Mill Competition – Supply and Demand

John Stuart Mill, Competition, Supply and Demand, Price

Next in order in point of time as well as from the progressive development of ideas was John Stuart Mill. Mill recognized the idea of free competition for what it was worth; it was an abstract ideal accepted merely for use in logical analysis. Whereas Smith, Ricardo, and Senior had believed in free competition as a state which existed and asserted itself in the long run—even though various obstacles hindered the free play of economic forces—Mill understood that this process of reasoning did not fit actual conditions, and should not, therefore, be used as a guide to political or social behavior. Said he, "Assume competition to be their (economic affairs') exclusive regulator, and principles of broad generality and scientific precision may be laid down...but it would be a great misconception of the actual course of human affairs to suppose that competition exercises in fact this unlimited sway. Mill conceded that competition was modified in matters of price by monopoly and custom, the latter being far more important than generally recognized. One of his more important contentions in connection with competition was that the laws governing production and Exchange were in the nature of physical laws, while the conditions of distribution were man made. Therefore, free competition should be promoted in connection with production, while common sense and sound judgement should apply to the problems of distribution. There perhaps is no need for pointing out that such a rigid distinction between production and distribution is unfounded. There is such a clear dependency of one upon the other that any law which applies to one must of necessity influence the other.

In his discussion of the law of supply and demand mill was able to show that previous interpretations concerning the operation of this law were incomplete. Generally speaking the law meant that supply and demand determined price; that is, an increase in supply caused the price to fall, an increase in demand caused it to rise. Mill said that while supply and demand controlled price, price also caused variations in supply and demand. Price was, for example, the guide to the producer. Falling prices warned him to turn his efforts in another direction. Rising prices indicated that supplies were insufficient and that greater profits could be gained by entering the field or by increasing output. Variations in price guided consumers purchases, though not with the directness nor in the same degree that has been usually assumed. Consequently Mill attempted to restate the law of supply and demand to take account of this process of action and reaction. The law is that the demand for a commodity varies as its value, and that the value adjusts itself so that the demand shall be equal to the supply. In mill’s exposition the law of supply and demand applied directly and completely only to objects absolutely limited in supply. For other objects whose quantity could be increased by the expenditure of labor and capital, the cost of production represented a natural value below which the market value would not fall. The force causing prices (market value) to fall to the cost of production but not below was com­petition; for if the market value was greater than the cost of pro­duction, producers would increase the supply so as to increase their profit and new producers would enter the field. Except for the restatement of some points, Mill does not add greatly to the general ideas of price expressed by Ricardo and Nassau Senior. His emphasis was upon supply and demand, as influenced by various factors of supply. Apparently Mill felt that demand was more or less fixed, for he devoted little or no time to an investiga­tion of it.