I am very grateful for the comments on my previous post, ‘Classical Economic Theory and the Modern Economy’ cover text comments, thoughts and suggestions sought with special thanks to Gerry on how to begin the text, which was also the point raised by Tim Neilson. However this is the length they are looking for. This is now my second draft.

‘Classical Economic Theory and the Modern Economy’

If you are interested in how economic theory became the wasteland it has become, this is the book you must read.

It starts with two premises: First, that economic theory reached its deepest level of understanding in the writings of John Stuart Mill and the classical economists of his time, and then, secondly, the author of this book has understood Mill and has accurately explained what the classical school of the late nineteenth century wrote. From these premises, this then follows.

To have any hope of understanding how an economy works, and how modern economic theory became the dead end it has become, this is where you must begin.

The classical economists, and John Stuart Mill in particular, lived through the Industrial Revolution, saw its astonishing economic transformation before their eyes, and explained, so others could understand for themselves, how their prosperity had been created through the emergence of the market economy.

Classical economics was entirely a supply-side theory.

Mill, the greatest utilitarian philosopher of his age, refused to use utility as anything other than a minor element in his theory of value. Mill explicitly and emphatically denied any role for aggregate demand in the creation of employment. In reaching these conclusions, there was no disagreement among the entire mainstream economics community of his time.

First through the Marginal Revolution of the 1870s, and then through the Keynesian Revolution of the 1930s, the entire edifice of classical theory has been obliterated and made virtually incomprehensible to anyone educated in modern economics. From a classical perspective, modern theory is Mercantilist trash.

This book explains why that is and how to understand the classics as they were meant to be understood.

From the comments, I can see that this business about utility among the classical economists is extraordinarily difficult to accept. Of course no one will produce anything that they do not believe they can sell, and no one will buy things that do not satisfy some need or desire.

Perhaps this will provide a clearer understanding which is taken from the text of the book. The heading in bold is my assertion, the quote that follows is by D.P. O’Brien from his 1975 Classical Economics Revisited which was such a tour de force that a second expanded edition was published thirty years later, in 2005. He says throughout his book many of the things I say myself, with only this difference, if it is a difference, that I believe the classics were right about what they wrote where he is only reporting.

The Classical Theory of Value was Not Based on Utility Although Mill was Himself a Utilitarian
“Mill advances a ‘cost of production’ theory of value…. He was not a subjective value theorist…. He treated utility as merely a condition of value.” (p.96)

Both Marginal Utility and Aggregate Demand are demand-side theories that completely divorce an economist from thinking in relation to supply. There is much more to it, but there are no easy points to score against Mill over his cost of production approach to value. He has 17 elements in his overview of the theory of value with this the second:

II. The temporary or Market Value of a thing, depends on the demand and supply; rising as the demand rises, and falling as the supply rises. The demand, however, varies with the value, being generally greater when the thing is cheap than when it is dear; and the value always adjusts itself in such a manner, that the demand is equal to the supply.

This is pretty well all that is taught about supply and demand today and I doubt most economists know much more than that, although we now have diagrams and pages of terminology to explain it all (e.g. “price elasticity of demand” or the distinction between “demand” and “quantity demanded”).

Mill’s first proposition, by the way, is that value is entirely a relative concept. The classics were not trying to explain just the temporary price of the moment, but how the relative price structure across an economy is determined. That is a much much more difficult question and I doubt most economists today have much of a handle on it assuming it is even brought to their attention. It is also a much more important issue than mere price determination of a single product in isolation from the rest of the economy.

For those interested in a classical approach to economic theory, there is the third edition of my Free Market Economics. I think of it as Mill’s Principles for the twenty-first century. It is, unfortunately, absolutely unique.