John Stuart Mill on Laissez-faire

This is John Stuart Mill in his Principles of Political Economy, Book V, Chapter XI, Para 7 [Ashley edition p 950]:

Laissez-faire, in short, should be the general practice: every departure from it, unless required by some great good, is a certain evil.

This is William D. Grampp in his Economic Liberalism: , Volume II: The Classical View, Chapter 3, titled “Liberalism in the Great Century” [New York: Random House 1965]. The chapter begins:

The nineteenth century usually is thought to have been the greatest age of economic liberalism, greater than any other, from its origins in Stoicism down to the present time. Economists think of the century as the long afternoon of the ideology. They believe it then meant laissez-faire and that laissez-faire was the policy of Great Britain, the major economy of the world. In fact, the century was not like that, and historians have tried to tell us so. They have reported the many ways in which the British government intervened in the market. The historians also have said the intervention was inconsistent with liberalism. In this, they are in my opinion, mistaken. (Grampp 1965: 73)

From the introduction to the chapter he continues with his first section on “The Importance of the Nineteenth Century”. He lists six reasons, this is the fourth:

“(4) The first effort to make a comprehensive statement on its principles was in 1848.” (Grampp 1965: 74)

1848 was the date of publication of the first edition of Mill’s Principles. He makes what he means absolutely clear on the following page:

“John Stuart Mill was the first to do this – to enunciate a theory of policy – and he did it in his Principles, which was published in 1848.” (Grampp 1965: 75)

He makes clear its significance in the very first para in which he discusses the notion of laissez-faire.

“1. The idea of economic liberalism, which had been gathering force for centuries, came to their full power in the nineteenth century…. Liberalism had many different meanings to these people. But one generalization can be made. To almost all who believed in it and to some who did not, liberalism did not mean laissez faire – that is, it did not mean a policy of non-intervention by the government and of allowing the major economic decisions to be made on unregulated markets. The rejection of laissez faire was one of the few ideas on which there was nearly complete agreement among the economists and between them and the political leaders.” (Grampp 1965: 74)

In that quote from Mill, the most important word is “unless”, “unless required by some great good”. His Book V is “On the Role of Government”, and in the 185 pages that follow he makes clear just how extensive he believed that role is.

John Stuart Mill at Econ Lib

This is the EconLib (The Economics of Liberty} online biography of John Stuart Mill. The greatest defender of freedom and liberty in history, this is what they come up with. They really have no idea about the economics of Mill or about the economics of freedom for that matter, but it is sadly par for the course in our day and age.

The eldest son of economist James Mill, John Stuart Mill was educated according to the rigorous expectations of his Benthamite father. He was taught Greek at age three and Latin at age eight. By the time he reached young adulthood John Stuart Mill was a formidable intellectual, albeit an emotionally depressed one. After recovering from a nervous breakdown, he departed from his Benthamite teachings to shape his own view of political economy. In Principlesof Political Economy, which became the leading economics textbook for forty years after it was written, Mill elaborated on the ideas of David Ricardo and Adam Smith. He helped develop the ideas of economies of scale, opportunity cost, and comparative advantage in trade.

Mill was a strong believer in freedom, especially of speech and of thought. He defended freedom on two grounds. First, he argued, society’s utility would be maximized if each person was free to make his or her own choices. Second, Mill believed that freedom was required for each person’s development as a whole person. In his famous essay On Liberty, Mill enunciated the principle that “the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection.” He wrote that we should be “without impediment from our fellow-creatures, so long as what we do does not harm them, even though they should think our conduct foolish, perverse, or wrong.”

Surprisingly, though, Mill was not a consistent advocate of laissez-faire. His biographer, Alan Ryan, conjectures that Mill did not think of contract and property rights as being part of freedom. Mill favored inheritance taxation, trade protectionism, and regulation of employees’ hours of work. Interestingly, although Mill favored mandatory education, he did not advocate mandatory schooling. Instead, he advocated a voucher system for schools and a state system of exams to ensure that people had reached a minimum level of learning.
Although Mill advocated universal suffrage, he suggested that the better-educated voters be given more votes. He emphatically defended this proposal from the charge that it was intended to let the middle class dominate. He argued that it would protect against class legislation and that anyone who was educated, including poor people, would have more votes.

Mill spent most of his working life with the East India Company. He joined it at age sixteen and worked there for thirty-eight years. He had little effect on policy, but his experience did affect his views on self-government.

 
Let us in particular look at this: “Surprisingly, though, Mill was not a consistent advocate of laissez-faire.” Not only was he not a consistent advocate, he was no advocate of laissez-faire at all. No economist has ever been an advocate of laissez-faire, not Adam Smith, not David Ricardo, not anyone else. If you mean in all cases, leave it to the market, no one has ever advocated such a hands-off approach. Going further, Mill was an advocate of using government agency and regulation in a wide variety of instances. Yet his economics was the most hands-off approach to economic policy of any economist since the middle of the nineteenth century. This was from my own discussion of Mill that appeared on the EconLib website back in 2015: John Stuart Mill explaining what is wrong with Keynesian theory. My book on the economics of Mill will be published this year: Classical Economics and the Modern Economy.

This is overview of the book found on the Elgar website:

Economic theory reached its highest level of analytical power and depth in the middle of the nineteenth century among John Stuart Mill and his contemporaries. This book explains classical economics when it was at its height, followed by an analysis of what took place as a result of the ensuing Marginal and Keynesian Revolutions that have left economists less able to understand how economies operate.

Chapters explore the false mythology that has obscured the arguments of classical economists, clouding to the point of near invisibility the theories they had developed. Steven Kates offers a thorough understanding of the operation of an economy within a classical framework, providing a new perspective for viewing modern economic theory from the outside. This provocative book not only explains the meaning of Say’s Law in an accessible way, but also the origins of the Keynesian revolution and Keynes’s pathway in writing The General Theory. It provides a new look at the classical theory of value at its height that was not based, as so many now wrongly believe, on the labour theory of value.

A crucial read for economic policy-makers seeking to understand the operation of a market economy, this book should also be of keen interest to economists generally as well as scholars in the history of economic thought.

I never worry that anyone will be able to contradict me about Mill since the most certain statement I can make is that no one, but no one, has read Mill in the past fifty year to find out how an economy works, and virtually no one has read him sympathetically – other than myself and a handful of others – in over a century. But you do have to wonder about those who tell you about freedom and liberty who don’t read the author of On Liberty for some insights into how an economy works and his views on the role of government in making an economy work.

 

Mill’s Principles reviewed by Bonar in 1911

In 1911, James Bonar wrote a review on the publication of the Ashley edition of Mill’s Principles of Political Economy which was published in The Journal of Political Economy, titled: The Economics of John Stuart Mill. It perfectly summarises the consensus view of Mill’s economics at the start of the twentieth century, which shows just how far from the centre Mill’s economics had already by then moved.

If John Stuart Mill’s eminence is not supreme, it is great enough to make almost every utterance of his worth considering. His was rarely a hasty judgment; and what he says of his fellow-enthusiasts of the year 1825 might be applied to himself on most occasions: he never left a subject he had taken up until he had (to the best of his ability) untied every knot in it.

Another century later, there is virtually no economist who reads Mill today for instruction. And it’s not just their loss, we all lose because of the inanity of modern theory. It is the residuals from the economics of Mill and his contemporaries that allow our economies to limp along and innovation to continue. It was also interesting to discover how Mill came to write The Principles:

The success of the Logic drew him back into political economy by making the publishers willing (perhaps anxious) to print what they had refused before, namely, the Essays on Some Unsettled Questions in Political Economy, Mill’s part of the work projected in 1831 [he had originally intended to co-author a series of papers on economics which is why it was “Mill’s part”].

As he was setting out to write his Political Economy, he wrote the following to Auguste Comte in 1844:

I know what you think of the present political economy. I have a better opinion of it than you; but, if I wrote something about these things, I should never forget the purely provisional character of all its concrete conclusions and I should devote myself more especially to separating the general laws of production, necessarily common to all industrial societies, from the principles of distribution and exchange, which assume a particular state of society. Such a treatise could have a great provisional utility, especially in England.”‘ It might appear to you essentially anti-scientific; and it would be so as a matter of fact, if I were not taking great pains to establish the purely provisional character of every doctrine (about industrial phenomena) which made abstraction from the general movement of humanity. I think that if this plan is at all adequately executed it would give a scientific education (education positive) to many who are now studying social questions more or less seriously; and in taking as my general model the great and brilliant work of Adam Smith I should find good opportunities for spreading directly one or two principles of the new [positive] philosophy, as Adam Smith found them for spreading most often those of negative metaphysics in his social applications, yet without awakening dark misgivings by waving any flag.

I find this especially enlightening since quite a number of Mill’s views that have been superseded according to Bonar are views that I believe are of premier importance.

There are many details of economic doctrine in respect of which Mill has probably few followers now. Occasionally his positions, instead of being solemnly refuted, are quietly dropped as purely Ricardian. Many of the pages devoted to wages and profits are so treated. His particular form of Malthusianism has gone out of doors into the hands of an energetic sect of reformers. Without adopting the sweepingly adverse verdict of Jevons, we may admit that there is at once too much and too little in Mill’s Political Economy for most of us now. We should not confine wealth to exchange value, or believe that nothing remained to be added to the theory of value. We should not say that without competition there is no economics. We should not say so broadly that industry is limited by capital. We should not make so much of the distinction between productive and unproductive labor or try to prove that a demand for goods can never in any sound sense be a demand for labor. We cannot be induced to rank land, labor, and capital as co-ordinate factors in production, or to adopt Senior’s view that abstinence is rewarded in interest. We should probe further into the cause of interest. We might ratify the general principle of Malthus without making all progress turn on the practical recognition of it. We should be more chary than Mill in the use of the word ” laws.” We should not, all of us, admit that the “laws” of production were purely physical and the “laws” of distribution “of human institution solely.” Mill was probably aware that the abandonment by him in I869 of the wages fund carried consequences reaching into the heart of his arguments on profits and wages reducing them largely to useless dialectic.

But once we have removed Malthusian pessimism on population from the list, the rest of Mill’s judgements stand, even if few [no] modern economists any longer understand or subscribe to Mill’s position.

Much more to read at the link if these things interest you. But there is this one error that should be a reminder that no one can write anyone else’s life without error. This was the dates of Mill’s life stated by Bonar: “(May 20, 18o8, to May 8, 1873)”. Mill was, in fact, born in 1806.

Productivity is dead

Just got to the AFR at the end of the day, and what do we find: Falling productivity numbers cloud economic recovery. The headline front-page story too.

The weakest productivity numbers in at least 25 years have unsettled the outlook for an economic recovery, a pick-up in wage growth and a string of budget surpluses predicted by the Morrison government and the Reserve Bank of Australia.

Former Productivity Commission chairman Gary Banks said that while he was cautious about the poor productivity reading, it “caps off what has been consistently weak productivity performance” in Australia and the serious need for structural reform to lift economic output.

“Trying to stimulate demand through monetary and fiscal measures won’t cut it, I’m afraid, and these pose risks of their own,” Mr Banks said. “The causes of [economic weakness] require regulatory and other reforms to enhance the supply side of the economy.”

Public sector spending is notoriously non-value-adding. You can have all the fake GDP growth you like, building train lines in Melbourne and streetcars in Sydney, and who know what everywhere else, but if they do not repay their production costs in higher levels of output, they are taking your economy backwards. And like with the trains and the trams, since neither is even carrying a single passenger as yet, there is absolutely nothing on the ground taking place that creates any value whatsoever. All for very classical reasons, but you’d have to read Mill and not Mankiw to see the point.

Liked this bit too, also for very classical reasons:

While the figures are likely to reflect strong jobs growth at a time of weakened economic activity, including a drop in farm production because of the drought, many economists blame structural problems, such as a distinct lack of business investment, especially outside the resources sector.

My favourite line from Mill, the most radicalising phrase I ever read, was “demand for commodities is not demand for labour”. To translate: there is no connection between the level of demand and employment. With real wages there is a major connection, but with employment none at all.

Hayek v. Mises

Sinclair’s post and the John Papola video on Mises v Marx was a really interesting but I doubt will have the same penetration as did his early video on Keynes v Hayek. This continues to provide some kind of ground for understanding the economic policies of our time, and the disasters of a demand-side approach to managing an economy. Central banks are now the major carriers of the disease.

As it happens I am in the last stages of completing my manuscript on Classical Economics and what is needed for a modern economist to follow the classics, which studying modern theory makes virtually impossible. This is the draft opening to the chapter on Austrian economic theory for your interest. Comments welcome.

Although Carl Menger initiated the Marginal Revolution with the intent to find a unified theory of value, the names now most closely associated with the Austrian School are Friedrich Hayek and Ludwig von Mises. And while both are seen from a distance as almost one and the same, up close they were quite different from each other. There are many ways to highlight their differences, but here their approaches will be compared through their attitudes to John Stuart Mill, since both specifically identified themselves with the classical liberal tradition.

Where it matters is in the social aims an economist might hold. The essence of Mill’s approach to economic theory was to attempt to answer the question, what ought to be done to create the greatest amount of good for the greatest number of people? Uppermost in his mind was the question of what can be done to raise the living standards and economic wellbeing of the individual members of the community. Yet while he called himself a “socialist”, it was the kind of socialism that by today’s standards would have had him grouped among the most market-oriented political theorists of the present day. In particular, he would find modern macroeconomic theory, and the policy matrix that accompanies its Keynesian basis, completely false. While he saw a definite role for government involvement in the economy, the basic framework was that everything that can be left to the market should be, while also understanding that not everything can be left to the market. He saw a clear but limited role for government regulation.

Hayek’s approach is similar to Mill’s (and I would say my own). Hayek discusses the economics prior to the publication of Menger’s Principles of Economics in 1871, noting that this was only “a mere twenty-three years since the great restatement of classical economics by John Stuart Mill (Hayek 1992: 96-97). He continues:

“It is important for proper appreciation of Menger, that we do not underestimate what had been achieved before. It is misleading to think of the preceding period, 1820-1870, as simply dominated by Ricardian orthodoxy. At least in the first generation after Ricardo there had been plenty of new ideas. Both within the body of classical economics as finally expounded by John Stuart Mill and even more outside it there had been accumulated an array of tools of analysis from which later generations were able to build an elaborate and coherent structure of theory after the concept of marginal utility provided the basis of the unification. If ever there was a time in which a quasi-Ricardian orthodoxy was dominant, it was after John Stuart Mill had so persuasively restated it. Yet even his Principles contain very important developments which go far beyond Ricardo. (ibid.: 97)

The point was that Mill had provided much of the raw material that the marginalists had been able to consolidate into a more unified whole. Hayek stops to state that

“It is indeed quite difficult to understand how a scholar of the penetration and transparent intellectual honesty of John Stuart Mill could have singled out what was so soon felt to be the weakest part of his system for the confident assertion that ‘there is nothing in the laws of value which remain for the present or any future writer to clear up; the theory of the subject is complete.” (ibid.: 98)

That Mill, the greatest utilitarian scholar of his generation, had no interest in making utility the core of his own theory of value may have been a conundrum to Hayek, although it might also have suggested that utility had been considered by Mill but then rejected. Yet the core point here is that there is no question that Hayek had a profound and extremely high regard for the economics of Mill, self-proclaimed “socialist” though he may have been. This is opposite to the attitude taken by Mises.

The economics of Mises is astonishingly detailed and profound. But what makes his approach so austere is its narrow focus on economic issues almost entirely outside the social and political arena. Hayek, like Mill, was continuously thinking through how economic conditions could be improved using as many arms as policy as possible, while always understanding the limits that are placed on the various possibilities available by the laws of gravity of economic theory which forbid various approaches to be adopted. Mises, on the other hand, thought that only an absolutely rigid adoption of market-based economic theory was acceptable. And unlike Mill, who even in 1848 could see how economic policies would be constrained by popular pressures to alleviate economic pressures and to use governments to temper economic outcomes, Mises accepts no compromise with the hard-edge views of how a market economy must operate. Here he discusses his views of John Stuart Mill in his Liberalism in the Classical Tradition (Mises 1985).

“John Stuart Mill is an epigone of classical liberalism and, especially in his later years, under the influence of his wife, full of feeble compromises. He slips slowly into socialism and is the originator of the thoughtless confounding of liberal and socialist ideas that led to the decline of English liberalism and to the undermining of the living standards of the English people. Nevertheless – or perhaps precisely because of this – one must become acquainted with Mill’s principal writings:

Principles of Political Economy ˆ(1848)
On Liberty (1859)
Utilitarianism (1862)

“Without a thorough study of Mill it is impossible to understand the events of the last two generations. For Mill is the great advocate of socialism. All the arguments that could be advanced in favor of socialism are elaborated by him with loving care. In comparison with Mill all other socialist writers – even Marx, Engles and Lassalle – are scarcely of any importance.” (Mises 1985: 195)

An indication of how adamantine Mises’s political judgements are may be recognised in the following comment from the preface he wrote for Liberalism in 1962.

“In England the term ‘liberal’ is mostly used to signify a program that only in details differs from the totalitarianism of the socialists.” (ibid.: xvi)

At any rate, no actual socialists have ever cited Mill as the source of their views on how an economy ought to be managed. Yet Mises’s concerns over the drift of economic theory and government policy remain a vivid warning of how dangerous economic theory has become, both economically and politically.

Mill discusses the Quantity Theory of Money in 1848

From Mill’s Principles:

If we assume the quantity of goods on sale, and the number of times those goods are resold, to be fixed quantities, the value of money will depend upon its quantity, together with the average number of times that each piece changes hands in the process . The whole of the goods sold (counting each resale of the same goods as so much added to the goods) have been exchanged for the whole of the money, multiplied by the number of purchases made on the average by each piece. Consequently, the amount of goods and of transactions being the same, the value of money is inversely as its quantity multiplied by what is called the rapidity of circulation. And the quantity of money in circulation [M] is equal to the money value of all the goods sold [PT], divided by the number which expresses the rapidity of circulation [V]. (Mill [1848] 1871: 494 – letters in parentheses inserted into the text)

Note that the money value of all goods sold is PT, with the T standing for Transactions. This is the accurate rendering of the concept since the same item might be sold many times over. A sack of flour might find itself sold first to a distributor, and then to a retailer and then finally to a consumer. It is the number of transactions that matter. The transactions also incorporate all of the sales between input producers that occur well before, perhaps years before, some item is sold as a final good to a consumer.

Thereafter we come to the quantity equation which is actually a quantity identity since it is true by definition. It is true only because it could not be anything else.

M ≡ PT/V

Or in its more typical formulation:

MV ≡ PT

The number of times a unit of money is exchanged is equal to the total money value of all sales that take place inside an economy. Since there is no means to calculate T or the average price of all of the items that are turned over in the market, PT is a number that can never be calculated.

Following that para from The Principles are a large number of additional considerations that help make sense of the point and also make it more comprehensible in relation to the operation of an economy.

Whatever else Mill is or is not trying to do, what he is not trying to do is provide some means to regulate an economy by trying to adjust any of the four elements within the identity.

A thief walks into a store

Here is a question from Quora I have slightly changed which I leave for you to work out for yourself:

A thief walks into a store and steals $350. The thief then buys $350 worth of goods at the store. In the end, did the store lose any money and if so, how much?

To help you along, let me add in this quote from John Stuart Mill’s 1844 Essay, “Of the Influence of Production on Consumption”.

“The man who steals money out of a shop, provided he expends it all again at the same shop, is a benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman’s fortune.”

I need hardly add that Mill thought he was being fantastically ironic. But there is then this, the third iteration.

A government who taxes you to the hilt but then spends the money it took from you on whatever the government chooses to buy, provides a benefit to you and everyone else since it adds to the level of demand and therefore helps maintain full employment.

This is modern economic theory and practice to the back teeth. In looking at this third iteration, bear in mind the money spent on all of the various unproductive forms of stimulus spending that occurred following the GFC.

[My thanks to Tony for bringing this Quora question to my attention.]

Jordan Peterson discusses the Nazis in comparison with communists

How does one make the moral distinction, he asks, between the Nazis and the comms with the speaker actually using the term “socialism”? The video shows his answer. But here’s a hint about his answer: I really really like what he says.

Which brings to mind this quote from John Stuart Mill which I ran across today:

Apart from the peculiar tenets of individual thinkers, there is also in the world at large an increasing inclination to stretch unduly the powers of society over the individual, both by the force of opinion and even by that of legislation. And as the tendency of all the changes taking place in the world is to strengthen society, and diminish the power of the individual, this encroachment is not one of the evils which tend spontaneously to disappear, but on the contrary, to grow more and more formidable. This disposition of mankind, whether as rulers or as fellow-citizens, to impose their own opinions and inclinations as a rule of conduct on others, is so energetically supported by some of the best and by some of the worst feelings incident to human nature, that it is hardly ever kept under restraint by anything but want of power; and as the power is not declining, but growing, unless a stronger barrier of moral conviction can be raised against the mischief, we must expect, in the present circumstances of the world, to see it increase.

He wrote that 150 years ago. Just think how much more applicable and terrifying all that is today. If you haven’t read On Liberty, you really should.

Classical economic theory and employment

At the very core of the classical arguments against public spending as a means to raise employment is John Stuart Mill’s 1848 Fourth Proposition on Capital: “Demand for commodities is not demand for labour”. There is no relationship between the level of employment and the level of aggregate demand. Everything that matters happens on the supply side, with the only role of demand being what gets produced, but not how much or how many people are employed. It’s always been difficult to understand, but with macro now specifically stating that demand for commodities does raise the demand for labour, there is virtually no one who any longer even knows what Mill and the classics had said, never mind actually being able to explain why that might be. So with this in mind, there is a quite interesting story that just appeared the other day at Zero Hedge: Finland Abandons ‘Helicopter Money’ Experiment: No New Jobs Created. He’s the whole thing:

With socialists rising to the calls of the ‘free shit army’ and the ever-more-left-leaning liberal intelligentsia imagining ever-more-creative ways to pretend to fund their massive government interventions (Modern Monetary Theory), the topic of “QE for the people” or “helicopter money” or the more academic-sounding “Universal Basic Income” is becoming ever-more-prevalent.

Well, we have some more results in on the impact of Universal Basic Income (UBI) experiments – handing out free money to citizens with no strings attached.

As part of its experiment, in Finland 2,000 unemployed people aged 25-58 were paid a tax-free €560 (£490) monthly income. This was independent of any other income they had and not conditional on looking for work.

As Valuewalk reports, UBI-expert from the Institute for Policy Research at the University of Bath (UK), Dr Luke Martinellicomments:

“Universal basic income has ascended policy debates in recent years, motivated by the shortcomings of existing welfare systems, and our rapidly changing – and increasingly dysfunctional – labour markets.

“Yet despite the idea’s widespread appeal, there remain substantial and unanswered questions about its economic viability and political feasibility. This is why all eyes will be on Finland this Friday and why the results of its UBI experiment will be so revealing.

“We expect these results will provide us with the first really robust evidence on how UBI could affect changes in employment and people’s overall finances, as well as wider measures of wellbeing.”

So what were the results?

Simple (and Dr Martinelli – and the left – won’t like it):

1) People were happier, and

2) No new jobs were created.

As Yahoo reports, this was the widest such study to be conducted in recent years in Europe

“The recipients of a basic income had less stress symptoms as well as less difficulties to concentrate and less health problems than the control group,” Minna Ylikanno, lead researcher at Finland’s welfare authority Kela, said in a statement.

“They were also more confident in their future and in their ability to influence societal issues,” she added.

Results at this stage are preliminary and relate only to the first year of the study, meaning Friday’s findings are far from conclusive. But a hoped-for stimulus to levels of employment has not yet materialized, the project’s researchers said.

“The recipients of a basic income were no better or worse than the control group at finding employment in the open labour market”, Ohto Kanninen, research coordinator at the Labour Institute for Economic Research, said in a statement.

Shocker!!  Who could have seen that coming?

Give people free money for doing nothing, with no conditions, and they will be happier to sit around all day in non-productive utopia.

Finally, we note that, based on these results, Finland’s social affairs minister, Pirkko Mattila, conceded on Friday that the government has no plans to roll out the scheme across the whole country.

And let there be no doubt that whoever might have received this helicopter money would have spent it, to the last Euro.