Mill Theory Of Value, John Stuart Mill Value Theory

The theory of value, or relative prices, presented by Mill is a fundamental rejection of Ricardo's labor theory of value, although Mill characteristically stressed not his deviations from Ricardian dogma but the continuity between his theory and the past. He presented a cost of production theory of value in which money costs fundamentally represent the real costs or disutilities of labor and abstinence. In this regard, Mill and Senior have comparable theories of. value. However, Mill gave up the Ricardian search for absolute value based on some invariant measure of value, believing that the purpose of value theory is to explain relative prices. In his discussion of rent, he recognized that the opportunity cost of land is not always zero and that rent is a social cost of production in cases in which there are alternative uses of land. Although Mill did not distin­guish between short run and long run in the manner of Marshall, he did seem to have a vague idea of this distinction and regarded his primary task as explaining how relative prices are determined in the long run. Though he did not explicitly formulate supply-and-demand schedules, his value theory clearly reflects a recognition that the quantities demanded and supplied are a function of price. For this reason, we may present his theory of long-run prices in the familiar Marshallian form without doing an injustice to either Marshall or Mill.

For a good to have exchange value, or a price, it must be useful and difficult to obtain; but use value determines exchange value, or price, only in unusual circumstances. Mill discussed the price of a musical snuff-box using two hypo­thetical cases he borrowed from a contemporary writer: one set in London, where, he assumed, the boxes are produced under conditions of constant costs; the other on a boat on Lake Superior, where only one such box exists. Mill's purpose in this example was to demonstrate that prices will almost always depend on cost of production rather than on utility. Where supply is absolutely limited, the supply curve is perfectly inelastic (vertical), and price depends upon supply and demand. This first class of commodities Mill regarded as relatively unimportant, because few commodities are perfectly inelastic in supply; it includes wines, works of art, rare books, coins, the site value of land, and potentially all land as population density increases. He also used this case to analyze monopoly situations in which the monopolist can artificially limit the supply. A second group of commodities, manufactured goods, has a perfectly elastic (horizontal) supply curve, and Mill concluded that the cost of production of these goods determines their price. Mill assumed that all manufacturing industries are constant-cost situations (see Figure 6.1b); that is, their marginal costs do not change as their output increases. For Mill's third group of commodi­ties, those produced by agriculture, he assumed that marginal costs do increase as output expands (increasing costs); the price of these commodities depends upon cost of production in the most unfavorable circumstances. Thus, he applied the principle of diminishing marginal returns to agricultural production but not to manufactured goods. Although Mill was very careful to make clear that utility (demand) and difficulty of attainment (supply) must both exist before any commodity has a price, the terminology of his conclusions obscures the fundamental applicability of the laws of supply and demand to all three groups of goods.

He saw clearly how equilibrium prices are brought about in markets through the forces of demand and supply and that 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.

Final equilibrium is reached when quantity demanded equals quantity supplied.

Even though Mill did not use mathematical equations, schedules, or supply-and-demand curves, his analysis of price determination is a notable advance over Ricardo's, particularly because Mill's conceptual apparatus was obviously set up in accord with supply-and-demand functions. The only group of commodities he failed to cover are those with decreasing costs and downward-sloping long-run supply curves.

Mill also made some original contributions to value theory in discussing noncompeting groups (he recognized that in labor markets mobility was far from perfect), pricing where a firm produces two or more products in fixed propor­tions (wool and mutton), rent as price-determining when land has alternative uses, and economies of scale. His satisfaction with the development of value theory was manifested by his view that "Happily, there is nothing in the laws of value which remains (1848) for the present or any future writer to clear up; the theory of the subject is complete."

A number of economists writing after Mill have been amused by this state­ment, and it was probably the reason why Marshall suggested that his own contributions to microeconomic theory would soon be obsolete. Yet it can be argued that our general understanding of the workings of supply and demand in allocating resources under competitive markets has not fundamentally changed since Mill. Of course, many developments have occurred that permit more technical analysis and greater insights; but Mill, with cruder technical apparatus and a complete lack of mathematical notation, was able to carry out a significant analysis of markets with few analytical errors. The great gap in Mill's micro-economic theory, a gap not filled until the 1930s, was his inability to analyze less than perfectly competitive markets. Some would say that this gap still remains to be filled.