Mill and marginalism

A conversation based on John Stuart Mill and the theory of value.

PETER:

Obviously I don’t find this stuff as interesting as you do. But have just, admittedly quickly, looked at JSM’s theory of value. I can’t see how this stacks up: “almost equally disastrous [as the Keynesian Revolution] was the Marginal Revolution which undermined the classical theory of value”. Which of Mill’s 17 propositions does it undermine?

ME:

The Marginal Revolution starts with Marginal Utility. And let me mention that Mill was the greatest and most influential utilitarian philosopher in history, yet he absolutely refused to incorporate utility into his economic analysis, as noted here. The abstract begins:

“The concept of utility, which stood at the heart of J. S. Mill’s utilitarian moral philosophy, played only a minor role in his account of economics. The economic idea of (individual) utility, as is well known, neither inspired Mill directly nor excited his attention when developed in the work of other economists.”

And the reason in part, as discussed in my forthcoming book, was, and I argue from plenty of evidence, that the introduction of utility took the analytics of the economy from the supply side to the demand side. Lots of other things I could say and do say, but I hope this is enough for you to see my point. In my textbook I go into it in much more detail but do preserve cost-benefit analysis as part of what an economist needs to understand.

There are around 1200 economists on that website but I doubt any of them will want to buy into any of this and they are typically a fractious lot. Not that it’s the reason I bought into this query, but it did stoke my annoyance that it is the editor of our local journal, who want to dispose of the two papers, including mine, that he has held in his hands for two years, that asked the initial query which began thus:

My long message emerges from a series of papers I have received from a retired physicist, Kevin Wilks, who is 95 and argues (as physicists are wont to do) that laws of physics underlie economics, in this case production itself and the industrial structure. Economies capture energy and convert it into value (my summation). He draws on Quesnay and the primacy of agriculture, which I [is] why I write to SHOE for help, both to advise Kevin and to sort things out in my own head. And perhaps Kevin is onto something; if so, it is not straight HET, so what journals or outlets cater for speculative papers by intelligent amateur economists? The main concern here is not what Quesnay really said, but why what is valid in Quesnay is absent from textbooks. Wilks argues that introductory economics should locate the dependency of what we now call the secondary and tertiary sectors on the primary sector. Textbooks would be written differently. Of course, what is valid in a body of thought need not be regarded as important, but I press on.

This chap is a complete economic illiterate who thinks that economics should be reduced to energy flows – an old and idiotic economic concept that completely omits the notion of value and pricing. My article on Mill is however beyond his ken. Is it any wonder that economics has stagnated for the past hundred years, if not actually going backwards? Actually it has gone backwards, but who is this cretin to notice? This is why it is so difficult to get published when trying to say anything against modern textbook theory runs such obstacles as this. It’s only fortunate that I am now beyond the realm of publish or perish.

PETER:

Marginal utility is a demand concept for sure but I would have thought the fault which led to Keynes was the focus on demand as an aggregate not on demand per se.

ME:

Want more? Utility cannot be measured and in any case has nothing to do with relative prices, whereas the supply side of the economy and the cost structure of the economy is the way in which the resource base is allocated to different outputs.

No classical economist bought the marginal stuff in the English speaking world until Joan Robinson and Edward Chamberlain turned the concepts into diagrams.

And fwiw, marginal utility has disappeared from our texts and been replaced by indifference curves, which are just as useless, and also unmeasurable.

PLUS THIS:

And this from “The Physiocrats and Say’s Law of Markets”. I by Joseph J. Spengler.

The Physiocrats and Say’s Law of Markets. I
Author(s): Joseph J. Spengler
Source: Journal of Political Economy, Vol. 53, No. 3 (Sep., 1945), pp. 193-211

The physiocrats always expressed their theory of circular flow in interclass, rather than in interindividual, terms. Notwithstanding, their theory of circular flow forced upon them several conclusions of importance. They looked upon money as an instrument whose essential function it is to facilitate the circulation of goods and services, to serve as a medium of exchange. In consequence, they recognized that commerce consists, not in buying and selling, but in the exchange of goods and services for goods and services. They thus laid the ground work for the formulation of Say’s law of markets and evoked its actual statement by their treatment of consumption and expenditure. They recognized, too, that if money ceases to perform its function, the nexus between potential purchasers and potential sellers is broken, thus anticipating Keynes; but they did not develop this theory, for they supposed that in a healthy economy founded upon their principles money would always perform its proper function. (p. 205)

 
Notable here is that goods exchange for goods and the circular flow is in real terms with money facilitating the exchange. This is what Say himself would include in his Treatise in 1803. What Keynes did was recast the entire process into a circular flow of money forgetting to separate out and on their own the real exchanges that simultaneously occur. In a Keynesian model, and therefore in modern macro, the real half of the process is no longer distinguished and discussed.

How to describe my next book

This was the outline of my next book that has been proposed to me by the publisher.

‘Classical Economic Theory and the Modern Economy’

Exposing the zenith of analytical power and depth of understanding that economic theory reached in the middle of the nineteenth century, this book discusses the importance of John Stuart Mill and his contemporaries. Steven Kates explains what took place in the ensuing Marginal and Keynesian Revolutions that hindered economists’ understanding of how economies truly operate.

Chapters explore the false mythology that has obscured the arguments of classical economists, providing a route into the theory they developed. Kates offers a theoretical understanding of the operation of an economy within classical economic theory by classical economists, providing a new perspective for viewing modern economic theory from the outside. This provocative book also not only explains the meaning of Say’s Law in an accessible way, but also the origins of the Keynesian revolution and Keynes’ pathway in writing The General Theory.

A crucial read for economic policy-makers seeking to better understand the key policies needed to generate economic recovery, this book will also be of keen interest to economics and economic history scholars. It offers an alternative theory to modern macroeconomics for those studying economic theory and policy.

OK, but not what I think is needed. This is what’s needed.

‘Classical Economic Theory and the Modern Economy’

The book 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.

If you are to have any hope of understanding how an economy works, and how modern economic theory became the dead end it has become, you will need to read this book.

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.

Mill, the greatest utilitarian philosopher of his age, refused to use utility as part of 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. From a classical perspective, modern economic theory is Mercantilist trash. If you are interested in how economic theory became the wasteland it has become, and wish to understand the classical theory no one any longer has the slightest clue about, this is the book you must read.

If that’s your interest, then you should certainly read this book.