John Stuart Mill's Approach to Economics, Mill Thought and Principle

Mill's views on the scope and method appropriate to economics are contained in an article published in 1836—the same year as Senior's Outline of the Science of Political Economy, with its heavy emphasis on methodology—and in his Principles, published in 1848. Mill's article on methodology is available in his Essays on Some Unsettled Questions of Political Economy.6 He regarded eco­nomics as a hypothetical science using the a priori method. The economist makes certain assumptions and then deduces conclusions from these assumptions. Because the experimental method is not available to economists, they must rely on the deductive technique and cannot use the inductive techniques that have been so fruitful in the natural sciences. Mill is, however, careful to point out that the conclusions that economists derive from their deductive models should be verified by a comparison with the facts of life. A lack of agreement between the results predicted using the deductive model and the historical facts will, in Mill's view, reveal important "disturbing causes" that have been overlooked. These causes may result in new fruitful hypotheses, which will yield new conclusions through deductive reasoning, or they may be the result of noneconomic factors that the economist has failed to consider. Although Mill's statement on the proper methodology for economics is basically sound, he, like his contemporar­ies, did not practice what he preached. "Disturbing causes" became a rug under which orthodox economists swept any divergencies between the predictions of the Ricardian model and the empirical evidence.

Influenced by the ideas of Comte, Mill regarded economics as only a part of a much larger study of humankind. The economist assumed an abstract economic man who was motivated completely by the desire to possess wealth. Yet Mill recognized that although this abstraction yielded some useful conclusions, it ultimately had to be integrated into a more complex model of humans in their social activities. Mill's open-mindedness, breadth of knowledge, and social concerns led him to develop economic analysis on a much broader level than Ricardo had. The full title of his major economic work is Principles of Political Economy with Some of Their Applications to Social Philosophy. There are two outstanding editions of this classic. The one we will quote from was edited by W J. Ashley.

Whereas Senior distinguished between positive and normative economics in order to eliminate normative judgments from economic inquiry, Mill drew this division in order to reincorporate questions of social philosophy into the Ricardian model. Mill maintained that his single most important contribution to economic thinking was this differentiation between the laws of production and the laws of distribution. The laws of production, according to Mill, are laws of nature (like the law of gravity) that cannot be changed by human will or institutional arrangement. But the laws of distribution are not fixed; they result chiefly from particular social and institutional arrangements. Mill was reacting strongly to the way in which classical orthodox theory was being used. In particular, many efforts to improve the quality of life of the mass of society through social legislation, the trade union movement, and income redistribution policies had been countered by conservative arguments alleging that the laws of economics invalidated these attempts. Classical economics was used to show that the distribution of income was determined by fixed, immutable laws that could not be changed any more than the law of gravity could be changed—despite one's great sympathy for the downtrodden masses, one must not permit one's heart to rule one's head.

Mill wanted to show that most economists were wrong in believing that neither the laws of production nor the laws of distribution could be changed by the institutional structure of the society. The laws of production (e.g., the principle of diminishing returns in agriculture) are -fixed, according to Mill, but the personal distribution of income is subject to change by social interven­tion.

In his Autobiography Mill discussed the origins of his concepts of the laws of production and laws of distribution, citing the socialist writings of the Saint-Simonians as his chief inspiration and crediting Harriet Taylor for convincing him of the importance of distinguishing between the two. Thus, Ricardian theory's predictions of the stationary state in which wages would be at a subsistence level were countered by Mill's more optimistic conviction that over time, society would act in a wise and humane way, so that a more equal and equitable distribution of income would result. He therefore favored high rates of taxation on inheritances but opposed progressive taxation because he feared its disincentive effects. He also advocated the formation of producer cooperatives and believed that as workers received not only wages but also profits and interest from these cooperatives, they would have greater incentives to increase their productivity. Furthermore, he believed that the results of diminishing returns in agriculture could be mitigated by the increased enlightenment of the people and by the reduction of the rate of population growth by later marriage and by birth control.

Some of the purely economic implications of Mill's distinction between the laws of production and the laws of distribution require further discussion. Modern orthodox economic theory discloses a close relationship between the laws of production and the functional distribution of income. The forces determining the prices of final goods and services in retail markets are closely connected to the forces determining the prices of the various factors of production. The physical relationship between inputs and outputs, what economists call production functions, determines the marginal physical productivity of the various factors of production, and the price of a factor of production in the market is, in part, determined by this productivity. Modern orthodox theory has, however, very little to say concerning the forces that determine the personal distribution of income. The personal distribution of income depends upon a much broader set of noneconomic variables, such as the laws, customs, and institutional arrangements of a society, and therefore, in the view of the orthodox economist, is outside the discipline of economics. Furthermore, the orthodox theorist hesitates to examine issues connected with the personal distribution of income, because normative issues and value judgments are involved. If Mill's distinction between the laws of production and the laws of distribution is translated into the terms of modern theory (a translation that is arbitrary, because Mill made this distinction before the development of marginal productivity analysis), Mill would maintain that there is only a loose connection between the marginal productivity of the various factors and the personal distribution of income. Society cannot modify production functions, but it does have the ability to effect a distribution of personal income in keeping with, its own value judgments.