Tag Archives: John Stuart Mill

Cultural economics and the history of economic thought

Posted on by
Reply

I have submitted a paper to a conference on cultural economics and have been asked to explain how a paper on the history of economic thought belongs in a conference on cultural economics. Since the premise of the letter to me was, in the words of the conference organiser, “the more the merrier”, the query was entirely friendly. This is my reply:

I am all for the more the merrier and I must tell you that attending the conference does seem a very copasetic way to spend a few days in Montreal at the start of summer. So I will begin by saying that I have approval to attend your conference since I am already attending the HES conference in the previous week and my confreres will be there already. Nevertheless, I would very much like to help chisel out a bit more territory for cultural economics which is what I am hoping to do with my paper.

The notion that lies behind it came to me in this review of my Defending the History of Economic Thought written by my friend AW whom I am sure you know very well. There he wrote (using the initials IH for Intellectual History):

“More fruitfully, Kates reminds us that HET can be ‘a conversation with economists of the past on contemporary questions.’ Now we are talking IH, the opportunity cost of which needs to be justified. In my opinion, the value of IH to the apprentice economist depends on what kind of economist we are training. There is a large demand, in both the private and public sectors, for skilled technicians in essentially subordinate positions. IH is of no more professional importance to them than Shakespeare or Mozart. But if we are training high-status economists – the Krugmans and Stiglitzes of this world, who play a large part in public affairs and in elite universities – then we must encourage a wide and humane culture: literary, philosophical, historical, artistic and scientific. IH certainly belongs in the mix here. The great Paul Samuelson was a better economist (of this kind) for his ‘conversations’ – often quite disputatious – with Quesnay, Hume, Adam Smith, Thünen and Marx. At his Nobel Prize banquet he listed among the conditions for academic success in economics, fourthly: ‘you must read the works of the great masters.’”

In my book, I did not entirely neglect this side of the issue but I cannot say that I explored it thoroughly either. And while I completely agree with AW in relation to its necessity amongst the elite of the profession, I am not sure that I would wish to stop there since when someone is an undergraduate, or even a graduate student, it is impossible to know who is going to be at the elite of the profession 20-30 years hence. So that is why my abstract is written as it is:

“There is a growing recognition that economists need to study the history of their subject not just because it helps to understand how economies work, but also because it is part of the transmission of cultural traditions. It is not just that knowing the works of the great economists of the past, such as Adam Smith or John Stuart Mill, is valuable for their economic insights, but may be even more valuable for the traditions they represent. This paper looks at the importance of the history of economic thought in terms of the cultural transmission such studies represent. From that premise, it goes on to suggest how the history of economics should be taught so that both the economics of earlier times is understood as well as providing deeper insights into the cultures of both their own times and, by way of contrast, our own.”

Nor should you think that this is a late conversion. As part of the course I teach which is based on the book I wrote, there is a major section on the history of economic thought whose importance I explain not just in relation to helping them understand the theory we teach but also this, which is quoted from my Free Market Economics (Kates 2011: 181):

“It is also important, as a matter of general cultural awareness, to know the great economists of the past who have had an influence on the way in which we think about economic matters. For good or ill, these people have influenced our lives more than any other people in the social sciences because it is based on their theories that our economic structures are organised. This is true irrespective of the kind of economic system one happens to live within.”

I am always struck by how little any of my students know about the historical and intellectual traditions of their own culture. All of the following make at least walk-on appearances although most are treated at length: Adam Smith, J.-B. Say, T.R. Malthus, David Ricardo, James Mill, John Stuart Mill, Karl Marx, Charles Darwin, Stanley Jevons, Karl Menger, Leon Walras, Alfred Marshall, F.A. Hayek, Ludwig von Mises and J.M. Keynes. On more minor members of the economics tradition, I throw in Robert Torrens, Walter Bagehot, Henry Clay, Fred Taylor, Gottfried Haberler, Paul Samuelson, Gary Becker and William Baumol. It will not, of course, surprise you that even in my class of graduate students, the only one that any of them have ever heard of is Marx. To encourage someone to speak up, I always say (as a joke but they can’t be 100% sure) that I will give an automatic “A” to anyone who can tell me a single historical fact about John Stuart Mill. I have had only one taker in the last five years. Their cultural knowledge is pitiful. My course is a tiny experiment in trying to do better. And I might note that as I begin this three hour class on the history of economics, I always say to them that for some this will be the longest three hours of their lives but for others it will be amongst the best experiences they will have in a classroom during their entire university career. And at the break, around half don’t come back but the half that remain feel they have learned something worthwhile which gives them some sense of what they have missed out on had they actually had a genuinely liberal education.

Anyway, I hope you find this interesting as a subject for a paper. I have already written up some of what I intend to give but will leave it in your hands whether space can be found for me to present at the conference. I do, in any case, look forward to being there in June.

With kindest best wishes

Government ‘investment’ does not equal growth

Posted on by
Reply

Judy Sloan’s column from The Australian today goes under the heading, Public spending won’t fuel the growth engine. I mention this on the same day as I have received word that my paper on Mill’s Fourth Proposition on Capital has been accepted for publication.

First Mill. In 1848, John Stuart Mill in his Principles of Political Economy included his four propositions on capital which not only never challenged in his lifetime, the fourth, that demand for commodities is not demand for labour, was described by Leslie Stephen in 1876 as the “best test of a sound economist”. It was the pons asinorum of classical economics, the divide that separated those who could understand economics from those who could not. But what is remarkable is that since that date in 1876, not only has there not been another economist to have embraced this statement in full, but it has been challenged by some of the greatest names in the history of economics – Marshall, Pigou, Hayek are just some amongst a quite extraordinary array of economists from every side of the economics divide who have tried to explain what Mill meant. To my astonishment, I am literally the first person since 1876 who has argued in print that what Mill wrote is literally true. It is the best test of a sound economist.

And what the proposition meant, as the words plainly state, is that buying non-value-adding goods and services – and here the issue is public spending in particular – will not lead to increased employment because it does not lead to economic growth. A Keynesian stimulus is therefore doomed to fail, evidence for which has been accumulating at an astronomical rate since 2009.

Judy in her column has brought forward evidence from a paper published in the UK whose subtitle is, “Government ‘investment’ does not equal growth” and written by an economist by name of Brian Sturgess. Here is Judy’s conclusion:

If the government is intent on spending even greater proportions of GDP on infrastructure — which was already ramped up under the Labor government — it must ensure that only projects for which the benefits far exceed the costs are approved. Spending money on infrastructure is no silver bullet to achieving economic growth and better living standards. Let’s just hope the audit commission has taken on board some of Sturgess’s conclusions.

Yes, let us hope our government has taken on these conclusions which once went under the collective name Say’s Law.

The Greatest Economist of the Millennium

Posted on by
Reply

The following article on the greatest economist of the millennium was published on January 4, 2000 as one of the last of my regular columns in the Canberra Times. It was a follow up to the article on the ten most influential economists of the century that had been published two weeks before.

The Greatest Economist of the Millennium

To choose the greatest economist of the past thousand years to some extent invites the question whether the study of economics has even existed over that span of time.

Economic questions have certainly been matters of the deepest consideration for as long as humans have had commercial relations. Hammurabi’s Code, the first recorded attempt at a written system of law, sought to fix prices. Aristotle’s arguments against the charging of interest remained an obstacle to economic development for more than fifteen hundred years.

But the actual attempt to isolate an economic system from within the on-going blur of events, and then make judgements about what ought to be done, is probably no older than the sixteenth century. It was not until then that the first pamphleteers attempted to understand the structure of the economies in which they lived and to persuade governments about the policies they ought to adopt. These were the ancestors of the economists of today.

Who then was the greatest economist of the millennium? In my view it was John Stuart Mill (1806-73) whose great work, his Principles of Political Economy with Some of their Applications to Social Philosophy, was first published in 1848. There were to be seven editions during Mill’s life and it was used as a text, with few concerns about its antiquity, well into the twentieth century.

The year of publication of Mill’s Principles is one of the most significant in world history. It was the year of European revolution and in that year and for that reason Karl Marx (who is definitely not the runner up) published his Communist Manifesto. The contrasting visions of Marx and Mill were to reverberate down the succeeding years in a battle for the allegiance of the whole of the human race, a battle which has not ended even to this day.

To Marx the unit of analysis was the economic class to which one belonged. To Mill, what mattered was the individual.

The world of Marx was a world of class conflict in which the capitalist class, the owners of the means of production, exploited those who laboured but earned barely enough to keep alive.

The world as seen by Mill was strangely similar to the one inhabited by Marx, but with a recognition that an economic system based on personal liberty was one in which even those ground down by the burdens of poverty could have their material wellbeing vastly improved and their political freedoms at the same time preserved.

In one of the most remarkable passages ever written, listen to Mill’s judgement on whether the world as he knew it, if it could not be made to change, was preferable to a system in which all property was communally held.

If, therefore, the choice were to be made between Communism with all its chances, and the present state of society with all its sufferings and injustices; if the institution of private property necessarily carried with it as a consequence, that the produce of labour should be apportioned as we now see it, almost in an inverse ratio to the labour … if this or Communism were the alternative, all the difficulties, great or small, of Communism would be but as dust in the balance.

The twentieth century has been a war of ideologies in which the rights of the individual have been crushed time and again by the dictates of the state. Both the Nazis and the Communist dictatorships ruthlessly suppressed human rights in the name of a higher truth.

The cold war was fought over little more than the structure of the economic system. Massive damage was inflicted on large swaths of the world’s political landscape due to the attempts made to turn collectivist economic theories into a living reality.

Indeed, much of what is now called the third world continues to live in desperate poverty because of the introduction of central direction into their economies, an approach to solving the economic problem which has never yet worked in practice and whose continuation will guarantee poverty for so long as such attempts persist.

There is, of course, much we have learned since his time that makes Mill an imperfect guide to the operation of the economic system, although there are many worse being written even now. His theory of value, to which he believed nothing need ever be added, is the most famous instance of Mill having been superseded by the subsequent work of a later generation of economists.

Yet at the start of the new millennium, we live in the world bequeathed to us by Mill. The politics of On Liberty united with the basic propositions of his economics of limited government, free contract and individual initiative provide the blueprint for a future filled with hope and the promise of a lasting prosperity.

Say’s Law and the business cycle at SHOE

Posted on by
Reply

My likely final posting on this fascinating thread that began with my bring up Francois Hollande’s pointed comment on Say’s Law. The interesting thing for me to have seen in this instance is that others study the business cycle and find Say’s Law invisible. I began from examining Say’s Law and found its concepts an intrinsic part of the theory of the cycle.

Between Daniele Besomi and Barkley Rosser, I am beginning to get some idea why it is so hard for me to get my papers published.

But they are not the only ones who have published books on the classical theory of the cycle. I have my own as well, Free Market Economics: an Introduction for the General Reader (Elgar 2011). It’s an unusual title, perhaps, but I adopted it from Henry Clay’s Economics: an Introduction for the General Reader published in 1916, and after many reprints, with a second edition in 1942. My book is a cross between Clay, John Stuart Mill and a number of more modern features economic theory has picked up over the past century or so. I also teach Keynes, but those sections come with a skull and cross bones just so my students are warned about the dangers this kind of stuff can cause.

In this book I have a chapter on the classical theory of the cycle which is largely adopted from Haberler (1937) and then three more chapters explaining in more detail the nature of economic management using classical theory. But because I think of Say’s Law as the very core in understanding the cycle, what you see is the result of an enormous amount of additional reading on everything I could get my hands on about the pre-Keynesian theory of the cycle. In the days when I was starting my work on Say’s Law, I would tell people that I was working on classical business cycle theory because, as you know and can see from this thread, putting in a good word for Say’s Law is not apt to get you published or promoted. But I can do no other.

So let us suppose you were interested in the classical theory of the cycle, who do you think would get you closer? Someone who accepts Say’s Law, agrees with Mill on his fourth proposition on capital, thinks Keynes was right when he stated that he had introduced aggregate demand into mainstream economics where it had never been before, and uses classical reasoning to argue, at the very moment the stimulus packages were introduced, that they would lead to exactly the kind of economic stagnation we find today.

Would you trust that person, or would you trust someone who thinks you can boil most of what the classical economists had said down to deficient aggregate demand, even when Ricardo has explicitly stated that demand deficiency is not a valid explanation for recession, while Keynes had argued that what he was doing was overturning Ricardian economics and bringing demand deficiency into economic theory.

You can disagree with the classical theory of the cycle and why not, millions already do even though they have no idea what it is. But to argue that you have understood classical theory when you don’t agree with a word of it makes me have to ask why you are so sure you have it right? Some of the smartest people who ever lived were classical economists. Are you really going to set John Stuart Mill straight, or W.S. Jevons, or David Ricardo or Alfred Marshall? What will you add to their sum total of insight? That following a downturn business people become more tentative and hang onto their funds for a longer time before committing them to some project? That demand deficiency actually does cause recession? That wasteful public spending will increase employment and generate faster growth?

Does it really make any sense to believe that the Global Financial Crisis was caused by an almost overnight decision of people around the world to stop spending and start saving. What possible insight do you get by saying there was a shift to the left of an aggregate demand curve? Or that what we must now do is shift the AD curve to the right?

The GFC was a classical recession which is described almost down to its last gory details by Walter Bagehot in Lombard Street who had seen many just like it. Money and resources had been poured into the housing construction industry in the US and houses bought by people who could not make their payments. Events flowed on from there, including a financial crisis. Since demand is constituted by value adding supply, the fact that people could not afford what had been supplied, meant that resources had been misdirected. The recession was just a necessary correction with the prior lending practices the eventual disaster in waiting.

I will merely state that if you cannot incorporate the classical understanding of Say’s Law into what you write, you will have a problem understanding how classical economists analysed recessions. If you are going to reproduce the classical theory of recession, then you must begin with these words: “Recessions are, of course, never ever caused by too little demand and excessive levels of saving, but in spite of that recessions are a frequent occurrence because . . . .”

Let’s go to the policy level as well. Your explanation of recession must also help you to complete a sentence that begins with these words: “Even though the most evident signs of recession are warehouses filled with unsold goods and extremely high levels of unemployment, we cannot get out of recession by increasing public spending because . . . .”

Although we are mostly academics on this thread, this is not some academic exercise. There is an awful lot riding on this. The Japanese had their lost decade (times two) following their stimulus in the early 1990s. We are ourselves already half way into our own lost decade and there is nothing to suggest it might not go another half decade, or even stop then.

If you want to understand how I think about recessions and what needs to be done, you can read my text, or you can read Henry Clay. The one advantage you get from reading mine is that I have actually experienced Keynesian economic theory and have been taught this classical fallacy as the best economic theory we have today. I have seen the enemy, and it is us.

Say’s Law and the law of markets are not the same

Posted on by
Reply

I have belatedly come to realise that Say’s Law is not the law of markets. How weird is that, after all these years. I have put the following up on the SHOE website as a continuation of my previous post L’offre crée même la demande. Hollande, as a result of the bitter experiences in trying to manage the French economy, now has a better grip on our fundamental economic principles than pretty well the whole of the economics profession.

There are a number of facts that are relevant in any discussion of Say’s Law which I thought I might set out. What I find something of a problem is the common assumption that Say’s Law refers to something that was believed during the early parts of the nineteenth century and was of little significance thereafter. No discussion ever seems to get past Malthus, Say and Mill in looking at what was an embedded principle right up until 1936.

The first thing that might be noted is that the term “Say’s Law” is not classical in origin but was consciously invented by Fred Manville Taylor and introduced into general economic discourse with the publication of his Principles of Economics text in 1921. Before Taylor no one called this association of demand with previous supply “Say’s Law”. Taylor introduced the term because he thought economic theory needed to identify one of its most important underlying principles. The ironies of what followed next are too obvious for comment.

This continuous fixation on the early classical economists has had a number of unfortunate consequences. The first is that economists are always returning to Say as if he provided the definitive statement on Say’s Law. He did not. If you want the point of origin, it is in James Mill in his Commerce Defended published in 1807. Here is the passage that matters, although the whole of his discussion is well worth the effort:

“No proposition however in political economy seems to be more certain than this which I am going to announce, how paradoxical soever it may at first sight appear; and if it be true, none undoubtedly can be deemed of more importance. The production of commodities creates, and is the one and universal cause which creates a market for the commodities produced.”

The final sentence should be familiar but is not the actual origins of the specific words used by Keynes.

It is also important to appreciate James Mill’s role since I see his statement not only as exactly right, but he wrote his book in response to an argument in which too much saving and too little demand were seen as the causes of recession. This was the first instance in which an argument that economies are driven by demand was rejected. Mill was saying an economy could not be stimulated from the demand side. That was the point of Say’s Law, and still is.

This nameless principle was universally accepted by the mainstream. But if you would like to find Say’s Law as clearly stated as it is possible to find it in the classical literature, this is David Ricardo writing to Malthus just after the commencement of the General Glut debate in 1820. Malthus said the post-Napoleonic recessions had been caused by too much saving and too little demand. To this, Ricardo replied:

“Men err in their productions, there is no deficiency of demand.”

That’s it. Say’s Law. Recessions are caused by mis-directed production, not deficient demand. This was the foundation for the entire theory of the cycle that would develop over the following century. It is the disappearance of the theory of the cycle that may be the greatest loss economists have experienced because of the General Theory.

There is then this. At the end of the General Glut debate in 1848, John Stuart Mill published his Principles of Political Economy, which included his fourth proposition on capital. This may be the most enigmatic statement ever made by a great economist, but if you want to see the principle behind Say’s Law, whether you agree with it or not, this is what Mill wrote:

“Demand for commodities is not demand for labour.”

Or as we might put it today, an economic stimulus will not create jobs. This is a statement whose reasoning is perfectly clear to me. I teach it to my students and it is in my text and few ever have any trouble with it. Described in 1876 as “the best test of a sound economist”, in my view it still is. It was a conclusion that policy makers accepted right through until the 1930s and perhaps even for a while after. But it was an enduring concept.

So I take you back to Francois Hollande. What he said in French was this:

“Le temps est venu de régler le principal problème de la France : sa production. Oui, je dis bien sa production. Il nous faut produire plus, il nous faut produire mieux. C’est donc sur l’offre qu’il faut agir. Sur l’offre ! Ce n’est pas contradictoire avec la demande. L’offre crée même la demande.”

This is the whole thing in my free translation:

“The time has come to work through the number one problem in France: which is production. Yes, that’s what I said, production. We must produce more, we must produce better. Hence, it is upon supply that we must concentrate. On supply! This is not in opposition to demand. Supply actually creates demand.”

It is true the point Hollande makes takes you back to J.-B. Say, David Ricardo and James and John Stuart Mill, all of whom are, of course, classical. But he also takes you back to Fred Taylor whose book was published only a few years before the General Theory, where he was trying to state what every economist of his own generation knew and accepted. Today, so far as aggregate demand goes, we are all Keynesians now, with some very few exceptions.

And while we’re at it, you might also ask yourself how Taylor’s very much twentieth century phrase ended up in The General Theory. The standard story of the trek from the Treatise to the General Theory has a lot of gaps, even after the hundred million words that have been devoted to explaining what the General Theory means and how it came to be written.

Classical economists – there are still a few of us around

Posted on by
Reply

A quite instructive article by Peter Boettke on The Great Disruption in Economic Thought. Addressed in particular towards Janet Yellen but more generally to anyone capable of listening, you are encouraged to read it all but let me provide the first para so that you can decide if you would like to continue after that:

Roughly speaking classical political economy, or economic orthodoxy, taught the following: private property, freedom of contract and trade, sound money, and fiscal responsibility. For our purposes we refer to this set of policies as the laissez-faire principle. Of course throughout the history of economic ideas there were always subtle differences of opinion within orthodoxy, and fine points of disagreement in method and methodology. But these paled in comparison with the broad consensus on matters concerning the nature and signficance of economics and political economy. Yes, John Stuart Mill had exceptions to the laissez-faire principle that one could drive an intellectual truck through, but re-read how he sents up that discussion and the importance he places on the laissez-faire presumption.

I will only add that anyone who thinks they can drive an intellectual truck through the ideas of John Stuart Mill has their work cut out for them. But since for most people, someone’s views on John Stuart Mill are not apt to be an obstacle, let me encourage you to read the rest.

And if you do, let me mention that I specifically classify myself as a classical economist a label which Peter is also willing to use. Indeed, I go further. I think of my own book on economic theory as a twenty-first century version of Mill’s 1848 Principles. We have learned a lot since then it is true, but we have forgotten even more.