John Stuart Mill Economics Mill Economic

Millian Economics, John Stuart Mill Economic

The previous section completed our overview of Mill's social philosophy. We now turn to examine his modifications of and contributions to the mainstream of orthodox theory.

The Role of Theory, Mills Economics

Influenced by the literature of both orthodox and heterodox thinkers, Mill approached technical economic theory critically. Although he regarded himself as merely extending the basic Ricardian analysis, in a number of areas Mill made fundamental changes in Ricardo's theory of value. Richard Jones, in his Essay on the Distribution of Wealth (1831), had criticized Ricardo's theory of rent in particular and the classical position in general because their analysis ignored the historical and institutional circumstances of the economy. Jones has been called a forerunner of the historical school because he questioned the application of the Ricardian analysis to all times and places and advocated a more empirical approach in accounting for changes in institutional structure. "Of Competition and Custom," Book II, Chapter 4, of Mill's Principles, implicitly recognizes this criticism of Jones and shows Mill's recognition that abstract economic theory must be tempered by an awareness of historically prevailing institutions. Mill maintained, therefore, that two forces, competition and custom, govern the distribution of income, and he criticized the orthodox line of English economists for emphasizing the role of competition while almost completely neglecting the role of custom. "They are apt to express themselves as if they thought that competition actually does, in all cases, whatever it can be shown to be the tendency of competition to do."

Taking a relativistic historical position, Mill pointed out that the operation of competition in the market economy is a comparatively young historical phe­nomenon and that, if we glance backward, we find that custom has traditionally played a major role in solving the economic problems surrounding the distribu­tion of income. Mill presented historical material describing a variety of institu­tional arrangements that had existed in the past and that were present in the underdeveloped, less market-oriented economies of his own time. For example, he recognized that the Ricardian system assumes the existence in the economy of a set of actors, businessmen, who are motivated by a strong desire to make profits, and that it is through their actions that resources are allocated and market equilibrium is reached. Yet there are economies without such actors, and even market economies in which "there are no enterprising competitors, those who have capital prefer to leave it where it is, to make less profit by it in a more quiet way."23 Here, and elsewhere in his book, Mill was pondering the question of how much importance should be given to abstract theory and how much to institutional-historical material. This issue has been raised again and again by various heterodox economists and is still with us today.

In the face of social forces such as custom that modify or even negate predictions based on competitive processes, why do economists continue to use a competitive model? "This is partly intelligible," Mill said, "if we consider that only through the principle of competition has political economy any pretensions to the character of a science."24 This curious conclusion makes sense only if we accept a certain definition of science—that to be scientific, economic theory or models had to be able to reach exact and certain conclusions. In other words, science requires that exact predictions be made and that the probability of their occurrence be equal to one. This view carried over then-prevalent notions of science to economics from the natural sciences. Today, however, we can accept as scientific areas of inquiry in which the probability of an expected occurrence is less than one. Thus, modern physics acknowledges that random phenomena can occur that prevent experiments from being repeated with perfect consistency. In his statement about competition and economic science, Mill seemed to accept a narrow conception of science. In much of his writing, however, he was much closer to the present-day view of science.
Mill on Contextual Analysis

Mill's views about the role of theory—not accepting theoretical outcomes uncritically because in practice, in the context of a given society, other factors such as custom may modify theoretical predictions—distinguish him from Ricardo and are closer to the Smithian view. In our examination of Adam Smith, we found that Smith's economic policy pronouncements were not abstract theoretical tools applied to a mechanical society but were a contextual analysis that reflected his views of how pure theoretical propositions work out in a given social context.

The eclecticism that we found in Mill's examination of the merits of capitalism and private property as.compared with communism is also a reflection of this Smithian-type contextual analysis. Mill suggested that he would choose pure theoretical communism as contrasted with existing capitalism, but he immedi­ately exclaimed that this is not a proper basis for choice. Existing capitalism (and, indeed, socially reformed capitalism) compared with communism as it is likely to unfold throws the balance in favor of a system of private property capitalism.

Smith's and Mill's contextual analysis is fundamentally grounded in their broader approach to economics—the view that economic activity is only a part of all activities. This contrasts sharply with the more narrow focus of Ricardo and the legions of mainstream economists who followed his lead.