Circular Flow—Invisible Hand—Law of Markets
Cantillon—Circular Flow
Quesnay—Tableau Economique
Smith—Invisible Hand
Jean-Baptiste Say—Law of Markets
• Centrality of entrepreneur
• Oversupply in one market  shortage in another
Malthus—Gluts  deficient effective demand
Sismondi—production outstrips demand  gluts
• Factor immobility inhibits price clearing
• Regulate … constrain unfettered capitalism
Marx—Crises: Disproportion/Realization/Liquidation
Mill—Say’s Law holds if money is viewed as a commodity
Walras—General Equilibrium
Keynes—deficient effective demand
Arrow-Debreu—Conditions of market clearing
The Circle of James Mill (1773 -1836)
•Jeremy Bentham(1748-1832) – utilitarianism
–“Greatest good for the greatest number”
•Calculus of pleasure and pain
–Daniel Bernoulli … St. Petersburg Paradox (1738)
»Diminishing marginal utility of income
•Everyone’s happiness counts equally
 Robin Hood principle
–Roles for State
•Employer of last resort
•Redistribute wealth … but maintain incentives
–Panopticon: an ideal prison
•Thomas Robert Malthus
•David Ricardo
•John Stuart Mill (1806 – 1873)
–Prodigy/philosopher/East India Co. administrator
•Learned Greek @ age 3/Read Plato @ 8 … the Illiad for fun
•Studied Ricardo & Smith @ 13/Edited father’s & Bentham’s works @ 19
•Stayed with Say on trip to France/Nervous breakdown @ ~20
•Philosophical Radical: civil liberties; women’s rights…
»MP, opinion-maker: “Saint of rationalism”
Synthesis and Refinement of Classical Economics:
Nassau Senior/John Stuart Mill
Major/Dominant Texts
A. Smith, The Wealth of Nations, 1776
David Ricardo, Principles of Political Economy & Taxation, 1817
Nassau Senior, Outline of the Science of Political Economy, 1836
John Stuart Mill, Principles of Political Economy, 1848
Alfred Marshall, Principles of Economics, 1898
Paul Samuelson, Economics, 1948
Popular Principles of Economics Texts
Campbell McConnell
Gregory Mankiw
George Leland Bach
Wm. McEachern
James Gwartney
Wm. Baumol and Alan Blinder
Roger Arnold
Bradley Shiller
Wm. Boyes and Michael Melvin
Glenn Hubbard and Patrick O’Brien
Synthesis and Refinement of Classical Economics:
Nassau Senior/John Stuart Mill
Nassau Senior, Outline of the Science of Political Economy, 1836
Wealth = scarce goods & services that have utility
(supply)
(demand)
Bridge from Classical economics to Neo-classical economics? Not quite.
Four postulates:
1. People want as much wealth as possible at as little sacrifice as possible
 Services have value/Demand affects value
2. Population limited by “moral or physical evil” or fear of lacking subsistence
– Means of subsistence increase faster than population owing to
accumulation of capital … the Malthusian devil is tamed
3. Productivity may be increased by accumulating capital (= “abstinence”)
– Abstinence (on margin) as factor of production  Profit/Interest
• Profit as well as wages enter value: Labor theory of value
– Productivity of “waiting”…roundabout production
• Increasing returns in manufacturing
4. Diminishing returns in agriculture
John Stuart Mill’s Concerns
• Malthusian Specter
• Emancipate women!
– Contraceptive rights
– Property rights
– Voting rights
• Division of Labor
Drudgery/Ignorance
If the principle of equality and liberty is
true, we ought to act as if we believe it
and not ordain that to be born a girl
instead of a boy…shall decide a
person’s position throughout life.
• Educate/Participate
• Inequality
• Producer Co-ops
• Limit inheritance
• Monopoly
• Public utilities
John Stuart Mill, Principles of Political Economy, 1848
• Synthesis of Classical Economics
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Economic man  self-interest as motive force
Invisible hand  harmony through competition
Minimal government …but still a role
Discern economic laws
Say’s Law: Saving is spending
Law of Population
Iron Law of Wages
Law of Diminishing Returns in agriculture (“most significant proposition”)
Law of Comparative Advantage
• Mill: Competition  Efficient Production
…but Political Redistribution can enhance utility
• Natural science production. But Institutions  distribution
• Wiggle room in “wage-fund”  union bargaining not futile
» Anticipation of Welfare State
• Harriet Taylor’s contribution(?)
» "when two persons have their thoughts and speculations
completely in common it is of little consequence in respect of
the question of originality, which of them holds the pen."
Mill’s Idealism: A Sample
… [W]e (Mill & Taylor) dreaded the ignorance, selfishness and brutality of the
mass; but our ideal of ultimate improvement went far beyond Democracy and
would class us [as] Socialists…[W]e looked forward to a time when society will
no longer be divided into the idle and the industrious; when the rule that they
who do not work shall not eat will be applied not to paupers only, but impartially
to all; when the division of the produce of labor , instead of depending …on the
accident of birth, will be made…on an acknowledged principle of justice; and
when it will no longer … be impossible for human beings to exert themselves
strenuously in procuring benefits which are not to be exclusively their own, but
to be shared with the society they belong to.
…We saw clearly that to render any such social transformation possible or
desirable, an equivalent change of character must take place both in the
uncultivated herd who now compose the laboring masses, and in the immense
majority of their employers…Education, habit, and the cultivation of the
sentiments will make a common man dig or weave for his country, as readily as
fight for his country. It is only by slow degrees…that men in general can be
brought up to this point…The deep-rooted selfishness which forms the general
character of the existing society, is so deeply rooted, only because the whole
course of existing institutions tends to foster it.
John Stuart Mill, Autobiography, 1873
Principles in Mill’s Principles text
…happily, there is nothing in the laws of value which remains for the present
or any future writer to clear up; the theory of the subject is complete.
• Operation of Supply and Demand
• Value (price) adjusts to clear the market
• Short-run / long-run distinction…PLong-Run= Cost
• “Productive labor”  Capital/Saving employs “productive labor”Say
• Economies of scale  monopoly
• Role for public utilities
• Free trade  losers as well as winners
• Division of gains from trade … reciprocal demand
• Tariffs and terms-of-trade  strategic trade theory
• Defense of infant industry protection
• Socialism  indolence
• Competition  efficiency … but then redistribute
• Technology can benefit all positive steady state
• Agricultural technology must overtake diminishing returns
• Role for government guidance  progress
• Human drives + Institutions  Economic Outcomes
• Institutions are subject to political intervention
More from Mill’s Principles
• Analytics
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Non-competing groups (limited mobility) and wages
Joint products and theory of value
Opportunity cost of land  cost of production entering value
Economics of the firm – economies of scale
Supply and demand with numerical examples
Say’s Law elucidated (treat money as commodity)
• Applications
– Peasant proprietorship championed  sand into fertile soil
– Co-operative socialism (producer co-ops)
– Flat income tax
• Exemption for low income
• Progressive rates penalize enterprise
– Wage fund as limit on wage share
• Weakened in later editions  Labor unions can be effective