John Stuart Mill and the Decline of Classical Economics

Chapter 6

John Stuart Mill He was Jeremy Bentham’s godson Educated by his father (a Ricardian

economist), who hoped to create a genius intellect who would carry on the cause of utilitarianism

He succeeded At age 21 Mill suffered a nervous breakdown,

in part due to the stress imposed by his father Some say he was the greatest 19th century

British philosopher

John Stuart Mill

Attempted to rescue Ricardo’s theories which were under attack

He revised Ricardo’s classical theory

Attacks on Ricardo Disparity between Ricardo’s

theory and empirical evidence (reality)

Malthusian Population Doctrine not supported by empirical evidence - real per capital income was increasing

Diminishing returns to agriculture – technological progress increased returns

Profits were not decreasing Landlords were not becoming richer

Attacks on Ricardo

Criticism from “professional” economists who attacked his theoretical structure

They attacked labor theory of value Did not like the fact that he ignored profits

as price determining

Attacks on Ricardo Criticism from humanist and

socialist writers These writers pointed to the negative aspects

of capitalism – viewed it as “disharmonious” There is not universal agreement among these

writers as to solutions to this disharmony Some advocated more income to workers,

especially if labor theory of value is true Some wanted a return to the past, with

production centered with artisans and craftsmen

Some wanted more state planning

Defenders of Ricardo

Nassau Senior - MAYBE Senior stated that economics should

focus on developing internally consistent theories rather than worry about empirical foundations; that is, conclusions should follow from assumptions, even if the assumptions were not grounded in empirical fact

Essence of Mill’s Theory Utilitarianism Maximization of good over bad – greatest

happiness principle “actions are right in proportion as they

tend to promote happiness; wrong as they tend to produce the reverse of happiness. By happiness is intended pleasure and the absence of pain; by unhappiness, pain and the privation of pleasure.”

Essence of Mill’s Theory

Libertarian – On Liberty people can do anything they like as

long as it does not harm others Moral and economic liberty Free markets He believed that freedom would

lead to the best possible outcome for society

Essence of Mill’s Theory Advocates and critics of Mill's views

have argued that he does not take liberty as an absolute standard of value, and believed that diversity, equality and social progress are more important goals than liberty

He was interested in redistribution of income in order to achieve best possible outcome – the greatest happiness

Framework of Analysis

What are the questions that J.S. Mill is asking?

How can classical economic theory be saved?

What modifications need to be made to classical theory?

Framework of Analysis

What are Mills’ assumptions?

Theory should reflect reality – empiricism

Utility maximization

Framework of Analysis

What is the economic/political / cultural/social environment of Mill?

Rise of socialists – critics of capitalism and capitalists

Framework of Analysis

What is the role of the market?

Advocated economic liberty and free markets

BUT, remember be was a utilitarian and he understood that free markets do not always maximize social good

Framework of Analysis What is the role of government? Middle ground between laissez-faire

capitalism and socialism General rule was that government should

prevent people from harming others He discussed class conflict between

landlords and others in society but did not emphasize class conflict between capitalists and workers

Advocated public education, labor unions, inheritance taxes, shorter work day

Framework of Analysis What is the role of government? In general, he accepted government

interventions in the economy if there were sufficient utilitarian grounds

Mill believed that "equality of taxation" meant "equality of sacrifice" and that progressive taxation penalized those who worked harder and saved more and was therefore "a mild form of robbery".

How did Mill's approach to economics differ from others in the classical school? Believed that conclusions drawn from

deductive economic models should be tested to see if they correspond to reality (although he did not always do this)

Mill was more "Smithian" than "Ricardian" - he thought that economics should be integrated into broader theories of human behavior

He distinguished between laws of production and laws of distribution

laws of production are laws of nature, cannot be changed by people

laws of distribution were based on human action and institutions - these can be changed by social intervention

How was J.S. Mill influenced by the ideas of Jeremy Bentham? Bentham was a utilitarian - achieve pleasure and avoid

pain - 'utility' being defined as pleasure, preference-satisfaction, or in reference to an objective list of values  (remember the concept of utility maximization from EC215?)

He  left a large estate, which was used to finance University College, London (for those individuals excluded from university education--i.e., non-conformists, Catholics and Jews)

as an interesting note, after his death his body, per his instructions, was dissected, embalmed, dressed, and placed in a chair, and to this day resides in a cabinet in a corridor of the main building of University College

Bentham hoped to based social reform on measured utility that would lead to "greatest good for the greatest number"

How was J.S. Mill influenced by the ideas of Jeremy Bentham?

Bentham's focus on social reform which was of interest to J.S. Mill, but Mill did not agree with Bentham on all matters Bentham treats all forms of happiness as

equal, whereas Mill argues that intellectual and moral pleasures are superior to more physical forms of pleasure.

Mill not believe in the dogmatic view that pain/pleasure was the only way to analyze human behavior

How did Mill view the long run state of a capitalist economy? Adhered to Ricardo's prediction of long run

decline in rate of profit and a stationary state

But he was not sure that this was necessarily bad, considering the terrible conditions in which so many people lived during the industrial revolution - he thought that less focus on economic growth might be a good thing, change in focus of values

He would have preferred a reduction in the rate of population growth in order for people to have a higher standard of living

How does Mill's view of the role of theory in economics differ from that of Ricardo?

Abstract economic theory should be examined in light of reality

He believed that classicals focused too much on competition and ignored the role of custom in determining the distribution of income

Mill believed that economics should be more integrated with a comprehensive study of human behavior

How did Mill's theory of value compare to that of Ricardo?

Prices are determined through the interaction of Demand (utility) and Supply (difficulty of attainment)

In some markets, supply is perfectly inelastic – rare commodities. Also used this model to analyze monopolies, in which the producer can restrict production

How did Mill's theory of value compare to that of Ricardo?

In some markets (manufactured goods) supply is perfectly elastic (constant cost industries) so that prices are determined by costs of production

In agricultural markets (increasing cost industries) the supply curve is upward sloping

How did Mill's theory of value compare to that of Ricardo?

So, like Ricardo, he did assume diminishing returns in agriculture but not in manufacturing

How did Mill's theory of value differ from that of Ricardo?

Rejected Ricardo's labor theory of value – looked at all costs of production in determining price

He saw rent as price determining (not price determined like Ricardo) when land has alternative uses

How did Mill expand and improve the theory of comparative advantage? Ricardo's model showed the limits to

the terms of trade Mill showed how the actual terms of

trade could be determined using concept of demand

He also introduced transportation costs into the model  and discussed how tariffs will influence the terms of trade (international prices)

How did Mill defend Say's Law? Discussed three types of economies - barter,

money with no credit (commodity money) and money with credit

In barter economy or commodity money economy there will be no oversupply - production will only take place when there is a desire for other goods

But in an economy with credit, then money can be saved (store of value) and may not be spent in the current period but the oversupply will be purchased later as prices adjust to clear the markets

How did Mill attempt to modify the wages fund doctrine?

There is a maximum wages fund BUT

The existing labor force may not exhaust this fund AND SO

Labor unions could help workers increase the wage rate

So what were the major modifications that Mill made to classical economics?