Principles of Political Economy by John Stuart Mill

First published: 1848

Type of work: Economics

The Work:

John Stuart Mill’s central concern in Principles of Political Economy is the production and distribution of wealth, which he defines as everything that serves human desires that is not provided gratuitously by nature. The most important elements in wealth are goods currently produced.

Production requires labor and appropriate natural objects. The labor devoted to a product is rewarded out of its sale proceeds, but before these sales are realized, advances to workers are required, which come from capital. Productive labor is what yields an increase in material wealth.

Capital consists of wealth used for productive activity. Capital provides the tools and materials needed to carry on production, as well as subsistence for the laborers while the production process is going on. The quantity of a nation’s industry is limited by its stock of capital. Increased capital means increased ability to hire workers, and thus increased employment and output. The accumulation of capital results from saving. It is not from demand for commodities, but from capital, that demand for labor arises, although the demand for commodities determines in what productive activities workers can find employment.

Differences in the productivity of nations may arise from geographic factors such as climate and the fertility of soil. There are also important differences in labor quality: in physical vigor; in ability to persevere in pursuit of distant objectives; in skill, knowledge, and trustworthiness. Productivity is enhanced by legal and social institutions favoring security of person and property, and by effective cooperation as manifested in division of labor. As a result of greater specialization of workers and equipment, large-scale productive establishments are often more efficient than small ones.

The rate at which production grows depends on the rate of growth of labor, capital, and land, and on improvements in productive technique. Increases in population tend to raise the total quantity of production by increasing the labor supply but may, by increasing the number of consumers, keep down the living standards of the working class. Unless birth rates are limited, increases in population and labor supply must continually tend to force wages to low levels.

The rate at which capital increases, reflects the flow of saving, which depends on the level of income and the desire to accumulate rather than to consume. Willingness to save is encouraged when the expected profits of investment are high and when uncertainty and insecurity are at a minimum. Whether a society is progressive or backward depends in large degree on the level of saving it achieves.

The real limits to production growth arise from the limited quantity and limited productiveness of land. Cultivation of land is subject to diminishing returns—that is, increased application of labor and capital by any given proportion will increase total output only in some lesser proportion. Tendencies toward diminishing return can be counteracted by improvements in methods of production, but these are more likely to produce decreasing costs in industry than in agriculture. The pressure of population growth against diminishing returns is the principal cause of widespread poverty.

Although the laws of production are essentially physical, the principles of distribution are social; once the goods are produced, they can be distributed as people wish. An important determinant of income distribution is the nature and distribution of private property. Some critics find much fault with the institution of private property and propose socialist systems involving democratic management of productive operations and equal division of the product. Such schemes cannot be dismissed as impracticable. Some people might shirk their responsibilities to work, but this is also a serious defect of other property and wage arrangements. A communitarian society would have to guard against an excessive birthrate and might encounter problems in determining who should perform which tasks. Practices relating to private property have not conformed to the ideal of assuring to each person the fruits of his or her labor or abstinence. The best system will be one that is consistent with the greatest amount of human liberty and spontaneity.

The produce of society is divided among the three classes who provide productive agents: labor, capital, and land. Wages are determined by the proportion between population (supply) and capital (demand); thus high birthrates tend to inhibit increases in wage rates. Limitation of births by the working class would be promoted by the extension of education and by any sudden, rapid improvement in their condition.

The profits of the capitalist are the reward for abstinence, for risk-taking, and for the effort of superintendence. Profits arise from the fact that labor produces more than is required for its subsistence; workers depend on the relationship between the productivity of labor and the wage rate. The rent of land is determined by the demand for it (and its produce), the supply of land being fixed. Differences in rent reflect differences in productivity on lands of different quality. Growth of population and capital tends to increase rents as demand for food increases.

As economic systems expand through growth of labor and capital, the rate of profit tends to decline because higher food prices force up wage costs. The declining rate of profit may halt the increase of capital and produce a stationary state. This state of affairs would not necessarily be bad, provided no one were poor, and provided the unseemly struggle for wealth and power were replaced by more elevated pursuits. Social improvement would also result from improvement of the relationship between employer and worker, perhaps through profit sharing or through cooperatives of producers or consumers.

The value of any article comes from the amounts of other things for which it can be exchanged in the market. To possess value, an article must possess utility (be desired) and be subject to some difficulty of attainment. Value tends to that level at which the quantity that buyers will take (demand) is equal to the quantity that sellers will offer (supply). Since cost of production is a chief determinant of supply, value tends to equal cost (plus a normal profit for capital), unless monopoly conditions prevail. Although labor is the chief element of cost, capital must also be rewarded or it will not be forthcoming. The longer the waiting period between the application of labor and the emergence of the finished product, the greater the capital cost.

Money provides a common measure of value and facilitates specialization and exchange. Variations in the general price level tend to be proportional to changes in the quantity of money, or in its rapidity of circulation, assuming the quantity of goods remains unchanged. Since credit may serve as a substitute for actual money, it can also influence the level of prices. Expansion or contraction of credit, in such forms as promissory notes or bank deposits, are principal elements accounting for periodic commercial crises. A paper currency not convertible into precious metal is liable to depreciate through excessive issue.

Although the supply of any individual commodity may exceed the demand for it, it is not possible for the supply of all commodities to be excessive. Each person’s willingness to work and produce reflects his or her desire to acquire goods for consumption or investment. In international exchanges, value depends not on the absolute levels of labor and capital required to produce an item, but on the comparative costs. A country may be able to import cloth more cheaply than to produce it, by paying for it with exports of another product in which its labor and capital are highly efficient, even though it could produce cloth with less labor and capital than the country from which it imports. Both participants in such trade tend to benefit from it, and total world output may be increased by the more efficient use of resources through specialization.

Should a country’s imports be excessive in relation to its exports, it will tend to export gold and silver to pay the difference. The outflow of money will tend to reduce the price level in that country, and raise it elsewhere, until the trade imbalance is rectified. The proper functions of government extend, at the very least, to defining and determining the rights of property and contract, the rules of partnerships and corporations, the regulation of insolvency, the monetary system, and weights and measures. In addition, government activity may be necessary where the consumer cannot judge or achieve his or her own interest (for example, the education of children), or in cases in which each person’s desire can be effectuated only if all conform (for example, limiting work hours). Government may undertake activities beneficial to the public, from which no private person could realize a profit (for example, providing lighthouses, or financing scientific research). Charity will be offered by private persons in any case, so it may be better to have it provided by the government so as to minimize possible harmful effects. Government should avoid activities based on fallacious doctrines: policies of tariff protection, price-fixing, restricting entry into a business or occupation, or prohibiting trade union activity.

Limitation of government activity is desirable to avoid undue enhancement of central power or the use of coercive authority in ways that infringe on important individual freedoms. Enlargement of government may also impair the efficiency of its operations. Taxation should be imposed so as to exact equal sacrifice from each person. This result could be achieved by an income tax that takes a fixed proportion of income beyond a minimum exemption. Taxation of inheritance and of unearned increases in land rent is highly desirable, but current saving should be excluded in calculating taxable income. There is a presumption in favor of laissez-faire; that is, the burden of proof is on those who favor extension of the role of government.

Although no longer a blueprint for specific economic reforms, Mill’s Principles of Political Economy remains one of the most provocative, systematic statements of liberal political and economic thought in Western literature. Applying the principles of utilitarian philosophy to a study of the economic system in England, Mill explains why, in democratic societies, it is imperative for labor and management to share in decision making and participate as equals in determining the future of business. Mill is convinced that only such collective brainpower will guarantee that people receive fair treatment and that business will prosper.

Mill’s stance is not pure socialism, however. He advocates a laissez-faire approach by government, so that the private sector bears chief responsibility for managing its own affairs. He insists, however, that individuals with superior education and insight—a cadre of “intellectual elite”—take responsibility for managing business affairs in such a way that the poor will benefit. As he does in all his writings, Mill emphasizes the necessity that corporations operate for the benefit of those employed by them as well as those who have invested in them or who manage business operations.

Throughout the Principles of Political Economy, Mill insists on recognition of the rights of individuals and the importance of allowing individuals certain liberties that permit them to achieve dignity and happiness. His approach may have been radical to contemporaries, most of whom believed that the right to make decisions in any business rested solely with those who invested in it and who stood to gain or lose financially from its success or failure. Nevertheless, Mill’s farsighted analysis of the symbiotic relationship between workers and supervisors became the model for enlightened labor-management practices in modern Western-style businesses in the twentieth and twenty-first centuries.

Bibliography

Borchard, Ruth. John Stuart Mill, the Man. London: C. A. Watts, 1957. Principles of Political Economy is placed within the context of Mill’s life. Discusses the work’s ideas, reception, and relation to Mill’s socialism.

Reeves, Richard. John Stuart Mill: Victorian Firebrand. London: Atlantic Books, 2007. Authoritative and well-received biography that recounts Mill’s life, philosophy, and pursuit of truth and liberty for all.

Riley, Jonathan. “Mill’s Political Economy: Ricardian Science and Liberal Utilitarian Art.” In The Cambridge Companion to Mill, edited by John Skorupski. New York: Cambridge University Press, 1998. Riley discusses Mill’s ideas about political economy, placing them within the context of Victorian economic theory.

Schwartz, Pedro. The New Political Economy of J. S. Mill. Durham, N.C.: Duke University Press, 1972. A comprehensive study of Mill’s political economy, offering a detailed analysis of his theory of economic and social policy. A lengthy, if dated, bibliography provides an excellent guide for further study.

Varouxakis, Georgios, and P. J. Kelly. John Stuart Mill, Thought and Influence: The Saint of Rationalism. New York: Routledge, 2010. Examines Mill’s “fate and reputation; his youthful political and intellectual activism; his views on the formation of character; [and] the development of his thought on logic.” Also discusses his ideas on the environmental and on feminism.