John Stuart Mill and the
Decline of Classical Economics
Chapter 6
John Stuart Mill
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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
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Attempted to rescue Ricardo’s theories
which were under attack
He revised Ricardo’s classical theory
Attacks on Ricardo
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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
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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
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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
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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
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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
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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
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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
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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
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What are Mills’ assumptions?
Theory should reflect reality –
empiricism
Utility maximization
Framework of Analysis
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What is the economic/political /
cultural/social environment of
Mill?
Rise of socialists – critics of capitalism
and capitalists
Framework of Analysis
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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
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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
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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?
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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
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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?
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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?)
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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?
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Bentham's focus on social reform which was
of interest to J.S. Mill, but Mill did not agree
with Bentham on all matters
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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?
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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?
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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?
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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?
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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?
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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?
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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?
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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?
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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?
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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?