Post on 12-Jan-2016
description
Chapter 6: J.S. Mill and the Decline of Classical Economics
Questions for Review, Discussion and Research
1, 2, 3, 5, 10, 11
Overview of John Stuart Mill
Tremendous intellectual powers
A social philosopher intent on improving the role of the individual in society
Addressed broader issues of political economy
his contribution was to simultaneously make:
A mature statement of classical school
Initiate a new era of economic thinking
Believed his task was to write a lucid exposition of the Ricardian doctrine and incorporate it into the contemporary ideas of the mid – 1800's
Contemporary Critique of Ricardo
Disparity between doctrine and the empirical evidence of the mature stages of the industrial revolution.
Critique of labour theory of
value treatment of
consumer theory role of capital profits
in the determination of output prices
Humanist and socialist writers rejected the assumption of social harmony. They attacked the classical vision of a market-oriented society in capitalists were the key actors and benefactors.
Nassau Senior
Foundations of economics as a science rested on “self-evident” principles
1. People are rational, use economic calculus in discussion-making and seek to acquire wealth with a minimum of sacrifice
2. Malthusian population doctrine
Discredited by mid 1830’s
Nassau Senior Cont’d
3. Doctrine of diminishing returns in agriculture and other renewable resource sectors failed to foresee an acceleration of technological improvements
4. Principle of historically increasing returns in the industrial sector
pp. 164
Senior’s Theory of “Normal” Profits
Improved logical consistency of value theory by including capital costs.
Developed an abstinence theory of interest
Senior’s value theoryI. Placed more emphasis on
utility on the demand side of output markets
II. Disutility viewed as a real cost of production
Approach of J.S. Mill to Economics
“Pure” economics was a hypothetical science using the a priori method
One makes valid assumptions and the deduces conclusions
Social scientists can not use the inductive method as experimentation is not available
Made clear distinction between
I. Laws of production that cannot be changed by human will or institutional arrangements
II. Laws of distribution that result from social institutions and custom
Approach of J.S. Mill to Economics Cont’d
Overhead pp. 167-68 Read pp.168-73 on your
own Believed his task was to
write a lucid exposition of the Ricardian doctrine and incorporate it into the contemporary ideas of mid 1800’s
Influence of Richard Jones
Forerunner of British historical school
Questioned proposition that Ricardian theory was for all times and places
Advocated empirical approach in accounting for changes in structure of institutions
Emphasized the role of custom (ie. tradition)
Criticism of Ricardo
1. Disparity between doctrine and the empirical evidence from evolving nature of the industrial revolution in G.B.
2. Critique ofI. Labour theory of valueII. Treatment of consumer
demandIII. Role of capitalist profits in
the determination of output prices
Humanist and socialist writers rejected assumptions of social harmony. They attacked the classical vision of a market-oriented society on which capitalist
Mill’s Methodology
Correct the logic of an economic model to make certain that the conclusions followed from given assumptions
Influence of Comte – The founder of sociology – leads Mill to regard “pure” economics as just one discipline within social sciences
Role of Economic Theory in Mill’s Writings
Overhead pp. 175 Used Smithian
techniques of contextual analysis where economic phenomena is only part of all social activity
Mill’s Value of Theory
The purpose of value theory is to explain relative prices in input and output markets
Gave up Ricardian search for absolute value based on invariant measure of value
Mill’s Value of Theory Cont’d
Similar to Senior’s cost of production theory of value where monetary costs represent
I. Real costs of disutilityII. Abstinence theory of
interest in savings – investment process
III. Rent is a social cost of production when land has alternate uses
Mill’s Value of Theory Cont’d
Long-run theory of prices can be represented with a Marshallian, partial equilibrium format and summarized as follows
Price of output almost always depends on the cost of production rather than consumer utility (Figure 6-1)
A. Prices in manufacturing and service sectors (Panel B) Constant costs
Mill’s Value of Theory Cont’d
B. Use value determines exchange value in market transactions of (Panel A)
I. WineII. Rare books, coins,
stamps, art, etc.III. Site value of urban land
C. Intermediate case (Panel C) of agriculture and renewable resources where diminishing returns results in increasing costs and rising LRS
Overhead pp. 178
Original Contributions
1. Theory of non-competing groups in labour market
2. Prices for joint outputs1. Sheep: Mutton and
wool2. Cattle: Beef and hides
3. Rent is Price determining when land has alternate use
4. Economies of scaleOverhead pp. 178
International Trade Theory
Ricardo demonstrated potential gains in aggregate terms but did not show
1. How prices are determined in exchange
2. Distribution of benefits Mill did both by assuming
that the terms of trade depend on the consumer demand
International Trade Theory Cont’d
Set stage for mathematical and geometrical presentations by Marshal and Edgeworth
Mill’s other contribution include
1. Consideration of transportation costs
2. Influence of tariffs Theory only challenged
by Ohlin and Keynes in the 1930’s
Defense of Say’s Law
Two types of economies would never have an insufficiency of aggregate demand
I. BarterII. Monetary system
wherea) Money is a
commodityb) Money’s only
function is a medium of exchange
c) No credit
Temporary disequilibrium and oversupply when money functions as a store of value and credit markets operate
Overhead pp. 181
Mill’s Monetary Theory
Modification of Ricardo’s strict gold standard and quantity theory
Fell betweenI. Currency school
Sought to prevent inflation through strict adherence to gold standard
Necessary during periods of speculative financial booms
Predecessors were Bullionists
II. Banking school Predecessor was Real
Bills Doctrine that sought flexible money supply
Correct during “normal” times
Recantation of Wage Fund Doctrine
The wage ratio is not conclusively predetermined but has a range of possible levels