The eldest son of economist James Mill, John Stuart Mill was educated according to the rigorous expectations

of his Benthamite father. He was taught Greek at age three and Latin at age eight. By the time he reached young adulthood John Stuart Mill was a formidable intellectual, albeit an emotionally depressed one. After recovering from a nervous breakdown, he departed from his Benthamite teachings to shape his own view of political economy. In Principles of Political Economy, which became the leading economics textbook for forty years after it was written, Mill elaborated on the ideas of DAVID RICARDO and ADAM SMITH. He helped develop the ideas of economies of scale, OPPORTUNITY COST, and COMPARATIVE ADVANTAGE in trade. Mill was a strong believer in freedom, especially of speech and of thought. He defended freedom on two grounds. First, he argued, societys utility would be maximized if each person was free to make his or her own choices. 1 Second, Mill believed that freedom was required for each persons development as a whole person. In his famous essay On Liberty, Mill enunciated the principle that the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty o f action of any of their number, is self-protection. He wrote that we should be without impediment from our fello w-creatures, so long as what we do does not harm them, even though they should think our conduct foolish, perverse, or wrong. Surprisingly, though, Mill was not a consistent advocate of laissez-faire. His biographer, Alan Ryan, conjectures that Mill did not think of contract and PROPERTY RIGHTS as being part of freedom. Mill favored inheritance TAXATION, trade PROTECTIONISM, and REGULATION of employees hours of work. Interestingly, although Mill favored mandatory EDUCATION, he did not advocate mandatory schooling. Instead, he advocated a voucher system for schools and a state system of exams to ensure that people had reached a minimum level of learning. Although Mill advocated universal suffrage, he suggested that the better-educated voters be given more votes. He emphatically defended this proposal from the charge that it was intended to let the middle class dominate. He argued that it would protect against class legislation and that anyone who was educated, including poor people, would have more votes. Mill spent most of his working life with the East India Company. He joined it at age sixteen and worked there for thirty-eight years. He had little effect on policy, but his experience did affect his views on self-government. ---

John Stuart Mill 1806-1873

John Stuart Mill was a leading figure in the intellectual ferment of the nineteenth century. His father, James Mill, a famous philosopher in his own right, was his son's only teacher until John Stuart reached fourteen. Young John Stuart had mastered Latin and classical Greek, philosophy, and the advanced mathematics of his time by the age of eight and had also worked through the English histories of Gibbon and Hume. At twelve, he turned to logic and at thirteen, young Mill was correcting proofs for his father's Elements of Political Economy. The complex economics of David Ricardo were delivered when Mill was fourteen, which meant that his father would lead him on walks through the woods, lecturing constantly while John Stuart frantically scribed notes. Mill later recounted that he saw nothing extraordinary in these accomplishments; having been denied the company of children his own age, he assumed that every child was subjected to the same training. John Stuart loyally followed his fathers lead and embraced the ideas in Jeremy Bentham's Utilitarianism (1836). Utilitarianism pivots on the notion that pleasure is good, pain is bad, and that people should act accordingly. Ironically, John Stuart Mill missed the boat when it came to pursuing happiness; becoming a thoroughbred intellectual had a dark downside. The young man also became an emotionless depressant and, at twenty, he had a nervous breakdown. Meeting his future wife Harriet

was pivotal, according to Mills Autobiography, in helping him recover from this breakdown. Being in love was the right medicine for Mill. Mill thereafter spent most of his life as an examiner in the employ of the India House, where his father also worked. His official duties at work left him considerable time to reflect and write on philosophy, logic, and economics. Inspired in part by the logical positivism of Auguste Comte, Mill sought to bring all the social sciences into a grand synthesis to be called ethology but after a few years of trying to do so, he was forced to admit a lack of progress on his new science. He turned instead to a treatise on political economy and, in 1848, published his Principles of Political Economy: With Some of Their Applications to Social Philosophy. Although the book lacked pathbreaking originality, it elaborated and fused the powerful ideas of David Ricardo and Adam Smith, whose influence lived on long after they absented the scene. Principles enjoyed an unusually long life as an economics text, being widely read by both the serious-minded public and by several generations of economics students. Mill thought that the economics of his day needed increased emphasis on practical questions of economic policy. Many of these practical questions concerned government intervention, to which he was usually, though not dogmatically, opposed. Mill identified several broad instances of market failure cases where market solutions were not optimal because (a) buyers or sellers lacked adequate information, (b) pursuit of private gain injured innocent third parties, or (c) competitive behavior tended to shortcircuit economies of large-scale production. Although every government intervention restricts the freedom of some individuals, Mill did not reject such interventions if the collective benefits exceeded the collective costs. On quite pragmatic and utilitarian grounds, then, Mill established the philosophical basis of the mixed economy. Economics, as Mill perceived it, is not limited to the study of commerce. It also addresses freedom and fairness. Mill held that there was no simple rule appropriate for government interference or noninterference but that some broad guidelines for state intervention could be specified. Above all, he wished to preserve and enhance the concept of individual liberty, which could be done sometimes by removing government intrusion and at other times through government action designed to help individuals pursue their own interests more effectively. Indeed, one persons rights can sometimes be had only by limiting th e rights of another. Consider pollution, for one example. Your freedom to breathe clean air may be harmed by anothers freedom to smoke. Mill was a fervent advocate of equality of opportunity, but feared that peoples willingness to work and invest would b e severely hampered if government guaranteed equality of result. Consequently, he took a dim view of progressive income taxes, agreeing with Adam Smith that progressive taxes discourage effort. Instead, Mill proposed an almost confiscatory inheritance tax, a level playing field which would mean that only ones own diligence and ability would limit your capacity to succeed. Absent an inheritance tax, Mill supported a proportionate or flat tax, which taxes everyone at a stable tax rate. Mills so le exception would be for the poor, who would be exempt from paying taxes. Inspired by his wife Harriet, Mill published On Liberty (1859) which continues to be cited as among the most lucid and powerful defenses of personal freedom ever written. This was followed by The Subjection of Women (1869), which supported equal rights between the sexes. While serving in Parliament, Mill advocated public ownership of natural resources, women's suffrage, birth control and mandatory education. Many of Mill's views were based in egalitarianism, but others were not. For example, Mill believed that educated people should have more votes than uneducated people to facilitate governance by a ruling middle class or educated class. Gaining power not through bank doors, but through school doors was a part of Mills creed. Mill's views on government, along with many of his other ideas, live on today despite his death in 1873. On Liberty reads like a blueprint of the First and Fourth Amendments of the Constitution. His economic work also remains, which helped bridge many gaps between his time and ours.

John Stuart Mill on Production A fundamental appreciation of Mill's ideas on production might be obtained from reviewing Ricardo's Principles as well as the (minimal) post-Ricardian refinement on that topic. The key roles in economic progress played by productive and unproductive labor, Say's law, capital accumulation, the Malthusian population doctrine, and the wages-fund doctrine are all presented with great clarity. Mill, as Ricardo and all the classical economists had done generally, assigned a crucial role to capital and to capital accumulation. He attached great importance to his "five fundamental propositions respecting capital," which restated the classical theory of economic progress. In the classical tradition, Mill argued that, given Say's law, employment and increased levels of output are dependent on the accumulation and investment of capital. Part of the investment in capital, the

result of saving, is required to tide labor over a discontinuous production period. Although he later seemed to recant this idea, Mill revealed a clear understanding of the wages-fund doctrine: There can be no more industry than is supplied with materials to work up and food to eat. Self-evident as the thing is, it is often forgotten, that the people of a country are maintained and have their wants supplied, not by the produce of present labour, but of past. They consume what has been produced, not what is about to be produced. Now, of what has been produced, a part only is allocated to the support of productive labour; and there will not and cannot be more of that labour than the portion so allotted (which is the capital of the country) can feed, and provide with the materials and instruments of production {Principles, p. 64). Unemployment of resourcesother than as a temporary state of affairs was not considered possible because of Say's law. Contrary to the Malthusian position, saving would automatically be turned into another form of spending (i.e., investment), and a general glut of goods from underconsumption was impossible. Mill, in short, never considered that there could be a lack of aggregate demand in the economic system. Mill on Economic Growth Mill's clearest exposition of classical economics was in the area of economic development. Like Ricardo, he believed one of the factors limiting economic growth to be diminishing returns to agriculture. Another limit was a declining incentive to invest. In general, however, Mill focused upon the crucial variables of capital accumulation, population growth, and technology. Combining them with diminishing returns to agriculture, Mill devised a clear discussion of the classical theory of economic development. Like Ricardo before him, Mill believed that the economy, owing to diminishing returns and falling incentives to invest, was being propelled from a progressive state to a stationary state. But alone among the classical economists, Mill did not believe that the stationary state was undesirable, since, as we shall see, it provided the necessary condition for his program of social reform. Mill believed that once the stationary state was reached, problems of equity in distribution could be evaluated and social reforms could proceed apace. Apart from his views on distribution, however, Mill's statement of the dynamics of classical production theory achieved a depth of clarity and understanding of classical dynamics that was never surpassed by any other writer affiliated with the classical school. Mill's Theoretical Advances In spite of Mill's clarity on the issue of classical production theory, it is tempting to assign him the role of a sophisticated synthesizer of little theoretical originality. Many historians of economics have maintained exactly this point of view. Unfortunately, this assessment could not be more unfair; as one important historian of thought has maintained, it would be difficult to point to a writer of greater theoretical originality than Mill. The purpose of this section is to elaborate on a few of Mill's more important theoretical contributions. Though Mill himself did not emphasize the importance of these theoretical ideas (the theory of joint supply is found in a footnote, for example), they nonetheless indicate that he was more of a bridge between classical and neoclassical analysis than has commonly been perceived. Supply and Demand The first clear British contribution to static equilibrium price formation in the modern sense was developed by John Stuart Mill. Utilizing purely verbal analysis, he advanced the theory of equilibrium price on several fronts. Mill fully recognized the analytical necessity of abstracting and simplifying the principles underlying the functional relation between price and quantity demanded and supplied. He noted, for example, that "in considering the exchange value scientifically, it is expedient to abstract from it all causes except those which originate in the very commodity under consideration" {Principles, p. 438). The outcome of Mill's abstractions was a correct formulation of demand and supply as schedules showing the functional relation between price and quantity demanded and supplied, ceteris paribus. Noting the terminological confusion that previous writers had exhibited, Mill proposed that the proper

mathematical relation to express demand and supply is an equation, not a ratio, as had so often been supposed in economic literature: A ratio between demand and supply is only intelligible if by demand we mean quantity demanded, and if the ratio intended is that between the quantity demanded and the quantity supplied. But again, the quantity demanded is not a fixed quantity, even at the same time and place; it varies according to the value; if the thing is cheap, there is usually a demand for more of it than when it is dear {Principles, p. 446). The idea of a ratio, as between demand and supply, is [therefore] out of place, and has no concern in the matter: the proper mathematical analogy is that of an equation. Demand and supply, the quantity demanded and the quantity supplied, will be made equal. If unequal at any moment, competition equalizes them, and the manner in which this is done is by an adjustment of the value. If the demand increases, the value rises; if the demand diminishes, the value falls: again, if the supply falls off, the value rises; and falls if the supply is increased {Principles, p. 448). Mill thus broke the circularity contained in most early formulations of value-and-demand theory. Misunderstanding of the correct nature of demand, for example, could lead to the allegation that demand depends in part on value but that value is determined by demand. Given Mill's distinction, however, if "demand increases" (or decreases) is read as a rightward (leftward) shift in demand, Mill's compact statement is almost entirely analogous to modern explanations of the mechanics of price changes. He therefore presented a perfectly adequate distinction between price-determined and pricedetermining changes in demand and supply. Mill's performance in this regard was not equaled in England until Fleeming Jenkin presented a graphical exposition on supply and demand in his 1870 essay, On the Graphical Representation of Supply and Demand. Mill was, moreover, one of Alfred Marshall's most important sources on the subject. Joint Supply Another contribution of great subsequent importance to value theory was Mill's development of the theory of jointly supplied goods. Although Marshall is often given credit for the invention of the concept (he simply added the graphics), Mill stated the principle concisely in his chapter entitled "Some Peculiar Cases of Value": It sometimes happens that two different commodities have what may be termed a joint cost of production. They are both products of the same operation, or set of operations, and the outlay is incurred for the sake of both together, not part for one and part for the other. The same outlay would have to be incurred for either of the two, if the other were not wanted or used at all. There are not a few instances of commodities thus associated in their production: for example, coke and coal-gas are both produced from the same material, and by the same operation. In a more partial sense, mutton and wool are an example: beef, hides, and tallow: calves and dairy produce: chickens and eggs. Cost of production can have nothing to do with deciding the value of the associated commodities relatively to each other. It only decides their joint value. The gas and the coke together have to repay the expenses of their production, with the ordinary profit. To do this, a given quantity of gas, together with the coke which is the residuum of its manufacture, must exchange for other things in the ratio of their joint costs of production. But how much of the remuneration of the producer shall be derived from the coke, and how much from the gas, remains to be decided. Cost of production does not determine their prices, but the sum of their prices {Principles, pp. 569-570). The Problem The question raised by Mill in this regard is: Given a single cost function, how are profits from the two separate productions to be allocated to the jointly produced goods? Calculation of profits presupposes, of course, that prices can be determined for separate commodities. Mill's directions for determining an equilibrium were explicit: Equilibrium will be attained when the demand for each article fits so well with the demand for the other, that the quantity required of each is exactly as much as is generated in producing the quantity required of the other. If there is any surplus or deficiency on either side; if there is a demand for coke, and not a demand for all the gas produced along with it; or vice versa; the values and prices of the two things will readjust themselves so that both shall find a market (Principles, p. 571). The Solution Mill's solution to the joint-supply problem may be restated as follows: In the case where goods are

produced jointly in fixed proportions, the equilibrium price of each product must be such as to clear its market, subject to the condition that the sum of the two prices equals their (average) joint costs. His apparently complete understanding of this special aspect of competitive pricing, without benefit of mathematical analysis, seems incredible today. It should enhance our understanding of this complex problem to examine Marshall's graphics of the theory of joint supply. These graphics are found in a footnote to Chap. 6, Book V, of Marshall's Principles of Economics. In Figure 1, a joint-supply, or average-cost, function for steers is labeled SS". The total demand for steers is represented by demand curve DD', which is the vertical summation of the separate demands for beef and hides. The demand function for beef is depicted in Figure 1 as dd", and so the demand for hides may be easily derived by vertically subtracting the demand for beef from the total demand for steers. Thus at total quantity OM of steers produced, MB represents the demand price for beef and BA represents the demand price for hides. Figure

A special type of supply curve can be derived for beef, moreover. It is obtained by subtracting the demand price for hides from the supply price of the composite output, steers. As we have seen, the demand price for hides at quantity OM is equal to BA. Subtracting BA from the total supply function yields a derived supply price for beef at quantity OM of ME and thus a supply price for hides of EC. Following this procedure, the dashed supply function for beef (ss') can be traced for each quantity. Competitive equilibrium, as Mill clearly understood, is achieved when ON steers are produced. At quantity ON, the price of beef (NF) is achieved by the intersection of the supply-and-demand curves for beef (ss' and dd'). The price of hides is similarly determined (GF). The competitive market for both goods is in equilibrium when the quantity ON is produced. Several interesting characteristics of the Mill-Marshall model should be noted. An increase in the demand for one of the goodssay, hides increases the supply of the other (in this case beef) and thus lowers its price. Second, an increase in average cost (SS') raises the price of both the jointly produced goods. Moreover, these two results, as well as the construction of the Mill-Marshall analysis, depend upon an assumption of fixity in the proportions of goods produced; i.e., an increase in steer production implies a proportionate increase in the production of beef and hides. Other models may be constructed on nonproportionality assumptions, of course. The subsequent importance of Mill's theory of joint supply is fairly clear. It has seen much use in general economic analysis, specifically in the areas of transportation and public-utility economics. More recently it has been used in public-goods models and in problems involving the supply of by-products, such as pollution. Mill's joint-supply theory was, in sum, a contribution of great significance for economic analysis. ---The Theory of Reciprocal Demand, John Stuart Mill Mill extended his deep understanding of supply and demand into the area of international values. Citing Ricardo as the premier writer on the issue of comparative costs and advantage, Mill proceeded to construct a model that included both cost and demand determinants of international values and the terms of trade. Again, Mill used merely verbal exposition (Edgeworth and Marshall once more provided the graphics), but there is perhaps no better evidence of his analytical powers than his model of the equation of international demand. Mill set out his ideas on trade in his Essays on Some Unsettled Questions of Political Economy but repeated the essentials of his argument in his Principles . Abstracting from transport costs and technological change, Mill built a two-country (England and Germany), two-commodity (cloth and linen) model in order to investigate international price determination. Mill stated his law of reciprocal demand concisely:

The produce of a country exchanges for the produce of other countries, at such values as are required in order that the whole of her exports may exactly pay for the whole of her imports. This law of International Values is but an extension of the more general law of Value, which we called the Equation of Supply and Demand__The value of a commodity always so adjusts itself as to bring the demand to the exact level of the supply. But all trade, either between nations or individuals, is an interchange of commodities, in which the things that they respectively have to sell constitutes also their means of purchase: the supply brought by the one constitutes his demand for what is brought by the other. So that supply and demand are but another expression for reciprocal demand: and to say that value will adjust itself so as to equalize demand with supply, is in fact to say that it will adjust itself so as to equalize the demand on one side with the demand on the other (Principles, pp. 592-593). The Edgeworth-Marshall Exposition Mill amplified his theory with an elaborate numerical example, but an economy of exposition may be achieved by utilizing a graphic interpretation of reciprocal demand popularized by Edgeworth and Marshall. In Figure 2 the lines OP, OP', etc., represent the alternative international price lines that might face England and Germany. They express the price of cloth in terms of linen or the price of linen in terms of cloth, i.e., the "terms of trade." The flatter the OP curve, the cheaper linen is in terms of a given quantity of cloth and the more dear cloth is in terms of linen. The point can easily be established with respect to Figure 2. Quantity OC0 of cloth will trade for quantity OL1 of linen assuming price line OP'_ i.e., at a ratio of OL1/OC0but quantity OC0 will trade for OL0, a ratio of OL0/ OC0, given price line OP. Obviously, the line OP represents a lower price of linen in terms of cloth than price line OP' does, because a larger quantity of linen may be obtained for the same amount of cloth. Figure

Now assume some fixed quantity of linen, say OL0. The price of cloth in terms of linen is given as a ratio OC0/OL0 along price line OP or as OC1/OL0 along OP'. Clearly the price of linen becomes dearer in terms of cloth (more cloth for a given amount of linen) as the price line becomes more vertical (a movement from OP to OP', for example). Thus it is clear that if England is trading the good on the vertical axis (cloth) for the German good (linen) on the horizontal axis, England would get better terms of trade with a clockwise rotation of the price line and Germany's position would improve with a counterclockwise rotation. When England's terms of trade improve, Germany's deteriorate, and vice versa. In other words, a lowering of the price of linen in terms of cloth raises the price of cloth in terms of linen. It should be clear that a movement along any given price line say, at points A and B in Figure 2 connotes the same price ratio of cloth to linen and linen to cloth. Mill Once Again With a concept of the price line in hand, we may now turn to Mill's analysis. Mill viewed the trading of goods as a "real-goods" trade. As he noted, "the supply brought by the one constitutes his demand for what is brought by the other. So that supply and demand are but another expression for reciprocal demand." Mill's statement may be illustrated in Figure 2. At price OP' of cloth/linen, Germany will demand OC2 of cloth but will simultaneously supply OL2 of linen. At a lower price of cloth, represented by price line OP", Germany will increase its demand for cloth to 0C3. Simultaneously, Germany will supply an increased amount, OL3, of linen. A demand for cloth is thus expressed by a supply of linen. By varying price and connecting such points as C and D, a curve OG can be traced out. It is called a reciprocal-demand curve, but it is not a demand curve constructed in the usual sense. That is, it does not relate prices of a good to the quantity of that good demanded. Rather, it expresses the international demand for a good in terms of the amounts of another good that a country would be willing to supply in trade. Manifestly, the amounts of linen that Germany would be willing to supply in trade depend upon the cost of producing linen in Germany, the cost of producing cloth in

relation to the cost of producing linen in Germany,5 and the overall demand for linen and cloth in Germany. In short, many market factors lie behind Mill's reciprocal-demand functions.