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
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
Paul Krugman & Robin Wells
Wm. Baumol and Alan Blinder
Ben Bernanke & Robert Frank
Roger Arnold
Michael Parkin
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
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”
John Stuart Mill’s Concerns: Human Development
• Malthusian Specter
• Emancipate women!
– Contraceptive rights
– Property rights/Voting rights
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.
• Division of Labor
Drudgery/Ignorance
• Inequality
• Finance colonization
• Educate/Participate
...the uncultivated cannot be judges of cultivation
• Limit inheritance
• Competing Producer Cooperatives
...each man a capitalist, manager, and employee
• Monopoly
• Public utilities
Naïve “Justice”
Letter on the Negro Question, 1850 and The Condition of Ireland, 1846
A response to Thomas (“dismal science”) Carlyle’s complaint that emancipated slaves
in the West Indies weren’t working very hard
• The proprietors hadn’t worked at all [Mill’s consistent complaint...the idle rich]
• Mill rejects Carlyle’s racism, that “you [Negroes]will have to be servants to those
that are born wiser than you, that are born lords of you—servants to the whites...”
• Carlyle wasn’t more favorably inclined to the Irish, who had just suffered famine
• Mill’s allusion to Ireland: The labour market admits of three possible conditions, and
not, as this would imply, of only two. Either, first, the labourers can live almost
without working, which is said to be the case in Demerara; or, secondly, which is
the common case, they can live by working, but must work in order to live; or,
thirdly, they cannot by working get a sufficient living, which is the case in Ireland.
• That [make-work] system must be promptly put an end to. We must stop telling the
Irish that it is our business to find food for them. We must tell them...that it is their
business. They have a right, not to support at the public cost, but to aid and
furtherance in finding support for themselves. Millions of acres are lying waste,
requiring little more than labor to render them productive, and to avoid giving these
acres to the destitute, we are giving them, instead, many millions of pounds sterling.
Mill’s philosophy of progress stated in the Letter: To reduce very greatly the quantity
of work required to carry on existence, is as needful as to distribute it more
equally...The progress of science, and the increasing ascendancy of justice and good
sense, tend to this result.
John Stuart Mill, Principles of Political Economy, 1848
Ricardo with Wiggle Room
Synthesis of Classical Economics...Abstract Truths (Ricardo’s influence)
•
•
•
•
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
No Crises in Mill’s Principles
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  personal distribution
• Wiggle room in “wage-fund”  union bargaining not futile
– Assure equality of bargaining power
» Anticipation of Welfare State
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  knowledge/progress...public goods
• Human drives + Institutions  Economic Outcomes
• Institutions are subject to political intervention
Marginal Product
(corn)
Mill and the Stationary State
Recall Ricardo: Value, Distribution, and Growth
Mill: Welcome the stationary state
• Acquisition is distasteful
• Growth  Overcrowding
• Work Less!
• Reproduce Less!
• Redistribute!!!
• Live Better...Cooperate
• Pursue the arts/philosophy
Rent
w*
Profit squeezed
to zero
 Growth ceases
Wage
Bill
K1
Capital-Labor Input
K*
More from Mill’s Principles
• Analytics...Beyond Ricardo’s “Corn Economy”
–
–
–
–
–
–
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 (got to treat money as commodity)
• Applications
–
–
–
–
Provision of public goods
Peasant proprietorship championed  sand into fertile soil
Co-operative socialism (producer co-ops)
Flat income tax
• Exemption for low income
• Progressive rates penalize enterprise
– Poor relief: guaranteed minimum income—negative income tax
– Wage fund as limit on wage share ... But labor unions can be effective
Laissez-faire...with exceptions/Active but limited, decentralized government
Harriet Taylor’s
contribution.
Conventional wisdom: Harriet Taylor
was Mill’s “co-author”
• But
...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 regularly credited others with originating
“his” ideas
• This includes Helen Taylor, Harriet
Taylor’s daughter, who was no great
intellect
– Mill developed (most of) the ideas he gives
Mrs. Taylor credit for before she could
possibly have presented them to him
• She (perhaps) did encourage him to
articulate and give prominence to certain
radical ideas
• The emancipation of women
• Favorable treatment of “socialism”
• Injustice of competitive system:
hardest work done by the least paid
• ...unite the greatest individual liberty
...with common ownership of the raw
material of the globe
Mill’s Idealism: A Sample from Mill’s Autobiography
… [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