Summing Up on the Economics of John Stuart Mill

     

This will be my last attempt to explain my understanding of the economics of John Stuart Mill as part of this symposium. In doing so, let me say how grateful I am to the three other participants in this forum who have brought their own understanding of Mill to the table in a way that others will hopefully see how much there is to learn, not only from Mill but from pre-Keynesian economics in general. I would also wish to thank John Barkley Rosser, who from an opposite perspective took on the issues raised, which allowed us to have the most intense but for me enlightening discussion on the Coordination Problem website.[97] But mostly, I owe endless gratitude to Liberty Fund – David Hart and Sheldon Richman in particular – for allowing me this opportunity.

Let me summarize what I have been trying to explain.

And let me again put to use a production possibility curve, whose construction and conception I explained in the first of these articles. In the diagram, the interior of the production possibility curve represents the entire economy. The vertical axis shows forms of output whose production draws down on the resource base with no attempt made to replace what has been drawn down. These are described as “C and G,” which consist of forms of consumer demand and most forms of government spending.  Their production uses up resources, but what is produced is not intended to contribute to production at some future date. Resources are drawn down, products are consumed or services rendered. But when all of the production is completed, the economy is less capable of producing for the future since resources have been used up during the production process, while nothing has been created to replace what has been used up.

The horizontal axis represents all forms of drawing down on the economy’s resource base directed towards producing forms of output intended to add to the economy’s productive base. There is IC, which is the level of investment that would take place if there were only consumer demand. IC+G is an even lower level of investment spending, because here both consumers and governments deplete the economy’s resource base to satisfy their demands.

The level of saving is the proportion of the total economy that is available for maintaining the capital base as well as for new capital investment. The difference between total potential output, where the production possibility curve touches the vertical axis, and the total of consumption and government spending (C+G), is made up of the consumer goods and government services that could have been produced but were not. Saving is the productive potential left over after the economy’s resources have been used to produce goods and services bought by consumers and governments.

In a classical model, saving can occur only because of the consumer and government goods and services that could have been produced but were not. The goods and services that were not produced and purchased for current usage permitted a proportion of the economy’s existing resources to be used to maintain and extend the capital base. That saving consists of the massive proportion of the economy’s resource base that is used to build capital, roughly represented by the triangle at the top of the production possibility curve. Saving does not occur only out of current production as in a typical macro model.

Consumption to a classical economist literally meant using resources up. When Mill or Adam Smith discuss unproductive consumption, they are describing the using up of resources in ways that do not improve the future flow of output. Productive consumption, on the other hand, is the use of resources in ways that do improve the future flow of goods and services. Such consumption will include labor time, electricity consumed, machine hours taken up and everything else that was used up during their production. They were consumed in the process and are now gone. The actual workers, and much of the machinery, are still in existence, but their time and use has disappeared into whatever particular activities they were engaged in.

For myself, I find this approach clarifying, clear, and the proper basis for sound policy. Here are some of the insights highlighted by this approach bearing

[97.] "Mill > Keynes, so says Steven Kates", posted by Peter Boettke on July 06, 2015 on Coordination Problem <http://www.coordinationproblem.org/2015/07/mill-keynes-so-says-steven-kates.html>.