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 resources—other 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 price-determining 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.


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 goods—say, 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.