John Stuart Mill
1806-1873
Son of James Mill
One of the most important writers in the 19th century, in general
A very careful and deliberate thinker
Politics are a blend of classical liberal, philosophical radical, utilitarian, sympathetic to (pre-Marxian) socialism
John Stuart Mill
1806-1873
Autobiography
Broke with Bentham (and James Mill) on utilitarianism
John Stuart Mill
1806-1873
John Stuart Mill
1806-1873
“Lassiez-faire, in short, should be the general practice: every departure from it, unless required by some greater good, is a certain evil”
“it is not admissible that the protection of persons and that of property are the sole purposes of government. The ends of government are as comprehensive as those of the social union. They consist of all the good, and all the immunity from evil, which the existence of government can be made directly or indirectly to bestow”
August Comte
1798-1857
Positivism: knowledge is derived (only) from quantifiable empirical evidence
“Father of sociology”
Thought some cranky things about women, Mill would disavow
Comte, Auguste, 1830-1842, Course of Positive Philosophy
(J.S. with) Harriet Taylor
1807-1858
(Platonic!) affair and marriage to Harriet Taylor
Becomes sympathetic to a form of (pre-Marx) socialism, unions, cooperative production
John Stuart Mill
1806-1873
Essays on Some Unsettled Questions of Political Economy (1836)
Principles of Political Economy with Some Applications to Social Philosophy (1848)
“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.” 😅
David Ricardo
1772-1823
Evidence against Malthusian population principle and diminishing returns to agriculture
Logical inconsistencies in Ricardian theory
Socialist critiques of classical economics and market economy
David Ricardo
1772-1823
Ricardo (and followers, like Senior) are very theoretical:
Ignore real world evidence that suggests the contrary?
Nassau Senior
1790-1864
One of Ricardian economics’ biggest proponents after Ricardo’s death
An Outline of the Science of Political Economy (1836)
Political economy was a deductive science:
“[P]remises consist of a very few general propositions...and scarcely requiring proof, or even formal statement, which almost every man, as soon as he hears them, admits as familiar to his thoughts...and his inferences are nearly as general, and, if he has reasoned correctly, as certain, as his premises.”
Nassau Senior
1790-1864
Four self-evident principles of political economy:
Political economy should strictly be a positive science, not normative:
“conclusions, whatever their generality and their truth, do not authorize [an economist] in adding a single syllable of advice.”
Cornerstone of Ricardian economics — diminishing returns to agriculture; what about technological improvements?
An empirical question, not a theoretical conclusion!
Ricardo believed that technology would not offset diminishing returns, and so predicted “historical diminishing returns”
By 1830s, clear that food production greatly exceeding population growth (technological improvement)!
Ricardians (like Senior) did not change their models, kept holding out that it would not last
Blaug: *“The divorce between theory and facts was probably never more complete than in the heydey of Ricardian economics”
Following Godwin and the utopians, a new socialist writers launching critiques of market economy and classical (Ricardian) economics
Viewed society in market economy not as harmonious, but full of conflicts
Nassau Senior
1790-1864
Senior had an innovative response to critiques of profit theory
Abstinence theory: capital comes from the abstinence of consumption, someone must save their income
Labor & capital are both necessary to production, thus profits are the payment earned by capital
John Stuart Mill
1806-1873
“the principle of individual property would have been found to have no necessary connection with the physical and social evils which almost all Socialist writers assume to be inseparable from it.”
“Competition is beneficial to society; every restriction of it is an evil, and every extension of it, even if for the time injuriously affecting some classes of labourers, is always an ultimate good.”
John Stuart Mill
1806-1873
“[Landlords] grow richer, as it were in their sleep, without working, risking, or economizing. What claim have they, on the general principle of social justice, to this accession of riches?”
John Stuart Mill
1806-1873
Blend of Smith and Ricardo in his methodology
Views political economy as a (non-experimental) science:
Comte’s influence: economics is useful, but only part of a larger study of humanity
John Stuart Mill
1806-1873
“They are apt to express themselves as if they thought that competition actually does, in all cases, whatever it can be shown to be the tendency of competition to do.”
“Only through the principle of competition has political economy any pretensions to the character of a science.”
John Stuart Mill
1806-1873
John Stuart Mill
1806-1873
Very much agreed with Smith, Ricardo, and Malthus on general principles
Malthusian population thesis
John Stuart Mill
1806-1873
John Stuart Mill
1806-1873
Rejected Ricardian labor theory of value, and saw that land had an opportunity cost
Yet still maintained a cost of production theory (like Smith), that prices depend more on cost of production (supply) than utility (demand)
John Stuart Mill
1806-1873
“[T]he proper mathematical analogy is that of an equation. Demand and supply, the quantity demanded and the quantity supplied, will be made equal. If unequal at any moment, competition equalizes them, and the manner in which this is done is by an adjustment of the value. If the demand increases, the value rises; if the demand diminishes, the value falls: again, if they supply falls off, the value rises; and falls if the supply is increased.”
John Stuart Mill
1806-1873
Other contributions:
Theory of non-competing groups in labor markets
Economies of scale
John Stuart Mill
1806-1873
We have already seen he was better than Ricardo regarding Say’s Law (and rediscovered Henry Thornton): there is a monetary component to it!
Often brought about by (1) overissue of credit by banks & (2) sudden pessimism in business community and a contraction of credit
“At such times there is really an excess of all commodities above the money demand: in other words, there is an undersupply of money. From the sudden annihilation of a great mass of credit, every one dislikes to part with ready money, and many are anxious to procure it at any sacrifice. Almost everybody therefore is a seller, and there are scarcely any buyers.”
John Stuart Mill
1806-1873
Focus on proprietorship
Big believer in organizing production into cooperatives
In favor of some State ownership of certain industries (public utilities, railways)
Utterly opposed to a progressive income tax, but in favor of absolute limit on inheritance, favored a tax on land rent
John Stuart Mill
1806-1873
Wages fund theory (it was he who coined the term)
Theory allegedly used to argue against formation of unions (who aim to raise wages)
But with decline of pop. principle, how to explain long run wages?
Mill (famously) changes his mind about wages fund theory by 1869
John Stuart Mill
1806-1873
Mill, along with Ricardo and Smith, naturally are skeptical of landlords and their lack of contribution to society
Because land rent is price-determined, not price-determining (assuming land is fixed and has no opportunity cost), rent to landowners is mere surplus, not affecting production
This implies that it would make no difference at all if rent goes to the landowners or to the government
Henry George
1839-1897
"The nineteenth century saw an enormous increase in the ability to produce wealth. Steam and electricity, mechanization, specialization, and new business methods greatly increased the power of labor...Surely, these new powers would elevate society from its foundations, lifting the poorest above worry for the material needs of life...Yet we must now face facts we cannot mistake. All over the world we hear complaints of...labor condemned to involuntary idleness; capital going to waste...Where do we find the deepest poverty, the hardest struggle for existence, the greatest enforced idleness? Why, wherever material progress is most advanced...This relation of poverty to progress is the great question of our time."
George, Henry, 1879, Progress and Poverty (quoted in Posner and Weyl, 2017, pp.36-37)
Henry George
1839-1897
A "simpler, easier and quieter way" (than socialism) to fix problems is to “appropriate land rent for public use, by taxation”
Land (classical “free gifts of nature”) vs. “artifical capital” (human-made improvements)
Solution: allow private ownership in artificial capital, but abolish private ownership in land
Henry George
1839-1897
“Competitive common ownership”
Government owns all land, and leases it out to those it thinks make the most productive use of it
Individuals and businesses rent, but cannot own, land
Henry George
1839-1897
Modern (State and local) property taxes:
Versus George's land value tax:
Henry George
1839-1897
Occupants enjoy full value of improvements and structures built on land (privately owned)
Act as a tenant of the land (government is landlord), pay full rent value in taxes
People who can productively use land have high WTP the tax, those who would leave it idle would sell at low prices to avoid tax (no more absentee landlords)
Georgists often believed this “single tax” could replace all other taxes
"The Landlord's Game" created in 1902 to popularize Georgism
The famous Parker Brothers "Monopoly" board game based on this around 1930s (and interesting disputes about who invented it)
"The Landlord's Game" created in 1902 to popularize Georgism
The famous Parker Brothers "Monopoly" board game based on this around 1930s (and interesting disputes about who invented it)
Consider a market for a factor of production (inputs: land, labor, capital, etc.)
Recall market demand is the maximum willingness of firms to pay factor owners for use of the factor
Recall market supply is the minimum willingness of factor owners to accept, the minimum price necessary to bring a resource to market
But all (equivalent) factor units are paid the market price, p∗ determined by market factor supply and factor demand
Some factor owners would have accepted a job for less than p∗
Those owners earn economic rent in excess of what is needed to bring their factor into the market (its opportunity cost)
Consider a factor (such as “land”) for which the supply is perfectly inelastic (e.g. a fixed supply)
Then the entire value of the land is economic rent!
The less elastic the supply of a factor, the more economic rent it generates!
An increase in demand raises the price of the factor, and creates more economic rents
Think of land during the industrial revolution
A tax on land, τ, (if supply is perfectly inelastic) would not be distortionary!
Gross price to buyers (rg) remains the same, quantity of land used T*, remains the same!
No deadweight loss!
Landowners bear the full economic incidence of the tax
A tax on land, τ, (if supply is perfectly inelastic) would not be distortionary!
Gross price to buyers (rg) remains the same, quantity of land used T*, remains the same!
No deadweight loss!
Landowners bear the full economic incidence of the tax
At the limit, a 100% tax on land rent!
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