Liberty Matters

Mill’s Defence of Say’s Law and Refutation of Keynes


It has frequently been stated that Mill provided his best defense of Say’s Law in his 1844 essay, “Of the Influence of Production on Consumption,”[83] when the reality is that it is much more powerfully and comprehensively stated in his Principles. The arguments are, however, spread over a number of sections of the book, but Mill’s train of thought can be traced easily enough. His main discussion is found in Book III Chapter XIV, “Of Excess of Supply.” He begins his explanation on the impossibility of demand deficiency across an economy – that is, the impossibility of a general glut – by noting it is a conception so absurd that he feels almost inadequate to state it in a way that those who support it will accept. And please recall that he is discussing what amounts to the whole of Keynesian macro:
The doctrine appears to me to involve so much inconsistency in its very conception, that I feel considerable difficulty in giving any statement of it which shall be at once clear, and satisfactory to its supporters.[84]
Nevertheless, he develops the two possible arguments to show why demand deficiency is an absurdity. He looks first at whether demand deficiency might occur because incomes are not passed onto those who have helped produce so that there is not enough purchasing power to maintain demand. Then secondly – the Keynesian case – he looks at the argument that purchasing power is passed on as part of the production process, but where those who receive these incomes choose to save rather than spend. I commend the entire chapter to you as a fully satisfying and self-contained argument in and of itself. But in this note, I wish to widen the scope of where to look in the rest of the book to complete what Mill was trying to explain. And the best way I can think to do this is to follow the two footnotes in this chapter, which direct the reader to other parts of the book where the ideas expressed in this chapter are further developed.
In the first of the passages with a footnote reference, Mill points out that he had broached the subject earlier but could not fully explain everything that needed to be said until more had been discussed:
Because this phenomenon of over-supply, and consequent inconvenience or loss to the producer or dealer, may exist in the case of any one commodity whatever, many persons, including some distinguished political economists, have thought that it may exist with regard to all commodities; that there may be a general over-production of wealth; a supply of commodities in the aggregate, surpassing the demand; and a consequent depressed condition of all classes of producers. Against this doctrine, of which Mr. Malthus and Dr. Chalmers in this country, and M. de Sismondi on the Continent, were the chief apostles, I have already contended in the First Book;[FN1*] but it was not possible, in that stage of our inquiry, to enter into a complete examination of an error (as I conceive) essentially grounded on a misunderstanding of the phenomena of Value and Price.[85]
The footnote [FN1*] reads, “Supra, pp. 66-8” (in the online Liberty Fund edition) which brings you to the discussion on the first of his Four Fundamental Propositions on Capital.[86] Indeed, all four propositions are relevant and round out the argument, culminating in the fourth, which reads, “demand for commodities is not demand for labour.” The chapter on “Of Excess of Supply” argues that demand deficiency does not cause recession, while the referenced chapter on capital explicitly states that you cannot increase employee numbers by increasing aggregate demand.
There is then a second passage in the chapter “Of Excess of Supply,” which also contains a footnote reference:
This important feature in the economical progress of nations will receive full consideration and discussion in the succeeding Book.[FN2*] . . . . The true interpretation of the modern or present state of industrial economy is that there is hardly any amount of business which may not be done, if people will be content to do it on small profits. . . . Low profits, however, are a different thing from deficiency of demand.” [87] [My bolding.]
The footnote [FN2] forwards the reader to Book IV, Chapter IV that deals with the question of low profitability. And there we find a passage that ought to have blown up right from the start Keynes’s contention that an acceptance of Say’s Law means one denies the possibility of involuntary unemployment. This is Mill describing, as accurately as anyone ever has, the devastation in the labor market caused by recession:
Establishments are shut up, or kept working without any profit, hands are discharged, and numbers of persons in all ranks, being deprived of their income, and thrown for support on their savings, find themselves, after the crisis has passed away, in a condition of more or less impoverishment.[88] [My bolding.]
Bear in mind that not only does this passage exist, but the reader had been directed to it from a passage in which Mill had been explaining Say’s Law! Say’s Law was, of course, according to Keynes, the reason classical economists denied the very possibility of involuntary unemployment.
Reading the three sections of the Principles together we find Mill arguing:
  1. recessions do occur and when they do the effect on the labor market is prolonged and devastating;
  2. recessions are not caused by oversaving and demand deficiency;
  3. recessions cannot be brought to an end by trying to increase aggregate demand.
That is as complete a rejection of Keynesian economics as one is likely to find, and it was stated in 1848. These propositions and their supporting arguments were with near unanimity accepted by the entire mainstream of the economics profession through until the publication of The General Theory in 1936. Since then they have almost entirely disappeared resulting in a loss in our ability to understand the nature of recessions or what needs to be done to bring recessions to a timely end.
[83.] "Of the Influence of Consumption on Production," Essays on Some Unsettled Questions of Political Economy (1844) in The Collected Works of John Stuart Mill, Volume IV - Essays on Economics and Society Part I, ed. John M. Robson, Introduction by Lord Robbins (Toronto: University of Toronto Press, London: Routledge and Kegan Paul, 1967). </titles/244#lf0223-04_head_059>.
[84.] The Collected Works of John Stuart Mill, Vol. III, Principles of Political Economy, Part II, Book III: Exchange, Chap. XIV. Of Excess of Supply </titles/243#lf0223-03_label_379>.
[85.] ibid.
[86.] Specifically, Principles of Political Economy, Book I: Production, Chap. V: Fundamental Propositions Respecting Capital, § 2. Industry is limited by Capital, but does not always come up to that limit </titles/102#lf0223-02_label_793>
[87.] Principles of Political Economy, Book IV: Influence of the Progress of Society on Production and Distribution, Chap. IV: Of the Tendency of Profits to a Minimum </titles/243#lf0223-03_label_820>.
[88.] Principles of Political Economy, Book IV: Influence of the Progress of Society on Production and Distribution, Chap. IV: Of the Tendency of Profits to a Minimum, § 5. Profits are prevented from reaching the minimum by commercial revulsions </titles/243#Mill_0223-03_580>.