Economic theory’s version of Fermat’s Last Theorem now finally explained

I have just had an article published that has taken five years to finally see the light of day. More formally, “Steven Kates (2015). MILL’S FOURTH FUNDAMENTAL PROPOSITION ON CAPITAL: A PARADOX EXPLAINED. Journal of the History of Economic Thought, 37, pp 39-56.” This is the abstract:

John Stuart Mill’s Fourth Fundamental Proposition Respecting Capital, first stated in 1848, had become an enigma well before the nineteenth century had come to an end. Never challenged in Mill’s own lifetime and described in 1876 as “the best test of a sound economist,” it has become a statement that not only fails to find others in agreement, but fails even to find an internally consistent interpretation that would make clear why Mill found it of such fundamental importance. Yet the fourth proposition should be easily understood as a continuation of the general glut debate. Economists led by Malthus had argued that demand deficiency was the cause of recession and a body of unproductive consumers was needed to raise the level of demand if everyone who wished to work was to find employment. Mill’s answer was that to buy goods and services would not increase employment, or, in Mill’s own words, “demand for commodities is not demand for labour.”

That observation by Leslie Stephen in 1876 was literally the last time anyone had ever made such a positive statement about Mill’s Fourth Proposition. After that, it had been worked over by Alfred Marshall, A.C. Pigou, F.W. Taussig, Allyn Young, Friedrich Hayek, J.M. Keynes and Harry Johnson amongst many others, none of whom could make it make sense. I will write it down again, because it is the essence of Say’s Law. Understanding what Mill meant is the only means I can think of to refute Keynesian theory:

Demand for commodities is not demand for labour.

From the moment I read it in Mill, which I was just reading for fun, I was convinced by both the conclusion and the logic that had come before. I had no idea that it would change my life and give a shape to all of my economics thereafter. It simply says that buying of itself never creates economic momentum, but it is the logic of the argument that is required if you are to see the point. Everyone understood both the proposition and the logic for the entire period from the time of Adam Smith right through to the marginal revolution in the 1870s, but from that moment on has made no sense to anyone, other than me. How odd is that!

So now I have the paper in print, but I doubt anyone will get it anyway. You really do have to go back to Mill and the classics to see not just what they meant, but why it’s true. The alternative is to read my Free Market Economics which is classical economics for the twenty-first century. It is also the first book since the 1870s that has actually discussed and defended Mill’s fourth proposition, indeed all four propositions. I say this as honestly and sincerely as I can. You will never understand how an economy works unless you understand what Mill meant. There is no difficulty in seeing the point since I have been teaching it successfully as part of my course since the start of the GFC, but I also recognise how hard the point is to grasp and hold to in the midst of controversy. But if you can do it, it is worth the effort since Mill’s Fourth Proposition truly is the best test of a sound economist.