The last great classical economist was John Stuart Mill (1806-1873)
His main economic work is Principles of Political economy, published in 1848.
Mill was a most unusual and probably the most gifted writer who contributed significantly not only to economics but also to political science and philosophy.
His intellectual powers were in much the effect of his education. His father, James Mill was also an economist but of lesser importance. James Mill educated his son in a very disciplined and restrictive way.
At three years of age J. S. Mill was studying Greek and by age eight he began Latin. After mastering mathematics, chemistry, physics and logic, he started to study political economy at age thirteen. He was not allowed to read any religious writings or poetry, nothing that would make him irrational.
By his 15th year his formal education was finished, he had the knowledge of formally educated 30-years old person.
He suffered mental breakdown at the age of 20 (due to the psychological costs of this intense education), but after the period of depression he became one of the leading intellectuals of his and all time. He is an important figure in the history of economics and in the field of logic, political science, philosophy of science and political or social philosophy.
Mill contributed to economic theory, but his main interest was in broader social issues than economists typically address. He was rather social philosopher, social reformer, who wanted to improve the lot of the individual in the society.
So first, we have to say something about these broader social issues, which Mill was interested in, and only after, we will discuss his theoretical achievements.
There are two social movements, which influenced Mill. The first is socialism, the other utilitarianism.
Let’s start with socialism.
Early socialist thinkers appeared in economic thought in the beginning of 19th century. This group of writers was very diverse and one unifying that binds them together is their view that the functioning of capitalism in 19th century Western Europe was disharmonious. While classical economists were in general strong advocates of capitalism, early socialists against Smith, Ricardo and others, founded many objections to capitalist system.
They proposed many various means of eliminating evils of capitalism, most of them were of non-violent character. Most of them argued simply that capitalism is unjust, because there is too much inequality and poverty in capitalism.
Karl Marx called them – utopian socialists, since he thought that their critique of capitalism was not based on scientific science – we’ll get back to this issue, while discussing Marx’s views. Marx claimed that he scientifically proved that capitalism in inherently unstable and self-destructing, while early socialists, pre-Marx socialists mainly criticized capitalism on ethical basis, as unethical, unjust system. This is the difference between Marx and early, utopian socialists.
Before we proceed, further we should define what we mean by socialism and capitalism, because these terms have many different meanings.
We can use the following workable, but not generally agreed on, definitions.
There are two important features of ideal capitalism: 1) private ownership of economic resources; 2) market as a allocation and distribution mechanism
Ideal socialism is defined respectively as system where 1) there is a state or public ownership of economic resources; 2) market still serves to some extent as mechanism of allocation of resources and a mechanism of distribution of incomes.
Communism here would be a system with 1) state or public ownership of resources; 2) state or some central planning authority decides on the allocation of productive factors and on the distribution of incomes. There is no market. Ideally, according to Marx, in communism each person should be given as much resources as to fulfill her needs. In addition, everyone should give to the society as much as his or her ability is – to work as hard as possible.
Hence, the communist phrase describing allocation and distribution in communism says – “from each according to his ability, to each according to his needs”
In times of Mill early socialist ideas were becoming more and more popular and Mill is the first classical economists who gave response to these ideas, and evaluated them objectively.
Second social movement, which is important while discussing Mill’s views in utilitarianism.
Utilitarians, proponents, advocates of utilitarianism, were social reformers, social philosophers, who held some specific views about the economy and society.
The leader of the group was Jeremy Bentham (1748-1832), economist and philosophers.
What is utilitarianism?
Simply it is the ethical view that the only standard by which moral rules, civil laws, economic actions, government economic acts, or decisions in economic policy should be evaluated is the principle of utility: the maximization of the sum of the happiness (they named happiness also as utility) of all individuals that make up a society.
Early utilitarian economists thought that if society could measure happiness, than economic laws and regulations could be created that would result the maximal possible sum of the utility (happiness) of all members of society.
They thought that the best way to measure happiness was by the use of money.
How to use money in practice to measure happiness resulting for any economic action or event?
According to them, you have to ask how much would you pay for this economic action or event, if it can be brought about. Willingness to pay is the measure of happiness.
Thus, Bentham and early utilitarians thought that they could design an optimal society, that they can formulate the best possible economic policy for example, by using the principle of utility and by the use of money as to measure happiness.
This principle of utility became the most popular standard of evaluation economic policies, economic actions, and economic arrangements later in 19th century and today is used as one of the most popular criterion of social welfare in welfare economics – the sum of the utilities of all members of society.
According to this criterion, the social welfare increases, if the sum of utilities of all members of the society increases.
We may say here as a digression that there are many theoretical limitations of money as an instrument to measure utility and in general it is not easy, if not impossible to measure utility by the use of money.
In 20th century, in 1930s, 1940s, utilitarianism was largely rejected in economics because most economists agreed that there are no exact, scientifically valid methods for measuring utility or happiness, and what is more that there are no scientific methods for comparing utility of different persons.
Still, today utilitarianism is a quite strong movement in economics and social philosophy. Many of contemporary economists are in principle advocates of some form of utilitarianism. In later part of 20th century economists invented several more precise methods of measuring and comparing utility. We will discuss this issue, while studying the development of 20th century economics.
John Stuart Mill was a pupil, a student of Bentham, and soon became a leader of utilitarian movement, developing a sophisticated version of utilitarianism in economics and philosophy.
So much on Mill’s intellectual background, and especially the influence of socialism and utilitarianism on his thought.
Mill’s views on the economic policy, his attitude to capitalism and socialism and his general social philosophy.
Socialist writers influenced Mill. This influence is best evident in his distinction between the laws of production and the laws of distribution.
Mill maintained that this distinction between the laws of production and the laws of distribution was his single most important contribution to economic thinking.
The laws of production (for example the principle of diminishing returns), according to Mill, are laws of nature (like the law of gravity in physics) that cannot be changed by human will or institutional arrangements.
However, the laws of distribution are not fixed; they result chiefly from particular social and institutional arrangements.
Therefore, the laws of production are fixed, independent of human will, but the laws of distribution can be changed by human decision. This is the important difference between those two kinds of economic laws according to Mill.
Why he made the distinction?
Because he was reacting strongly to the way, in which classical economics was being used in economic policy.
Conservative economists, politicians and general opinion used classical theory to show that the distribution of income is determined by fixed, unchangeable laws (that cannot be changed anymore than the law of gravity can be changed).
According to this argument the many efforts to improve the quality of life, the welfare of the mass of society, particularly of the working class, through social legislation, the trade union movement and income redistribution policy are futile, because the distribution of income is governed by immutable, fixed economic laws, which result in the masses being poor (recall the so-called iron law of wages – the wages of laborers are on the subsistence level, they are sufficient to fulfill only basic needs of workers).
According to Mill the distribution of income or wealth (the laws of distribution in his language) can be changed through the social legislation (pro-poor legal acts, redistribution policy and the like).
Therefore, the government can redesign the institutions of capitalism, to some degree, to make the distribution of income and wealth more equitable, more equal.
We have to discuss here Mill’s distinction in more detail. What does it actually mean that the laws of distribution are not fixed, while the laws of production are fixed, independent of human will?
There are two meanings of distribution of income in economic theory. One is functional distribution of income – the distribution of income among the factors of production or the social classes – how big is the part of national income going to the owners of labor, how big is the share of NI going to the owners of capital and the like. The factual, real functional distribution of income depends on the prices of factors of production (rate of wage, profit, and land rate) and on the marginal productivity of factors of production.
As such, because it depends on the MP of factors of production, the functional distribution of income is in direct relationship with the laws of production, because we determine the MP of factors of production on the basis of the production function.
Therefore, the functional distribution of income cannot be changed any more, than the society can change the laws of production (the production function).
However, there is a second meaning of distribution in economics and this is personal distribution of income, the share on NI going to every household. The personal distribution of income depends on number of factors (economic ones – such as the resources in the possession of the household, the effort of the members of the household and the like). Moreover, a variety of non-economic factors do influence the personal distribution of income (factors like the laws, customs, institutional, political arrangements and, for example, the fact how lucky is the household in the market economy).
Most of these non-economic factors influencing personal distribution of income are outside the subject of analysis of economic science, so modern mainstream economics has little to say on factors explaining the personal distribution of income.
So the laws on production only loosely influence the personal distribution of income and the society have the ability to effect this distribution of personal income in accordance, for example, with some ethical judgments.
Therefore, Mill’s laws of distribution concern personal distribution of income, not the functional one. In this sense his distinction is correct.
But, against his views we could, from the modern point of view, argue that society, in a way, can influence also the laws of production, for example, by investing smartly in the development of technology, the production function of any country can be changed and governments can influence, the seemingly physical, unchangeable, relation between economic resources and economic output. Well, but classical economists generally did underestimate the importance of technology for economic development.
As you can see, Mill made the distinction between these two kinds of laws, because he was a social reformer and he was concerned with the standard of living of the working class. He thought that society should act in a more wise and humanistic way, so that a more equal distribution of income and wealth.
In practice, to achieve this aim, more equal distribution, he favored the following means in economic policy:
- high rates of taxation on inheritances, but he opposed progressive taxation because he feared the disincentive effects of progressive taxation (that is he thought that those who are progressively taxed would put less than optimal amount of effort into work)
- he advocated the formation of producer cooperatives, that is firms in which workers would receive not only wages but also would participate in profits achieved) – this would contribute to more equal distribution of wealth.
- he argued that more equal distribution would be achieved if population growth could be reduced. Therefore, he wanted to enlighten the working class through education (including education about birth control. Reduced family size would contribute to higher living standards of the masses.
- limitation of right of property in land. State may expropriate (take over the ownership of land) land if it pays compensation. He also thought that there should be a tax on all increases in land rent.
So much on the Mill’s distinction between the laws of distribution and the laws of production.
Mill’s economics was often described as eclectic (that is deriving ideas from many various, possibly contradictory, sources). His basic economic theory was Ricardian, but he used rather the methodology of Adam Smith than of Ricardo (that is he used contextual economic analysis, he was not a pure, abstract theorist).
He also drew inspirations also from socialism and utilitarianism; he thought that economic activity must be considered in a broader social context of all human activity; he was concerned not only with economics but with social philosophy in general
All this contributed to his main economic work being called eclectic.
This Mill’s eclecticism is best visible in his approach to economic policy.
His writings on economic policy are a strange mixture of opinions and he cannot be easily classified as an advocate of laissez faire or an advocate of government intervention or as a proponent of socialism. He was subtle writer, but also ambiguous one. And complex one too.
Possibly the best way to characterize such a subtle, complex economist as Mill is to say that in terms of economic policy he represents a midpoint between classical liberalism and socialism.
His views were not close to Marxian, revolutionary socialism, but rather to some kind of evolutionary, non-violent version of socialism.
What were Mill’s specific views of the role of government in a good society?
His philosophical book “On liberty” (1859) is a classic statement of political liberalism. In the book, he claimed that individual freedom is the most important social value. He maintained that the only rightful exercise of power by a government over an individual will is “to prevent harm to others”. So individual freedom is restricted only by not harming other people. You can do anything you want (in your private and public spheres of life), unless it is harmful for other people.
Until today, it is a classical statement of liberalism in political and philosophical tradition of the western world.
However, in his discussion of practical social action Mill abandoned such a strong liberal position and found exception upon exception to the general rule of liberty and freedom.
He found it necessary in one place to make a forceful statement, I quote it: “Laissez faire, in short, should be general practice: every departure from it, unless required by some great good, is a certain evil”. Therefore, the laissez-faire should be general practice in economic policy, according to this statement.
However, he was far from being an unqualified supporter of laissez-faire, going so far as to describe the exceptions from laissez faire as ‘large’.
He listed five classes of actions that had to be performed by the state.
They included cases where individuals were not the best judges of their own interest (it would include education for example), he advocated that state should complement private education by providing public education, but not on the monopoly basis, state education should compete with privately provided education.
He thought also that individuals may not be able to judge future consequences of actions, so the of long term obligations (long term job contracts for example) should be regulated by state.
He thought also that state could intervene in joint-stock companies, because if a task needs to be delegated to joint-stock associations, it would be better done by
the state; in joint-stock companies there is a problem with shareholder control over the management; while state can better control the management of the company.
In addition, he thought that the state intervention is required in situations where coordinated action is required, for example if workers aim at reducing hours of work, they should coordinate this action, they should all require the reduced hours of work at the same time. Because none of them (of workers) has the incentive to start to require the reduced hours of work individually – he would be fired and replaced by others from the labor market.
So reduction of the hours of work can be only implemented by government legislation.
Further, state should strongly participate in such a activities as public charity (it should be regulated by state), colonization, and in general in public services that cannot be performed by an individual.
Even more radically, Mill argued that there might be circumstances in which it became desirable for the state to undertake almost every activity:
“In the particular circumstances of a given age or nation, there is scarcely
anything, really important to the general interest, which it may not be desirable,
or even necessary, that the government should take upon itself, not because
private individuals cannot effectually perform it, but because they will not. At
some times and places there will be no roads, docks, harbours, canals, works of
irrigation, hospitals, schools, colleges, printing presses, unless the gvovernment
establishes them; the public being either too poor to command the necessary
resources, or too little advanced in intelligence or appreciate the ends, or not
sufficiently practiced in joint action to be capable of the means.”
So in cases of underdevelopment or possible the economic transformation, Mill proposed that state should take control over almost every economic activity in the economy.
The range of exceptions to laissez faire in Mill’s writings is quite extensive, much more extensive than exceptions to laissez faire proposed by Adam Smith.
Having made the case for laissez-faire in the first place, Mill thus qualified it so heavily as to open the possibility that this level of state activity could be regarded as socialist.
So should we call Mill a socialist thinker?
In principles of political economy, he compared capitalist and socialist economic systems.
He wrote that if we would compare existing capitalism (with its excessive inequality and poverty among laborers) with ideal socialism (with definitely more equal distribution of income and wealth) than we should choose without hesitation socialism. Even if socialism has the problems of its own, (the authority has to decide on the distribution scheme, has to decide how much equality should be among the members of society). ...
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