A friend and colleague has written a fascinating paper on the various interactions amongst later classical economists from the late middle of the nineteenth century through to the end. Part of his paper dealt with Mill’s Fourth Proposition on Capital – “demand for commodities is not demand for labour” – on which I have just published a paper explaining its meaning which no one else has been able to do since Leslie Stephen at the end of that century. Most intriguingly for everyone since, in 1876 he described it as “the best test of a sound economist” which no one, until me this year, has been able to make sense of. Here is my reply to his note to me. I also have put this up since I think it is a perfect example of why the study of the history of economic thought makes someone a better economist. Where is the standard issue economist who would even begin to know what any of this is about?
As always, it was a fascinating paper from which I learned a great deal, even some things I didn’t want to know, such as Cairnes form of rheumatism which sounds like a kind of torture you would wish on no one. But being almost entirely like Leslie Stephen in the issues you discuss, I can stand in as a proxy to see things from his point of view.
On your three points:
(1) It is perfectly clear to everyone that Mill’s Fourth Proposition (MFP) is a restatement of Say’s Law. The problem is that they don’t understand Say’s Law which I have translated thus: demand deficiency does not cause recessions and a demand stimulus will lead neither to recovery nor higher employment. That is the point, and the words support my view. Economists since 1936 have been trapped in the belief that classical economists always assumed full employment, on the assumption, I guess, that they were idiots. Once you see that they never thought any such thing, you are able to take the first steps in understanding Mill and MFP.
(2) You say that the issue came up again in the 1870s because of a rekindling of interest in the wages fund doctrine. This may well be, but whatever may have rekindled the issue, the arguments in support of the Fourth Proposition have nothing to do with the wages fund doctrine. I don’t teach the wages fund, but I do teach all four propositions. But you have to understand Mill, which no one, absolutely no one in my view, does.
(3) You say that Stephen’s statement that it was the best test of a sound economist was not an offhand comment as I do. I thought of it as offhand given the nature of the book he was writing. It was far from being a book on economic theory and while it is in context, it is not essential to the point he was making over all.
On your paper, let me make a few points related to these matters.
(i) You quote the proposition incorrectly, but it is this error that is part of the problem. The proposition is “demand for commodities is not demand for labour”. You wrote, “a demand for commodities is not a demand for labour” (p 9 and 13). This is fundamental and was the same problem that Simon Newcomb had. It is not micro. It is classical macro. Mill is looking across the entire economy and pointing out that lifting the level of aggregate demand does not lower the unemployment rate. I can see that, but no one else can see that. Aside from myself, no one, so far as I know, opposed the stimulus because it would not create jobs. To me, because I understand Mill, and therefore believe because of that that I understand how an economy operates, the failure of the stimulus was an absolute certainty. I listen to Krugman-style blather about how the stimulus was not large enough or that we are beset by secular stagnation and it is all ridiculous. Mill makes it clear, but to understand Mill you must absolutely give up on modern macro (and on Real Business Cycle theory as well). Stephen says it precisely right as you quote him (14-15) where he points out that expenditure by the rich will not lower unemployment. Substitute the government for the rich and you will see what he is getting at. I say the same and have more than enough evidence given the past six years. What evidence does a Keynesian have that they know the first thing about any of it?
(ii) The notion that MFP has been “exploded” is news to me. Marshall and Hayek tried to show that it was true, if you just made these wee adjustments. Of course, they made it completely incomprehensible and leached out of it any reason to see it as a “fundamental” proposition. They just couldn’t understand it for reasons I explain in my paper. That is why, I also think it is the “best test of a sound economist” which is why I think there are so few sound economists left. No Keynesian is a sound economist since each and every one would fail this test.
(iii) You seem to think that Stephen and Ruskin couldn’t agree on economic issues because of their different philosophies, and that Ruskin was shoveled out because he was not amongst the professional economic elite. I went back to read Ruskin’s Munera Pulveris after watching Mr Turner and even with the best will in the world, which I then had, could not bear it. Ruskin is a rotten economist. He asks the wrong questions and comes up with stupid answers. Mill, and I presume Stephen, were concerned about the poor and wished to raise living standards and see them employed (as I wish to do myself). It’s not even that I disagree with him but that Ruskin had literally nothing to contribute to any serious debate about how economies work. It wasn’t that they disagreed but that Ruskin’s views were irrelevant since he wasn’t looking at serious questions.
But these differences aside, your paper was very stimulating reading. Could you send me in the direction of this additional debate over MFP that followed from the debate over the wages fund. There may be something there that I should follow up on.
I am very pleased to find myself cited by you in this excellent paper.