John Stuart Mill on Economic Theory and Method

Collected Essays III

Samuel Hollander

• Publisher: Routledge
• Year: 2000
• eBook ISBN: 9781134765973
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book, the third in the series of Samuel Hollander's essays, covers twelve key studies on the economic theory and method of John Stuart Mill. This volume provides an accessible sourcebook on Mill's relationship with David Ricardo, and the 'Classical School', as well as confirming his relevance for modern economics and for the place of economics

Chapter 1

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Technology and aggregate demand in J.S.Mill’s economic system¹

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The literature on the relationship between Keynesian and classical economics lays almost exclusive emphasis on monetary phenomena; relatively little attention is paid to technological relationships,² although an understanding of the precise nature of the production function assumed in each system is clearly of relevance. In particular, the assumption of variable proportions between inputs is crucial to Keynes’ approach, and it is usually taken to be an assumption of classical writers too. At times, it is recognised that the classics denied the possibility of obtaining additional output by increasing the quantity of labour used with other (given) inputs, but rarely is this seen as important.³ The customary interpretation possibly derives, in part, from the fact that the classics made use of the wages fund whereby full employment of labour is assured; attention is diverted, by this theory, from technological capital to wage-goods capital, and it becomes easy to jump to the conclusion that output in the classical system can be regarded as a simple function of the quantity of labour employed.

In this paper I shall argue first that in fact considerable attention was given to the assumption of fixed coefficients of production in classical economic literature. Second, it will be necessary to show how this assumption could reasonably be maintained by writers who, at the same time, advocated the wages fund theory. In concluding the paper, I shall suggest a possible implication of the classical authors’ approach to technology for their macroeconomic policy, in particular for their tendency to minimise the significance of aggregate demand as a determinant of aggregate output.

Although my main interest is to examine a problem in the classical system of economics, no attempt will be made to cover the literature as a whole. The discussion will be confined to the work of J.S.Mill,⁴ partly because Mill can be regarded as a representative author,⁵ and partly in order to keep the discussion within manageable limits. Much of the argument will be concerned with Mill’s celebrated propositions on capital.

My discussion of the production function in J.S.Mill’s system takes as its starting point the troublesome proposition, ‘industry is limited by capital’ (Principles, Book I:63). Edwin Cannan regarded the proposition as no more than a ‘useful catchword with which to attack the protectionist fallacy of giving employment or “creating an industry”’ (Cannan 1924:119). Mill had argued that:

industry is limited by capital… The following are common expressions implying its truth. The act of directing industry to a particular employment is described by the phrase ‘applying capital’ to the employment… Again, we often speak of the ‘productive powers of capital’. This expression is not literally correct. The only productive powers are those of labour and natural agents; or if any portion of capital can by a stretch of language be said to have a productive power of its own, it is only tools and machinery, which, like wind and water, may be said to co-operate with labour. The food of labourers and the materials of production have no productive power; but labour cannot exert its productive power unless provided with them. There can be no more industry than is supplied with materials to work up and food to eat…it is often forgotten that the people of a country are maintained and have their wants supplied, not by the produce of present labour, but of past. They consume what has been produced, not what is about to be produced. Now, of what has been produced, a part only is allotted to the support of productive labour, and there will not and cannot be more of that labour than the portion so allotted (which is the capital of the country) can feed and provide with the materials and instruments of production.

(Mill, Principles, I:63–4)

Cannan reacted strongly to this statement:

It is perfectly obvious that industry or labour can never be brought to a stand by the inaccessibility of materials or the instruments of production as long as food, drink, and, in some situations, clothing and fuel are obtainable. The inaccessibility of materials and the absence of instruments of production will make production a more laborious task, but it will not stop labour. So Mill’s argument really depends entirely on the necessity of food for labourers, though he has perfunctorily introduced the materials and instruments of production.

(Cannan 1924:118)

Cannan is obviously correct in pointing out that as long as the means of feeding and clothing labourers are available men can be set to work producing something. However, the important question is whether, given the pattern of expenditure by consumers and others, it is possible to produce each of the various goods desired by alternative methods, and in particular, whether it is possible to substitute ‘a more laborious’ method for that hitherto in operation. By the time Cannan wrote, fixed coefficients had long been assumed in the literature as a device to simplify analysis of the General Equilibrium problem; but fixed coefficients can also be considered a frequent fact of industrial life. It is suggested, then, that Mill by his first proposition meant to introduce into his analysis the assumption of fixed technical coefficients of production.

In point of fact the first proposition is taken, almost verbatim, from an earlier essay, and the interpretation suggested above can again be applied:

Capital, strictly speaking, has no productive power. The only productive power is that of labour; assisted, no doubt, by tools and acting upon materials. The portion of capital which consists of tools and machinery, may be said, perhaps, without any great impropriety, to have a productive power, because they contribute, along with labour, to the accomplishment of production.…

The proper view of capital is that anything whatever, which a person possesses, constitutes his capital, provided he is able, and intends, to employ it, not in consumption for the purpose of enjoyment, but in possessing himself of the means of production, in the intention of employing those means productively. Now the means of production are labour, implements, and materials. The only productive power which anywhere exists, is the productive power of labour, implements, and materials.

We need not, on this account, altogether proscribe the expression ‘productive power of capital’; but we should carefully note, that it can only mean the quantity of real productive power which the capitalist, by means of his capital, can command.

(Mill 1948 [1844]:90–1)

I have interpreted Mill’s comments on equipment and materials as referring not merely to the notion that production requires the presence of inputs in addition to labour, but more specifically to the assumption that factors must be used in fixed proportions. This interpretation can be supported by the following observations. In the first place, we can infer that the assumption of fixed coefficients was quite commonly posited from the fact that Mill, in common with other members of the classical school, framed the law of diminishing returns only in terms of the application of composite units of capital and labour to land. It might be argued that this procedure is to be expected, since land was considered the fixed factor par excellence. On the other hand, Mill stated explicitly that capital too, even in the long run, was not in perfectly elastic supply; thus the fact that the law was never applied to the case where varying amounts of labour are used in conjunction with a fixed amount of capital, lends support to the likelihood that fixed technical coefficients were generally assumed to hold.

Second, it will be recalled that Ricardo, in his chapter ‘On machinery’, had suggested the possibility of substitution between capital equipment and labour with respect to the production of a given commodity as a reaction to a relative rise in the price of labour (Ricardo 1951:I, ch. XXXI).⁶ The bulk of his discussion in the chapter, however, is taken up with the case of a technical change representing the commercial implementation of some technological invention. The new technique involves, by assumption, a higher ratio of equipment to labour for the production of a given level of output, but its introduction does not depend on relative input-prices; under any price structure, the new method would be preferable. The ‘Ricardo effect’, which assumes variable factor proportions then, is given but scant attention in this chapter and is not incorporated into the general body of Ricardo’s work. When Mill takes up the problems of ‘machinery’⁷ he does not carry Ricardo’s analysis any further and pays no attention to the ‘Ricardo effect’. For example, in his account of the expenditure-pattern of entrepreneurs at the close of a production-period, relative input-prices are ignored:

With the proceeds of his finished goods, a manufacturer will partly pay his work-people, partly replenish his stock of the materials of his manufacture, and partly provide new buildings and machinery, or repair the old; how much will be devoted to one purpose, and how much to another, depends on the nature of the manufacture, and the requirements of the particular moment.

(Mill, Principles, I:99)

Finally, nowhere does Mill refer explicitly to the relevance of relative input-prices in the choice between alternative processes. For example, a tax imposed upon a process of production may encourage the utilisation of ‘the untaxed process, though the inferior of the two’, but the ‘inferiority’ of the untaxed process is not regarded explicitly as a function of current input-prices, implying that under any price configuration the alternative method would be preferable:

Suppose that a commodity is capable of being made by two different processes; as a manufactured commodity may be produced either by hand or by steam-power; sugar may be made either from the sugar-cane or from beet-root, cattle fattened either on hay and green crops, or on oil cake and the refuse of breweries. It is the interest of the community that, of the two methods, producers should adopt that which produces the best article at the lowest price… Suppose, however, that a tax is laid on one of the processes, and no tax at all, or one of smaller amount, on the other… [If] the tax falls, as it is of course intended to do, upon the one which they [the producers] would have adopted, it creates an artificial motive for...

Table of contents

• Cover
• Half Title
• Full Title
• Copyright
• Dedication
• Contents
• List of illustrations
• Preface
• Acknowledgements
• 1 Technology and aggregate demand in J.S.Mill's economic system (1964)
• 2 The role of fixed technical coefficients in the evolution of the wages-fund controversy (1968)
• 3 Ricardianism, J.S.Mill and the neo-classical challenge (1976)
• 4 On John Stuart Mill's defence of Ricardian economics (1983)
• 5 William Whewell and John Stuart Mill on the methodology of political economy (1983)
• 6 'Dynamic equilibrium' with constant wages: J.S.Mill's Malthusian analysis of the secular wage path (1984)
• 7 J.S.Mill on 'derived demand' and the wages-fund theory recantation (1984)
• 8 Exogenous factors and classical economics (1985)
• 9 The relevance of John Stuart Mill: some implications for modern economics (1986)
• 10 John Stuart Mill as economic theorist (1987)
• 11 Commentary on 'John Stuart Mill interpretation since Schumpeter' (1988)
• 12 John Stuart Mill's method in principle and practice: a review of the evidence (with Sandra Peart) (1999)
• 13 On J.S.Mill's defence of Ricardo's proportionality theorem: a Longfield connection? (1999)
• Index