economists like Kenneth Arrow (Reference Arrow1974: 23) have suggested that ethical values such as trust, loyalty and honesty are ‘commodities . . .which increase the efficiency of the economic system’. Philosophers such as Hausman and McPherson (Reference Hausman and McPherson1993: 684) presented many studies confirming that ‘moral constraints on behaviour may be instrumentally important to good economic performance’. Similarly, historians like David Landes (Reference Landes1998: 516) observed that ‘the values and attitudes that guide members of society is the key to economic development of Nations’. By appropriately defining the influential social norms then, one can partly explain the economic disparities between societies as differences in the value system. Douglass North (Reference North2005a: 11) claimed that ‘the human environment is a human construct of rules, norms, conventions and ways of doing things that define the framework of human interaction’. Finally, economists like Acemoglu, Johnson and Robinson (Reference Acemoglu, Johnson, Robinson, Aghion and Durlauf2005), using the analytical tools of economic growth theory, assert that ‘differences in economic institutions are the fundamental cause of differences in economic development’. Beyond political institutions, which use their power to regulate economic activity, these economists also recognise that ‘commitment problems are intrinsic to the exercise of political power’ (Reference Acemoglu, Johnson, Robinson, Aghion and Durlauf2005: 391). Commitment problems arise when a social group with political power decides not to use it in its own favour or arbitrarily, for ethical reasons.

The main argument in our approach of the work of J.S. Mill and A. Marshall is that individuals follow a customary rule whenever they behave responding to the established norms and values in their social context (cf. Vanberg, Reference Vanberg, Maki, Gustafsson and Knudsen1993; Schlicht, Reference Schlicht1998). Rules are ‘conditional or unconditional patterns of thought or behaviour which can be adopted either consciously or unconsciously by agents’ (Hodgson, Reference Hodgson1997: 664). Rules can be either formal, and thus able to be enforced by law, or informal in the sense of unwritten codes of conduct that commonly exist in a particular spatio-temporal context. Social norms are ethical rules of behaviour shared by the members of a social group that ‘specify what actions are regarded by a set of persons as proper and correct, or improper and incorrect’ (Coleman, Reference Coleman1990: 243). Although norms cannot be legally enforced they are socially sanctioned and for that reason they do possess strong coercive characteristics. Values are ethical convictions about what is right and wrong (Weber, Reference Weber and Freund1904). Values like trustworthiness, honesty, loyalty, confidence, commitment, reciprocity and reputation, although considered as necessary conditions to every economic transaction, are in a way competitive to the maximising behaviour, as many eminent scholars have shown over the years (Arrow, Reference Arrow1974; Williamson, Reference Williamson1985; North, Reference North1990; Hodgson, Reference Hodgson1998; Akerlof and Shiller, Reference Akerlof and Shiller2009). As it will be seen below in our study of Mill and Marshall, by competitive it is not meant opposite to rational behaviour, since many actions are both rational and normative. As pointed out, ‘sometimes, the outcome is a compromise between what the norm prescribes and what rationality dictates’ (Elster, Reference Elster1989: 102). Because norms and values very often take the form of a social custom, they provide a stable behavioural pattern, ‘due to a general disposition on the part of the acting person, to exhibit a particular kind of behaviour’ in similar situations, as Vanberg (Reference Vanberg, Maki, Gustafsson and Knudsen1993: 176) has observed.

A rule-following behavioural pattern produces then a path-dependence process. This last concept has raised considerable interest in its various aspects, technological, economic and institutional. The original idea of technological path-dependence (David, Reference David1985) suggested that past decisions continue to affect any future development against other potential technological choices which are eventually more efficient. This process is characterised by inertia, in that once an outcome begins to stabilise, it becomes progressively locked to attractors who are not always optimal (Arthur, Reference Arthur1989). The same concept was used to describe institutional path-dependence, in an effort to examine why national economies stagnate because of inefficient institutions. Important political and economic choices (such as constitutional rules or the adhesion to an international union like the EU) create an irreversible historical commitment which dictates the set of future choices of a society.Footnote ² As North explains this is also true about the whole matrix of informal institutions and arrangements that ‘impose severe constraints on the choice set’ and in that way it also determines economic and political performance (North, Reference North, Ménard and Shirley2005b: 25). Institutions, both formal and informal, having thus originated through social networks are ‘locked-in’ into a genuine path-dependent evolutionary pathway which explains not only why some inefficiencies persist, but also how some advantages lead to increasing returns.

John Stuart Mill and Alfred Marshall were by far the most influential economists of their epoch and their books have educated many generations of English speaking students of Political Economy, from 1848 to 1930. Despite their unmistakable theoretical and methodological differences in major issues regarding price and distribution theory, Mill and Marshall offered a comprehensive investigation of the institutional structure of the economy within which rational actors operate.Footnote ³ A careful study of their work suggests that even if they do not share the same principle of economic behaviour, they both believed that economic action is historically specific and thus constantly under the influence of norms and values.Footnote ⁴ Beyond the self-image of Political Economy as an objective discourse about society, moral considerations were present at the very heart of economic theory because it was recognised that social morality plays an important role in coordinating economic activity. Mill has suggested in his Principles of Political Economy (1st edition 1848, 7th ed. 1873) that economic actions are embedded in social institutions, expressly including the norms and values which shape economic decision-making and the performance of the economy. Marshall has developed in his Principles of Economics (1^st edition 1890, 8^th ed. 1920) a study of the evolutionary path of ‘economic progress’, in order to extend it more thoroughly in his late Industry and Trade (1^st edition 1919). A key element of his evolutionary analysis was the disclosure of the role of ‘habits and institutions of industry’ (1885). After Adam Smith, except those two, no other major economist of the pre-Keynesian era has ever attempted to embrace in his theoretical analysis the entirety of social forces in order to understand economic processes.Footnote ⁵ Our purpose here is to stress out the importance of the institutional inheritance of social norms and values which generate customary rule-following economic behaviour according to Mill and Marshall.

2. Mill on social norms and customary behaviour

John Stuart Mill belonged to the intellectual tradition of Classical Political Economy which was receptive to the social circumstances of economic activity. From Smith to Mill – and even in the far more abstract theoretical work of David Ricardo – classical economists believed that economic actions take place inside a well-defined social context and that individuals are fully embedded in their social and historical environment, shaped by social norms and traditions. In the Wealth of Nations (Book I, Ch. X) for example, the analysis of moral values that affect the price of labour lays at the heart of Smith's theoretical thought. In those professions that require a high degree of trust from their employees (like goldsmiths and jewellers) a higher wage should be granted. Similarly, the reward of liberal professions (like the physician and the lawyer) must be high enough to remunerate first, ‘the confidence’ imbedded in them, and secondly their ‘rank in the society which is so important a trust requires’ (Smith, Reference Smith1776: 118). In both cases, the remuneration of labour follows a socially determined process, which complements the forces of the market.

With Mill, things have evolved differently, since he aimed to proclaim the axiological neutrality of Political Economy in order to defend the objectivity of its scientific discourse. In his 1836 Essay, he distinguished the ‘Art’ from the Science of Political Economy, just like Nassau William Senior did the very same year. The two fields, said Mill, differ from one another in their scope, content and grammatical mode (Reference Mill and Robson1836: 312). Morals are the art of human conduct and do not seek to discover the causal laws of human nature, but only to construct ‘a body of rules, or directions for conduct’ that serve a given end. Political Economy as a Science confines itself to be a ‘collection of truths’ regarding the economic aspects of man's activity ‘living in a state of society’ (Reference Mill and Robson1836: 320). Its ethical neutrality follows directly as a consequence of its limited scope. As an example, economists dealt only with the outcomes of Malthus’ Law of Population, without discussing the moral issues regarding the instinct of reproduction.

In the same Essay, Mill stressed clearly the abstract character and the proper method of the science of Political Economy. He explained that although social phenomena are complex and are produced by a ‘concurrence of causes’, every class of human affairs has its own, ‘exclusive’ central motivation force. But while ‘Political Economy considers mankind as occupied solely in acquiring and consuming wealth’, Mill recognises by the same token: ‘not any political economist was ever so absurd as to suppose that mankind are really thus constituted’ (Reference Mill and Robson1836: 322). Mill underlined that in actual economic operations the central economic motive – the desire to acquire ‘the greatest amount of necessaries, conveniences and luxuries’ – works concurrently with a plurality of non-economic motives. Using extensively the mechanical analogy of the ‘composition of forces’, Mill compared each ‘kind of cause’ (i.e. political, cultural, or economic), with the individual components of the resultant force. Political Economy, as an abstract science, explains only what people tend to do during their economic activities alone, ‘in which the acquisition of wealth is the main and acknowledged end’ (cf. Hausman, Reference Hausman1992: 126). Moreover, the deductions of Political Economy ‘will so far fail of being applicable to the explanation or prediction of real events until they are modified by a correct allowance for a degree of influence exercised by the other cause’ (Reference Mill and Robson1836: 323). To obtain a full explanation, the economist should correct this approximation ‘by making proper allowance for the effects of any impulses of a different description, which can be shown to interfere with the result in any particular case’ (Reference Mill and Robson1843: 903).

As a result of the above, Mill recognised that individuals are subject to the influence of the social norms and ethical values of the society they live in, so the economist needs to take them into account without failing to meet the requirement of axiological neutrality. In his Political Economy, one may easily observe how these informal institutions work. Along with the standard factors of ‘productiveness’, such as the natural advantages and technical skills, Mill includes the intellectual qualities of workers (e.g. ‘practical good sense’, ‘quickness of perception’, or ‘natural comprehension’) (Reference Mill and Ashley1848: 108–9) in common with ‘the moral qualities of the labourers’ which turn them into ‘self-monitoring agents’ as one would say nowadays (Casson, Reference Casson1993: 69). Among these moral qualities Mill includes ‘honesty’ in performing the labour task, ‘confidence’ as to the final result and ‘faithfulness’ in respecting the terms of the employment contract (Reference Mill and Ashley1848: 111). The aforementioned qualities reveal the nature of the individual's commitment to social norms. Following Smith, Mill wrote in Utilitarianism that men could not live without the approval and respect of their fellows, since their actions are under the constant scrutiny of public opinion (Mill, Reference Mill and Robson1861: 277). In that sense, social norms, as they were expressed by public opinion and internalised through moral cultivation, provide a coercive use and oblige people to follow a socially prescribed rule of behaviour in economic transactions. These rules are thus ‘objective and not purely psychological’ (Koppl, Reference Koppl2002: 535), like the rules established by the legal system.Footnote ⁶ Their normativity is only understood inside a specific system of social interactions (Klaes, Reference Klaes2002: 527).

Even more important is his analysis on the role of the institution of custom. In his famous chapter ‘Of Competition and Custom’, Mill holds that custom acts as a ‘positive obstacle’ to competition. Economists ‘exaggerate the effect of competition’ and rightly so, says Mill, since ‘only through the principle of competition has political economy any pretention to the character of science’ (Reference Mill and Ashley1848: 242). As pointed out, in the absence of competition the law of supply and demand is unable to achieve an equilibrium price (Légé, Reference Legé and Bensimon2005: 333). However, as Mill emphasises, ‘competition, in fact, has only become in any considerable degree the governing principle of contracts, at a comparatively modern period. The farther we look back into history, the more we see all transactions and engagements under the influence of fixed customs’ (Reference Mill and Ashley1848: 243).

The above does not mean that custom belongs to the traditional societies exclusively. Mill offers at least five instances whereby social norms and values, congealed into customs, actually compete the forces of the market. Firstly, the institution of custom functions as ‘the most powerful protector of the weak against the strong’ i.e. the rich and the politically powerful: ‘Custom is a barrier which, even in the most oppressed condition of mankind, tyranny is forced in some degree to respect’ (Mill, Reference Mill and Ashley1848: 243). The reasons are mostly historical and concern the distribution of land property rights based on power and inheritance. The examples he gives refer to the distribution of land and the conditions of ‘the occupancy of land’ in India and in many in parts of Southern Europe. In those cases the definition of the level of rent is determined following customary rules exclusively. As he wrote, in matters of rent and land tenure, ‘the custom of the country is the universal rule; nobody thinks of raising or lowering rents, or of letting on other than customary conditions. Competition, as a regulator of rent has no existence’. (Reference Mill and Ashley1848: 245).Footnote ⁷

Secondly, and more significant is his analysis about the influence of custom on remunerations for specific work or services, where Mill holds that competition seldom acts as the ‘habitual regulator’ of the market. The level of remuneration of the liberal professions is fixed by the local customs and not by the forces of supply and demand. In the ‘bookselling trade’ and in ‘professional remuneration’, he says, ‘the fees of the physicians, surgeons and barristers, the charges of attorneys, are nearly invariable’ (Reference Mill and Ashley1848: 247). Following again Smith, he thinks that ‘the cause of this, perhaps, has been the prevalence of an opinion that such persons are more trustworthy if paid highly in proportion to the work they perform’ (Reference Mill and Ashley1848: 404). The same applies to higher wages for ‘all persons in whom the employer wishes to place peculiar trust’ (idem). The fact that customary wages and remunerations vary by society and social group does actually exclude generalisation, without underestimating its importance. Mill has lengthily debated with Auguste Comte the meaning of historical evidence and has definitely concluded that ‘laws of social phenomena, empirically generalised from history, can when once suggested be affiliated to the known laws of human nature’ (Mill, Reference Mill and Robson1865: 308).

Thirdly, Mill refers frequently to custom in order to explain major economic issues, such as the impediments to the ‘tendency of profits to equality’: ‘Even in the countries of most active competition, custom also has a considerable share in determining the profits of trade. There is sometimes an idea afloat as to what the profit of an employment should be’ (Reference Mill and Ashley1848: 415). In various places of continental Europe, ‘customers are used to [higher prices], and acquiesce in it’.Footnote ⁸ Notwithstanding the tendency of profits to equality in every industry, in retail trade, as compared with wholesale trade, profits and prices are fixed according to the customary rules of every region or branch: ‘it is only in the great centres of business that retail transactions have been chiefly, or even much, determined, by competition’ (Reference Mill and Ashley1848: 246). In small towns, or even in distant neighbourhoods of large towns, Mill recognises that the ‘the habitual regulator is custom, modified from time to time by notions existing in the minds of purchasers and sellers of some kind of equity or justice’ (idem).Footnote ⁹ Mill deplores this situation in retail trade and recognises that ‘if this custom were universal, and strictly adhered to, competition indeed would still operate, but the consumer would not derive any benefit from it, at least as to price’ (Reference Mill and Ashley1848: 415). As it has been rightly suggested, custom had for Mill an ‘eroding effect’ upon competition (Jensen, Reference Jensen2001).

Fourthly, conditions of institutional dependence from the existing social customs are also active in cases where regulations that do not follow the principles of efficiency or justice exist traditionally. Most characteristic is the case of primogeniture in landed property. Mill points out that despite the positive effects on the productiveness of land, due to the size of the farm, usually this customary norm leads to ‘imprudent expenditure of the proprietor’: ‘The object of the institution, or custom, is to keep the land together in large masses, and this, it commonly accomplishes; but the legal proprietor of a large domain is not necessarily the “bona fide” owner of the whole income which it yields’ (Mill, Reference Mill and Ashley1848: 894). The institutional reform that Mill suggested – i.e. the abolition of primogeniture and the free disposal of land through the market – was precisely supposed to change this traditional social norm efficiently.

Lastly, a serious dependence from customary rules is revealed in Mill's thorough analysis of the ‘moral and social influence of (different) territorial arrangements’. The largest part of the Book II of his Principles of Political Economy (Chap. VI–IX) is dedicated to his well-known approach of the alternative social systems of distribution, beyond the three typical social classes (landowners, capitalists, labourers), existing outside England, where the distributional norms differ substantially.

In other words, when the distribution of property rights does not follow the rules of the market but the customary established social norms, the behavioural premises of Political Economy are no more valid and the terms for capitalist development are substantially modified. So, in the system of peasant proprietorship in Flanders and the German Palatinate, where agricultural producers are at the same time landowners cultivating their own fields themselves, the incentives to work and accumulate are more beneficial to economic development than those of the standard three-class mode of production. On the contrary, French peasant proprietors or Irish tenant farmers proved themselves to be far less industrious, the former because their land properties were too small and the latter because they were too distant from ownership. Finally, Mill examines also the disadvantages of the system of ‘metayage’ (sharecropping) prevailing in the Limousin, Tuscany, Piedmont and Lombardy. In that system the agricultural produce is traditionally divided between the landowners and the land-workers who live on the land and pay back a portion of the production to the owner, according to the custom of the region.

To recapitulate, in many instances (as in the cases of retail profits, of professional remunerations and of primogeniture in land heritage) custom corresponds to a static, change-resisting factor, called by Mill ‘conformity’, very close to the Weberian idea of ‘ingrained habituation’ (Reference Weber, Roth and Wittich1922: 25). Yet, Mill, unlike Marshall as seen below, never thought that custom is essentially a ‘passive’ force, in contrast to the ‘active’ forces of competition and ‘free enterprise’ (Schlicht, Reference Schlicht1998: 71). He had also identified an active role for custom when apprehended in the sense of a system of traditionally shared values that are able to promote social progress. A relevant example mentioned above, is the system of peasant proprietorship in some European regions, proving that not all customary social norms should be eradicated in order to secure the progressiveness of the social change (Hollander, Reference Hollander1985: 137–8). Another example is the idea of the ‘state of society’ discussed in Logic (Book VI, Chapter X). With the state of wealth and industry, the social division of labour and the quality of political institutions of a country, he also included ‘the degree of knowledge, and of intellectual and moral culture existing in the community, and in every class of it [. . .] the common beliefs [. . .] and the more important of their laws and customs’ (Mill, Reference Mill and Robson1843: 911–2). Mill never really adheres to the evolutionary widespread intellectual movement of the Victorian era. His mechanistic explanatory scheme of the ‘composition of forces’ remains fundamentally the same as in 1843, when the first edition of his System of Logic was published.Footnote ¹⁰ For that reason, when it comes to explain social change, or ‘the succession of states of society’ (genuinely called after Comte ‘Social Dynamics’) he suggests that one should apply the ‘inverse deductive method’ to understand the ‘sequences of social conditions’. Thus, one has to trace ‘the leading general circumstances of each generation. . . to its causes in the generation immediately preceding’ (Reference Mill and Robson1843: 924), using historical evidence only as a means of verification. Despite his acceptance of the incremental character of social progress, Mill's explanation of the historical evolution of society is always deductivist and mechanistic.

3. Marshall's evolutionary idea of custom

It seems needless to state that Alfred Marshall belongs to a school of thought that differs fundamentally from Classical Political Economy, both in methodology and in basic principles of economic theory. Neoclassical Economics, as called after Marshall, deals with the analysis of the market, where wages, profits and rents are determined by the very mechanism, which determines the price of every commodity. The Classics were seeking for the laws of long-term development of national product and its distribution between different social classes, while the Neo-classics put the emphasis on a static microeconomic analysis of consumption and production.

Nonetheless, Marshall consciously preserved and improved many elements of the dynamic approach of the Classical school, enriched with historicist influences from the German Historical School. Outside his innovative partial equilibrium analysis, Marshall never rested on short-run considerations solely. On the contrary, he believed that ‘problems are imperfectly presented when they are treated as problems of statical equilibrium, and not of organic growth’ (Reference Marshall1890: 382). He therefore considered static theory only as ‘a necessary introduction to the more philosophical treatment of society as an organism’ (idem).Footnote ¹¹ He believed that individual actions are integrated into a greater social whole, and therefore economists should not commit ‘the fault of claiming universality and necessity for their doctrines’ (Marshall, Reference Marshall1885: 18). This is the basis of his willingness to study economic phenomena in their social context: ‘economists, like other students of social science, are concerned with individuals chiefly as members of the social organism’ (Reference Marshall1890: 20). As he claimed, ‘economists study the actions of individuals, but study them in relation to social rather than individual life’ (Reference Marshall1890: 21). And because individuals are social beings, their motives have more dimensions ‘besides that of pecuniary gain’. This fact induces Economics to open its perspectives beyond economic motives:

Marshall – aligned with the ‘Old generation of Economists’ as he called the classics – defined Economics as a positive science: ‘it is clearly not the part of Economics to take a side in ethical controversy’ (Reference Marshall1890: 14 n.1). In his first lecture at the Cambridge Economic Club he insisted that ‘our first duty as economists is to make a reasoned catalogue of the world as it is; and never to allow our estimates as to what forces will prove the strongest in any social contingency to be biased [sic] by our opinion as to what forms ought to prove the strongest’ (Reference Marshall1897: 125). Yet, as he affirmed, in the abovementioned long quotation from his preface, ‘ethical forces’ must be taken into account ‘for even the most purely business relations of life assume honesty and good faith’ (Reference Marshall1890: 19). As seen with Mill, while ethical neutrality obliges economists not to express opinions about ethical issues, it is imperative not to ignore the economic outcomes of the ‘ethical forces’.Footnote ¹² Consequently, Marshall speaks about ‘the normal arrangements of many transactions in retail and wholesale trade, and on Stock and Cotton Exchanges’ (Reference Marshall1890: 29), where many things are not fixed by contract, or by written agreements. In contrast, these arrangements are ‘made without witnesses’ and are agreed upon a simple shake of hands assuming ‘honesty and good faith’. A static optimisation analysis, in terms of least pain or maximum pleasure, is unable to capture the significance of moral values affecting individual actions. In contrast, Marshall, following Mill, opens the field of economic analysis ‘to include vital elements that are not a part of competition nor even akin to it’ (Reference Marshall1890: 29), in order to encompass both the ethical values and customary social norms which influence economic activity and its performance.

Custom is of great importance to Marshall too, but in a very distinct manner. An evocative example refers to the customary character of the different forms of land tenure. Like Mill, before him Marshall places a particular weight to the role of custom in the process of production and distribution of the agricultural surplus. Contrary to Mill, Marshall believes that custom generally plays a passive role, rival to the active role of competition since it constraints individual freedom. For him, ‘the yoke of custom’ was an atavism characteristic of archaic village communities that ‘hinders the method of production and the character of the producers from developing themselves freely’ (Reference Marshall1890: 465). Custom was fundamentally a social rigidity that explains economic backwardness: ‘custom. . .has been tolerant of modifications in substance, form and method which did not obtrude themselves’ (Reference Marshall1919: 136). Nevertheless, he considered that custom will be eroded in the long run by the progress of commerce and that it evolves actually much more rapidly, in a way that undermines the validity of established doctrines such as the Ricardian theory of rent: landlords are not always in a position to increase the customary fixed level of the rent each time that the demand for agricultural products grows. The Great Depression of 1873 and the agricultural inflation that followed, forced the landowners to ‘let their tenants go on from year to year, without any attempt to make the money rents follow the changes of the real letting value of the land’ (Reference Marshall1890: 532). While nominal rent remained stable, the real rent has diminished against what custom commanded. So, Marshall concludes, ‘We change our customs more quickly than our forefathers did’, and that makes even more crucial the ‘scientific history’ of custom change. Without it, ‘short lived man has little better means of ascertaining whether custom is quietly changing, than the fly, born today and dead tomorrow, has of watching the growth of the plant on which it rests’ (Reference Marshall1890: 532).

As well-known, Marshall was very much influenced by the evolutionist ideas of Charles Darwin and Herbert Spencer and firmly believed that the economic phenomena do evolve over time, slowly, gradually and irreversibly: ‘if the book has any special character of its own, that may perhaps be said to lie in the prominence which it gives to this and other applications of the Principle of Continuity’, he wrote in the preface of his Principles.Footnote ¹³ Speaking about the nature of social progress he insisted on ‘slow growth, the product of many generations: it must be based on those customs and aptitudes of the great mass of the people which are incapable of quick change’ (Reference Marshall1890: 203, emphasis added). The passive role of custom is to be seen here as a stabiliser that balances the progressive forces of competition, innovation and change. When adaptive change occurs, the set of prevailing customs stands in the way, whereas competition relying on the inherent human faculties of creativity and invention pushes the economic system to change (Raffaelli, Reference Raffaelli2003: 58). Progress takes place as a combination of rule-following and ‘economic freedom’.

For that reason Marshall believed that ‘we cannot predict results from a mere knowledge of fundamental forces, without making a full investigation of the particular circumstances under which they act: a small change in those circumstances may alter the action of the fundamental forces almost beyond recognition’ (Reference Marshall1897: 118). In specifying the limits of technological progress, in his famous five chapters on industrial organisation (Book IV, Chs. VIII-XII), he did emphasise that technical progress ‘must be gradual and relatively slow’ (Reference Marshall1890: 207). This slowness is due to the limited capabilities of ‘man's growing command over technique and the forces of nature’ relatively to the ‘rapid inflow of proposals for the prompt reorganisation of society on a new basis’ (idem). Significantly, this is the instance when Marshall quotes the old Leibnizian motto Natura non facit saltum, which coronates the first page of his Principles in order to highlight the gradual, slow, continuous and irreversible evolutionary path of industrial progress.Footnote ¹⁴ In the Appendix Α, he offers a synoptic view of world economic history – ‘from savage life to free enterprise’ – to illustrate his view of social progress, replicating Spencer's idea of progressive evolution from homogeneity to heterogeneity (Reference Marshall1890: 602–623).Footnote ¹⁵ In his ‘Distribution and Exchange’ he evaluates his own idea of ‘organic growth’ vis-à-vis the Spencerian idea of one-way direction of social progress:

Unlike Spencer, Marshall learnt from Darwin that evolution does not necessary lead to optimum outcomes: ‘the struggle for survival may fail to bring into existence organisms that would be highly beneficial’ (Reference Marshall1890: 201). Not simply the best, but only ‘those organisms tend to survive which are best fitted to utilise the environment for their own purposes’ (idem).

A characteristic application of Marshall's hybrid Darwinian–Spencerian evolutionist process of development can be seen in his famous analysis of the genesis and growth of innovative industrial districts. The two ‘chief causes’ he uses to explain the origins of the ‘localised industries’ are the physical conditions and the ‘patronage of the court’. Still, the comprehensive description of these innovative clusters lies in the non-ergodic character of the development path:

The same effect applies to the labour force, which gradually acquires specialised skills and becomes highly desired by employers, strengthening their mutual dependence: ‘social forces here co-operate with economic: there are often strong friendships between employers and employed’ (Reference Marshall1890: 226). This mutual dependence has some disadvantages for the employers as they are forced to pay expensively the skilled labour when it is scarce. This is the main reason why as there is a substantial growth of an industry in a locality, many other industries are attracted to that area, in order to take advantage of the young and the female labour force that is unemployed. Gradually, the creation of an innovative industrial district generates more development, attracting more manufactures, thus creating an ‘industrial atmosphere’ which promotes the general ‘advantages which people following the same trade get from neighbourhood to one another’. Marshall illustrates his famous externality thesis with several examples from the industrial history of England, revealing ‘the mutual influences of the localisation of industry, the growth of towns and habits of town life’ (Reference Marshall1890: 227–30). Economic development is then comprehended in every aspect of its organic unity: economic, social, territorial and cultural. As accurately remarked, for Marshall, development is more a qualitative than a quantitative process (Caldari, Reference Caldari2004: 521).

A major illustration of the ‘organic growth’ comes from his study of the future interaction between the localised industries and the large international business firms. Marshall had the opportunity to witness the emergence of ‘large capitals’ and the subsequent changes in the industrial and trade firms of the early 20^th century and therefore to observe the phenomenon of increasing returns due to large scale production.Footnote ¹⁶ In his mature work, Industry and Trade, published at the age of 77, he studied further this movement from external to internal economies of scale:

Even though he was aware of joint-stock companies and especially of their advantages relating to longevity and productivity due to the advanced division of labour (1890, Book IV, Chap. XI and Book V, Chap.VI), Marshall expanded and deepened his analysis in a way, impressive even to modern managerial economists (Radner, Reference Radner1992: 1382), in order to reveal the forces which have contributed to the development of power and hierarchical structure of large business organisations especially in the United States.Footnote ¹⁷ Marshall recognised the efficiency of the Taylorist system of industrial organisation, but he remained very critical regarding its negative effects upon social relations and moral values related to the production process. He discerned the impersonal character of the ‘relations of an employer to his employees’. Echoing Mill's observation made 70 years earlier, he noted that ‘even from a merely business point of view, account is to be taken of the fact that the trust, esteem and affection of his staff are a valuable business asset, of a kind which his machinery cannot supply’ (1919: 229. Cf. Mill, Reference Mill and Ashley1848: 110). He also regretted the loss of individuality and creativity of the industrial workers due to excessive standardisation (1919: 137), subscribing thus to Adam Smith's early critique of the alienating effects of the extended division of labour upon ‘intellectual, social and martial virtues’ of the worker (Reference Smith1776: ii, 302). Finally, he criticised the bureaucratisation of large firms: ‘a tendency to ossification of the social organism might therefore be feared as the result of bureaucratic habits of shirking troublesome initiative, the main benefits of which would accrue to those who had not borne the burden’ (1919: 213).

In all the above cases, Marshall demonstrates a permanent concern: the modern system of scientific management is beneficial to material growth, but very harmful to other aspects of social life. For that reason he was very skeptical about its progressive ending:

What is more, Marshall expressed his fear that the ‘American’ system of large firms will destroy the older ‘British’ system of industrial districts along with its genuine economic social and cultural identity. As a keen social observer he was, he knew that medium size local firms – although preferable from an ethical point of view (Raffaelli, Reference Raffaelli2003: 73) – could not indefinitely compete with the efficiency of large business organisations. This is perhaps why he was so receptive to the idea of horizontal concentration of many localised firms of the same industry in order to form a cartel. Reporting on the industrial growth of Germany, he expressed his admiration for the ‘ethical forces’ behind their national competence, as well as his approval of the formal cooperation between competing firms: ‘the steadfastness, patience, and amenity to discipline of the Germans inclined them to seek the sheltered haven of a cartel’ (1919: 350). Once more, Marshall shows how industrial progress, defined in its overall aspects (economic, social, cultural and geographical), determines the evolution of an ‘economic nation’.Footnote ¹⁸ But, as Schlicht has rightly observed (in Raffaelli et al., Reference Raffaelli, Becattini and Dardi2006: 304), Marshall challenges in that way his own idea of custom as a passive constraint of economic freedom. As in the case of the alienating effects of standardisation, large industrial organisations alter trustfulness inside the workplace and threaten the existing nice ethical traits (cf. Raffaelli, Reference Raffaelli2003: 71). Thus, eroding effects may go both ways: competition erodes accustomed social rigidities, whereas custom, in the sense of ‘crystallised forms of high ethical principles, rules of honourable and courteous behaviour’, erodes the alienating effects of competition (1890: 466, n.1).