Liberty Matters

Mill, Macro, Political Economy, and Keynes

We are indebted to Kates’s essay for a number of reasons:  first, for calling attention to a long-neglected part of Mill’s economics; second, for relating Mill to issues in contemporary macroeconomics; and third for reminding us how debate on those issues ultimately reflects fundamental philosophical disagreements in political economy.
Mill on Capital
In Book I, Chapter V, of the Principles of Political Economy Mill advances Four Fundamental Propositions respecting Capital.[14] The first proposition is thatindustry is limited by capital” and therefore it is a mistake to believe “that laws and governments, without creating capital, could create industry.”  As an aside, this proposition alone should dispel the continuing misrepresentation of Mill as a socialist.  Moreover,
[t]here is not an opinion more general among mankind than this, that the unproductive expenditure of the rich is necessary to the employment of the poor. Before Adam Smith, the doctrine had hardly been questioned ... [namely, that] there would be no market for the commodities which the capital so created would produce. I conceive this to be one of the many errors arising in political economy…. [On the contrary] the limit of wealth is never deficiency of consumers, but of producers and productive power. Every addition to capital gives to labour either additional employment, or additional remuneration; enriches either the country, or the labouring class….A second fundamental theorem respecting Capital relates to the source from which it is derived. It is the result of saving [and hence] to increase capital there is another way besides consuming less, namely, to produce more.A third fundamental theorem respecting Capital … is, that although saved … it is nevertheless consumed…. To the vulgar, it is not at all apparent that what is saved is consumed. To them, everyone who saves, appears in the light of a person who hoards…. The person who expends his fortune in unproductive consumption, is looked upon as diffusing benefits all around; and is an object of so much favour, that some portion of the same popularity attaches even to him who spends what does not belong to him; who not only destroys his own capital, if he ever had any, but under pretence of borrowing, and on promise of repayment, possesses himself of capital belonging to others, and destroys that likewise. 
This is a remarkably prescient condemnation of Keynesianism and sovereign debt.
This popular error comes from attending to a small portion only of the consequences that flow from the saving or the spending; all the effects of either which are out of sight, being out of mind. The eye follows what is saved, into an imaginary strong-box, and there loses sight of it…. It is the invention of money which obscures, to an unpractised apprehension, the true character of these phenomena. Almost all expenditure being carried on by means of money, the money comes to be looked upon as the main feature in the transaction; and since that does not perish, but only changes hands, people overlook the destruction which takes place in the case of unproductive expenditure.… All the ordinary forms of language tend to disguise this…. Capital is kept in existence from age to age not by preservation, but by perpetual reproduction.
The fourth proposition, with due attribution to Say and Ricardo, is the one to which Kates refers. What “supports and employs productive labour, is the capital expended in setting it to work, and not the demand of purchasers for the produce of the labour when completed. Demand for commodities is not demand for labour. Demand for labor [job creation] depends upon “the amount of the capital, or other funds directly devoted to the sustenance of labour.”  We cannot increase demand – all we can do is shift resources from a to b.  Mill observes as well that the same bad argument is used to justify welfare systems and graduated tax structures.   More importantly, by ignoring the importance of wealth creation we injure the long-term well-being of everyone but most especially the poor.
Kates and Macroeconomics
As Kates observes, the transition from neoclassical economics as represented by such writers as Mill to contemporary Keynesian and neo-Keynesian macroeconomics is fundamentally a shift in focus from long-run wealth creation as the central aim of economic policy to short-run employment creation.  The causes of economic growth are at best an afterthought.  The shift in focus leads one to believe that recessions are caused by a fall in aggregate demand, and to end recessions it is necessary to increase aggregate demand.
Not only is Kates correct about this, but his way of putting it transcends the analogous contemporary debate between supply-side economics and demand-side economics, where the latter is technically speaking a form of Keynesianism.  Classical economists opposed taxation as a form of theft (redistribution) but primarily because it undermined production.  Contemporary demand-side economists agree with this but also make the claim that lower taxes (or manipulating the tax rate) will both help laborers and increase government revenue.  In short, supply-siders, as I understand them, are also advocating government manipulation of the market.
Production (supply) is the key to economic prosperity.  Consumption (demand) is a consequence. This is what Say's Law, as Mill pointed out, tells us: "A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value." In short, supply creates its own demand.[15]
However, what has happened, I suggest, is that democracy (politics) has so intruded upon economics, something that both Tocqueville and Mill warned about, that all political parties now feel called upon to advocate different but varying governmental programs to enhance a universal growth in prosperity.  It no longer matters whether these programs succeed or fail. (There is endless debate on this that provides perpetual employment for many economists engaged in fantasy counterfactual history.)  What seems to matter is the marketing of these proposals within the election cycle.
I am persuaded by Hayek that there is no such thing as market equilibrium if by that is meant a teleological endpoint or direction of economic activity.  The market is neither a mechanism nor an organic entity (although it does bite back in the form of unintended consequences) but an unpredictable historically evolving entity. All attempts at manipulation  reflect intellectual arrogance.
Mill and Political Economy
In general, Mill agrees with this.  Even when Mill turns his attention to the distribution issue (social question) he never loses sight of the fact that changes in distribution affect productivity.  Distribution, in his time, as Mill noted, was a product of historical accident not just market forces.  It seems clear that distribution is always going to be to some extent a result of historical accident.  Inequality never disappears, but the real issue is not equality but the potential for growth. 
Curiously, Mill saw two social obstacles to growth:  an “undeserving” rich and an “undeserving” poor.  In Mill’s time, and it has been argued by no less a person than Keith Joseph even down to Thatcher, Great Britain seemed to be ruled by a primarily landed gentry rather than an entrepreneurial class.  Although Mill was sympathetic to the laboring class, he had no illusions about their dysfunction – there was no romanticization of the laborers.  Mill attacked the presumption that anyone should “rivet firmly in the minds of the labouring people the persuasion that it is the business of others to take care of their condition, without any self-control on their own part; [and] that whatever is possessed by other people, more than they possess, is a wrong to them, or at least a kind of stewardship, of which an account is to be rendered to them.”[16]  Mill opposed the elimination of private property, the elimination of competition, central planning, and even a worker’s party. He most especially opposed a ruling class of technocrats as had been suggested by Saint-Simon and by arch-enemy Comte.   Mill could imagine a world in which the dreaded classical economic stationary state would be palatable, but he never advocated a limit to further economic growth. We cannot … foresee to what extent the modes of production may be altered, or the productiveness of labour increased, by future extensions of our knowledge of the laws of nature, suggesting new processes of industry of which we have at present no conception.”[17]
When Mill addressed the problem of distribution, he (a) advocated market solutions for the laborers in the form of competing worker cooperatives; (b) with regard to the taxation of wealth, Mill opposed a graduated income tax and advocated a flat tax -- otherwise we penalize thrift. He advocated a tax on inheritance, and although one could argue this was misguided, he did so in order to undermine large feudal estates but not large productive private industrial enterprises, primarily to encourage autonomy not equality; not to penalize the creation of wealth but to encourage a creative culture as opposed to a “rentier” culture. Even with the inheritance tax, a wealthy estate could avoid death duties by distributing the inheritance widely – thereby thwarting state confiscation of wealth. 
[14.] Mill lays out his "Four Fundamental Propositions" at the beginning of Book I. Chap. V. "Fundamental Propositions Respecting Capital" in The Collected Works of John Stuart Mill, Volume II - The Principles of Political Economy with Some of Their Applications to Social Philosophy (Books I-II), ed. John M. Robson, introduction by V.W. Bladen (Toronto: University of Toronto Press, London: Routledge and Kegan Paul, 1965). </titles/102#lf0223-02_label_787>.
[15.] See the Wikipedia articles:
[16.] From Letter 443. TO MACVEY NAPIER, 9th November 1844, in John Stuart Mill, The Collected Works of John Stuart Mill, Volume XIII - The Earlier Letters of John Stuart Mill 1812-1848 Part II, ed. Francis E. Mineka, Introduction by F.A. Hayek (Toronto: University of Toronto Press, London: Routledge and Kegan Paul, 1963). </titles/250#lf0223-13_head_223>.
[17.] From BOOK II: DISTRIBUTION. CHAPTER I: Of Property, in John Stuart Mill, The Collected Works of John Stuart Mill, Volume II - The Principles of Political Economy with Some of Their Applications to Social Philosophy (Books I-II), ed. John M. Robson, introduction by V.W. Bladen (Toronto: University of Toronto Press, London: Routledge and Kegan Paul, 1965). </titles/102#lf0223-02_label_1328>.