History of Economic Thought

Question 1

Changes in Europe in the 16th and 17th Century.

Answer 1

• Birth and consolidation of nation states, sometimes after long civil wars (France, Spain, United Kingdom..)
• Political and military power depends on the wealth of the State=sovereign
• The question arises: which are the sources of wealth?
• At the same time, expansion of long-distance trade, with new routes to the Americas and Asia; a new class of merchants and bankers emerges.

Question 2

What country is economic science was born in?

Answer 2

Economic science was born in France in the 18th century.

Question 3

Richard Cantillon

Answer 3

• An Irishman, who died in London in 1734 (?)
• Essai sur la nature du commerce en général (Essay on the Nature of Trade in General)
• It was published in French in 1755, but it was composed approx. in the period 1728-1730
• A treaty where we find the same issues that will be addressed by Adam Smith 50 years later: definition and creation of wealth, its circulation, the role of markets, money, foreign trade
• Its publication marks the beginning of a period that lasted until the French Revolution during which dozens of books and pamphlets on economic subjects were published in France.

Question 4

What is the Natural Order?

Answer 4

• Human activity is governed by natural laws similar to those that govern the world of nature (for example, the law of universal gravitation).
• Attempts to oppose these natural laws are useless or at worst harmful.
• «to govern better it was necessary to govern less» « laissez faire, laissez passer»: these two maxims must be interpreted in their historical context. Trade was strictly regulated then, above all grain trade.

Question 5

Agriculture and the production of grain

Answer 5

• Grain was the staple food of the population; its price had strong political implications.
• Not the whole harvest could be consumed; a part had to be set aside for use as seed the following year
• Demand for grain was inelastic and depended mainly on the size of the population; supply of grain was heavily dependent on weather conditions; grain prices tended to vary from one year to the next.
• The importance of grain price inspired strong regulation: export ban (so as not to harm consumers) import ban (so as not to harm consumers); limits even to domestic trade
Most important for people was to eat - mostly grain.

Question 6

Link between Agriculture and wealth the policy implication.

Answer 6

• The source of wealth is the agricultural surplus which circulates among the classes: the greater the surplus, the wealthier the whole country.
• Agricultural productivity must increase through appropriate investment . Investment comes out of the surplus which must not be diverted to the production of luxury goods that can be imported from abroad (against Colbertism).
• Taxes are ultimately funded by the surplus: all taxes (hitherto paid by consumers and bourgeoisie) replaced by a single tax paid by landowners who did not pay taxes together with the clergy.
• Trade must be free within the kingdom: no special taxes and duties.
• Freedom of export: trade in raw produce in exchange for luxury goods from other nations.
• Freedom of import: Agriculture should not be protected by foreign competition which could be a powerful stimulus for improvement.

Question 7

Liberalization of grain trade in practice

Answer 7

• After a short-lived attempt in 1763-1770, when both internal and external grain trade was liberalized, free internal grain trade was resumed in 1774 when Turgot became Controleur Général des Finances.
• This experiment also lasted little as did Turgot’s career which ended in 1776
• Like the physiocrats, Turgot was also accused of extremism, of blindly following an idea without taking into account its practical implications and negative consequences for a part of the population.

Question 8

Adam Smith

Answer 8

• Smith was born in Kirkcaldy, near Edinburgh, Scotland, in 1723. Professor of Moral Philosophy at Glasgow 1752-1764.
• He published two books (and two only) during his lifetime: The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776, better known as the Wealth of Nations).
• He died in Edinburgh in 1790, in time to see the 6th edition of TMS through the press.

Question 9

The Wealth of Nations

Answer 9

The book is about how much an individual can produce for a country and it is the most influential book in modern Economics.

Question 10

The division of labour and size of market

Answer 10

• The process of growth based on the division of labour, the surplus and accumulation finds a limit in the size of markets
• In the simple example of the pin factory, while the number of pins produced can grow together with the division of labour, the number of pins that can be sold depends on the demand for pins, which depends on the size of the market in which pins are sold
• ‘The division of labour is limited by the extent of the market’ (‘Smith’s theorem’)
• Policy implications: freedom of enterprise and free trade.

Question 11

The division of labour and exchange: the problem of value

Answer 11

• The higher the degree of specialisation, the more the individual will enter the market to sell her/his product in exchange for commodities produced by other specialised workers
• The bigger the markets, the more these social relations become anonymous and regulated by one factor and one only, namely, a set of relative prices (how much of commodity A will buy that much of commodity B, what is the value of C in terms of D, and so on).

Question 12

The division of labour and the surplus

Answer 12

• As far as accumulation increases, the division of labour can also increase
• As the division of labour increases, productivity also increases
• Even if L/P remains constant, this can lead to the production of resources in excess of the minimum quantity that that system needs in order to reproduce itself
• These resources in excess are the surplus DoL ↑ → π ↑ → surplus → DoL ↑ (… and so on).

Question 13

Value in use and value in exchange

Answer 13

• To introduce the distinction between value in use and value in exchange Smith used the ‘water diamond paradox’: “The word value [. . .] sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called ‘value in use’; the other, ‘value in exchange’. The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use.

Question 14

Rent

Answer 14

Rent is the income derived from the possession of natural resources (land) that, by definition, are not the product of human labour.

Question 15

Smith’s assumption on value/capital

Answer 15

Smith was assuming that labour is the only factor of production, which holds true only at an early stage of society, in which natural resources (land) are free and there is no accumulation/appropriation of capital.

Question 16

The three classes of people

Answer 16

These classes of people have different income:
• Labourers, whose incomes is Wages
• Capitalists, whose income is Profit
• Landowners, whose income is Rent

Question 17

Adam Smith’s answer of measuring rent and profits in terms of labour.

Answer 17

He views labour as a real value of commodities: “The real value of all the different component parts of price [wages + rents + profits], it must be observed, is measured by the quantity of labour … The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities.”

Question 18

Adam Smith’s answer to wages and profits in relation to prices.

Answer 18

“As soon as stock [capital] has accumulated in the hands of particular persons … ” and “As soon as the land of any country has all become private property….”, profits and rents will also be paid:

“Wages, profit, and rent, are the three original sources of all revenue as well as of all exchangeable value”
Wages + Profits + Rents (at their natural level) → value.

Question 19

Adam Smith’s definition of “market price”

Answer 19

“The actual price at which any commodity is commonly sold is called its market price. It may either be above, or below, or exactly the same with its natural price” (WN in M&S, p. 163)

Question 20

Adam Smith’s definition of a market correction (excess supply)

Answer 20

“If at any time it [the quantity brought to market] exceeds the effectual demand, some of the component parts of its price must be paid below their natural rate. If it is rent, the interest of the landlords will immediately prompt them to withdraw a part of their land; and if it is wages or profit, the interest of the labourers in the one case, and of their employers in the other, will prompt them to withdraw a part of their labour or stock from this employment. The quantity brought to market will soon be no more than sufficient to supply the effective demand” (WN in M&S, p. 164).

Question 21

Gravitation of prices

Answer 21

“The natural price, therefore, is, as it were, the central price, to which the prices of all commodities are continually gravitating” (WN).

No formal definition of demand relating quantities to prices there are also no processes in the book theory of the mind.

Question 22

Summary of Adam Smith’s main concepts on value

Answer 22

• Smith’s approach to the problem of value is nuanced and sometimes ambiguous
• He clearly distinguished between value in use and value of exchange (as in the water/diamond paradox) and it is also clear that, for him as well as for other classical economists, value in use is a necessary condition for value in exchange
• It is not always clear whether Smith was looking for the causes of value, or if he was looking for a stable measure of value, and he seems to oscillate between two different ideas of labour as the source/measure of value: labour commanded/labour contained
• He included profits and rents, along with wages, among the determinants of prices, and he described the way in which these three components are determined by supply and demand…
• … but he held fast to the view that labour is the “real value” of commodities, and therefore of wages as well as of profits and rents
• He produced a clear description (which is not yet a complete theory) of competitive markets as self-equilibrating mechanisms driven by price signals.

Question 23

David Ricardo

Answer 23

The son of a stockbroker in the London Stock Exchange and a stockbroker himself.
Little formal education; starts working at the age of 14 with his father
Gets interested in political economy after reading The Wealth of Nations
Becomes member of parliament in 1819
Involved in the great economic controversies of his time:
• the debate on Free Trade (against the Corn Laws)
• the «Bullionist controversy»
• the debate on how to repay the British huge public debt after the Napoleonic wars.

Question 24

Ricardo vs Smith

Answer 24

• D. Ricardo : “classic” economist (both for Marx and Keynes, but with different meaning )
• Ricardo favours a theoretical-deductive approach based on the construction of models based on clear hypotheses rather than Smith’s inductive, realistic approach, of which, however, like everyone else, he declares himself a follower.
• This approach is Ricardo’s imperishable influence.
• Search for “natural” laws.
• As a classical economist Ricardo will influence economic theory in several aspects.

Question 25

Ricardo and Comparative Advantages

Answer 25

International trade in the reflection of economists from mercantilism to Ricardo (Ricardo = theorist of globalisation?)

Both countries will gain by specialising in the production (and export) of the good for which they have a comparative advantage. Even the least efficient country will gain from the exchange.

Question 26

Income distribution as the principal problem of political economy

Answer 26

• surplus = annual national production minus that part which must be devoted to enabling continuous national production and reproduction to take place.
• Surplus is the product of labour. The more people are employed productively, the greater the surplus
• Employment depends on capital, therefore growth depends on capital accumulation, i.e. on investment
• Investment depends on profits
• The prosperity of the country depends on the prosperity of one class, that of the capitalists (“owners of stock or capital”).
• The landowners spend their income on consumption (unproductively) while the capitalists save their income and invest it.

Question 27

What did Ricardo find unsastifcatory in Smith’s theory of price and commodity?

Answer 27

“When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price” (WN, in M&S, p. 163)

Question 28

Say’s Law

Answer 28

The production of a good implies the creation of a demand of equal value, through the revenues of the owner of the three elements of production [rent, profits, wages]:
“The sum of the revenues of all the individuals which make up a nation makes up the revenue of that nation. It is equivalent to the gross value of all her products.»

Question 29

Ricardo’s theory of the long-term trend of the rate of profit

Answer 29

There is one «natural» rate of profit; its uniformity is one of the main characters of a capitalist economy Definition of rate of profit:
Rate of profit = Profits/ K (different from P/Y=share of profits)
How to measure capital?
Two solutions:
1. One commodity model
2. Theory of prices

Question 30

Corn-model

Answer 30

• Corn is the only good: it is both input (seeds, food for the workers) and output
• Land is a heterogeneous factor of production, i.e. lands of different fertility
• Theory of differential rent: rent depends on the different fertility of the soil. If all land had the same fertility, there would be no rent.

Question 31

Ricardo’s theory of rent

Answer 31

• The price of corn is the cost of production on the least fertile land cultivated at a given time.
• The price of corn is the same regardless of the place of production (homogeneous good) . Since the cost of production of corn on the most fertile land is lower than the cost of production on the least fertile land, the owners of the most fertile land will ask farmers for a rent equal to the difference between corn price and its cost of production.
• By subtracting from income the rent thus determined the difference is divided between profits and wages.

Question 32

Malthus 1766-1834 and the limits to growth

Answer 32

Essay on Population: appeared in 1798 as a rather brief pamphlet. It was written as criticism of the views on progress of Godwin and Condorcet. Godwin declared a correlation between human misery and politcal institutions.

Malthus held opposite views: “the power of population is indefinitely greater than the power in the earth to produce subsistence for man. Population when unchecked, increases in a geometrical ratio: Subsistence increases only in an arithmetical ratio”

Why does subsistence grow at a slower pace? Because of decreasing returns in agriculture
Malthus was a very pessimistic economist.

Question 33

Profits in the long run 17-19th century.

Answer 33

Profits have to be the same in the long run - which is what economists thought.
You cannot assume that the rate of profit is the same
Smith thought that wages and regular profits could go up.
While Ricardo thought that it was impossible → the rate of profit goes up if the wages goes down.

Question 34

Iron law of wages

Answer 34

Populations does not increase indefinitely because of:
Positive checks: increased infant mortality, famines and even plagues, which inevitably reduce population to the previous, lower level.
Preventive checks: refraining from, or delaying, marriage; celibacy.

When real wages increase, population increases, labour supply increases, real wages decrease because the “wage fund” is the same.
Wages are constant in real terms. Any attempt at increasing them is bound to fail. Economics is a “dismal science”

Question 35

Ricardo’s theory of distribution

Answer 35

• To understand Ricardo’s theory of distribution we use the diagram introduced by Nicholas Kaldor (1956) related to the agricultural sector of the economy.
• The P-Mp and P-Ap curves represent, respectively, the marginal product (decreasing) and the average product of labour employed in corn production (higher than the marginal product). Assuming that the labour force employed in corn production is equal to OM, the total product will be equal to the OCDM area.
• On the marginal land the price and cost of production are equal and the rent is 0. On infra-marginal land (where the production costs are lower and the marginal and average product higher than on the marginal land) the rent is equal to the difference between prices and costs.
• The total amount of rent is equal to the area of the BCDA rectangle. Subtracting the total rent from the aggregate product, OBAM is divided between wages and profits.

Question 36

Corn model

Answer 36

Rent = AP-Mp x L

Was made by Kaldor in 1956 to show the difference in grain production with other factors of profit, wages and rent.

Question 37

Theory of rent - Malthus

Answer 37

The actual productivity and the productivity on the worse land is the rent.

Total product is divided between rent,product and profit.

Worse land / less fertile = more costs (wages, seeds etc.)
Better land = less costs

Rent is the difference between the costs
What is left is the profits

This is the comparison between the same productivity level on different land.

Question 38

Distribution of surplus in the corn model

Answer 38

The rate of profit 𝜋 is determined on the marginal land. 𝑋 = surplus

𝜋 = 𝑋/𝑤𝐿

w is constant, therefore the rate of profit decreases as L (labour necessary to produce quantity X of corn) increases.
Checks on the decreasing rate of profit:
• Technological progress
• Free trade

Capital = workers wages

Question 39

Ricardo’s opposition to the Corn Laws

Answer 39

Ricardo argued that the repeal of the Corn Laws would benefit first and foremost capitalists because of a rise in the general rate of profits and, as a consequence, society at large because of a rise in the rate of capital accumulation and growth.

Question 40

Ricardo’s theory of value

Answer 40

Prices do not reflect scarcity, but difficulties of production
The natural price of a commodity repndso n the quantity of labour which is necessary (directly and indirectly) to produce it, If labour is the only input:

P1 = L1*w + 𝜋*L1*w = L1*w*(1+𝜋)
P2 = L2*w + 𝜋*L2*w = L2*w*(1+𝜋)

Where P = profit, L = land and Pie is rate of profit

Question 41

The role of theory of prices

Answer 41

Determination of the rate of profit pie when the surplus on the Marginal Land is measured in monetary terms and w is the money wage (not kilos of corn but $).

𝜋 = pX/wL

If L and P increase proportionally, 𝜋 ↑ if and only if w ↓
There is an inverse relationship between w and pie.

Question 42

Rise of money wages

Answer 42

Two causes:
• Increase in real wages ( but «iron law of wages»)
• Constant real wages but higher prices of wage goods
• Price of wage goods (food) rise because the cost of production increases.

Question 43

Ricardo’s arguement against Corn Laws

Answer 43

• In conclusion, Ricardo’s argument against the Corn Laws can be summarized :

Population(up) = demand for food(up) = decreasing returns in argiculture = prices of food and necessities (up) = wages (up)

Question 44

Theory of compensation

Answer 44

Smith and most classical economists assumed that the decrease in employment in the sector in which technological progress takes place is compensated for by an increase in the other sectors.

Question 45

Charles Babbages

Answer 45

An engineer. Chair of mathematics at Cambridge.

Babbage first principle: substitution of highly qualified workers with specialised workers through the breaking of complex processes into simple operations.

Babbage second principle: substitution of non-qualified labour with machines

This is a positive process because it frees human beings from tedious and painful jobs.

Question 46

Karl Marx

Answer 46

• Born in Trier (Treviri, Germany) in 1818
• Studies laws and classics at the university of Bonn, then moves to Berlin and graduates in Jena in philosophy
• Moves to Paris where he meets Friedrich Engels and starts studying Political Economy in 1844
• 1848 writes Communist Manifesto with Friedrich Engels
• 1849 settled in London

Question 47

Capitalism and Karl Marx

Answer 47

Capitalism is not a natural system of production, but it represents a stage in the development of humanity: it has been preceded by other systems and will be superseded by others.

Karl Marx’s name has been associated with countless anti-capitalist movements since the second half of the 19th century until today, but in reality Marx has also given capitalism a positive role: development of “forces of production”

Question 48

Differences of Karl Marx and Adam Smith

Answer 48

• In the pin factory the pins are manufactured with simple tools (Marx: capitalist production employs machines; no production is possible without capital; we cannot go back to a stage where commodities are produced by labour alone)
• Rate of profit decreases in the long-run (Marx agrees but the reason is not that production becomes excessive).

Question 49

Agreements between Marx and Smith

Answer 49

• The capitalist mode of production, insofar as it favours the division of labour, increases labour productivity and the surplus. This leads to capital accumulation
• Society is divided into classes (but in Smith no clear conflict between classes).

Question 50

Capitalist division of labour

Answer 50

• Capitalist economy cannot be represented as a society of independent artisans. In such a society, producers exchange the products of their labour.
• This process can be represented as:
• M →D →M
• In a capitalist economy workers do not own the means of production. Capitalists are not interested in what they produce , they are interested in increasing the value of their capital
• D →M →D’
• This is why there may be a lack of demand:the goal of production is not to satisfy needs, which are infinite, but to increase capital, to make a profit.

Question 51

Surplus value and exploitation

Answer 51

• The total social labour is the quantity of labour employed during a year, L
• This is divided in : Necessary labour = the labour necessary to produce the wage goods, NL Surplus labour, i.e. L – NL, which goes to the capitalist as profit.
• Alternatively, we can imagine the working day divided in two parts:
In the first part the workers work for themselves,
in the second part they produce value for the capitalists

Question 52

Value of a commodity

Answer 52

• Value of commodity = labour necessary to produce the commodity , inputs included = c +v +s
C = constant capital, i.e. value of the raw materials and means of production, constant because its value does not change during the production process
V = subsistence wage, historically determined
S = surplus value
• Surplus value is the source of profit
S/V = rate of exploitation which depends on
1. Length of the working day
2. Level of wages
3. Productivity in the wage-goods sector
• Conflict between capitalists and workers.

Question 53

Globalization

Answer 53

The bourgeoisie has through its exploitation of the world market given a cosmopolitan character to production and consumption in every country.
In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal interdependence of nations.

Question 54

Crisis and the general laws of capitalism

Answer 54

Is a general overproduction crisis possible? NO: Say’s Law (Ricardo: Saving = Investment) YES: Under-consumption theories: Malthus, Sismondi. They both maintain that lack of aggregate demand is possible, but they put forward different solutions Malthus: consumption of the landowners is necessary, rents must be high Sismondi : better working conditions for workers Against underconsumption theories Marx argues that growth in equilibrium is possible.

Question 55

Schemes of simple reproduction

Answer 55

• Two sectors in the economy with no accumulation (profits are consumed) 
• Sector 1 produces consumption goods 
• Sector 2 produces capital goods 
If in each sector Supply = Demand 
c1+v1+s1 = v1+v2+ s1+ s2 
c2+v2+s2 = c1+c2 
Equilibrium condition : 
c1 = v2+s2

Question 56

Laws of movement of capitalism

Answer 56

1) The General Law of Decreasing Competition: capital accumulation leads to increased industrial concentration.
2) The General Law of Declining Rate of Profit: as capital accumulates, the rate of profit falls
3) The General Law of increasing misery of the proletariat .
• Strong Form: Real wages are stagnant under capitalism. Unemployment rises
• Weak Form: The share of national income accruing to labour would fall under capitalism.

Question 57

Rate of profit formula

Answer 57

Rate of profit = 𝑠/ 𝑐+𝑣 = 𝑠 /𝑣 ( 1 - 𝑐 𝑐+𝑣 ) in value terms

Question 58

Jeremy Bentham

Answer 58

The founder of British Utilitarianism Among his works:
Fragment on Government (1776) Introduction to the Principles of Morals and Legislation (1779) Defence of Usury (1787)
A close friend of James Mill, he strongly influenced J.S. Mill.

Question 59

The principle of utility

Answer 59

“By the principle of utility is meant that principle which approves or disapproves of every action whatsoever, according to the tendency which it appears to have to augment or diminish the happiness of the party whose interest is in question” (An Introduction to the Principles of Morals and Legislation, 1789, Ch. 1, “The Principle of Utility”, in M&S, p. 183)

This is the essential element of the utilitarian doctrine that Mill received from Bentham

Question 60

Pain and pleasure - felicific calculus

Answer 60

Bentham thought that pleasure and pain could be measured and that human beings were able to base their behaviour on a ‘felicific calculus’, aimed at maximizing pleasure and minimizing pain. Mill was rather skeptical of this part of Bentham’s thought.

Question 61

Bentham’s Utilitarianism as an idea of rational conduct

Answer 61

• Bentham’s Utilitarianism is a rationalist approach refusing any dogmatic/a priori/’natural’ idea of what is good or evil.
• It is a consequentialist approach: actions should be judged for the pleasure they may procure and/or for the pain they can avoid (not for their adherence to some moral law imposed by whatever authority).
• Every action (in particular by the government) should aim at procuring “the greatest happiness for the greatest number”.

Question 62

Bentham’s utilitarianism and policy

Answer 62

• Bentham’s work was mainly dedicated to find the way in which the legislator and the government could best pursue the greatest happiness for the greatest number.
• According to many commentators, Bentham’s utilitarianism was created having in mind policy much more than theory (be it moral or economic theory).
• Bentham’s Utilitarianism was an individualistic doctrine. In economics, it was based on laissez-faire.

Question 63

Elements of Bentham’s Utilitarinism

Answer 63

• Rationalism (incorporated into the principle of utility and the felicific calculus)
• Individualism
• Economic laissez-faire and political liberalism
• Egalitarianism

Possible applications to economics:
• Methodological individualism
• Utility maximization as a model of rational economic behaviour.

Question 64

Mill, Utility and Economics

Answer 64

Mill accepted the principles of utility but did not accept Bentham’s theory of felific caluculus.
• The role of utility in economic theory have long remained a problematic one, and not only for the well-known issues connected to its measurability.

Question 65

Nassau Senior and theory of abstinence

Answer 65

Nassau Senior (1790-1864) was a Ricardian economist. He is famous as the one who introduced the abstinence [from consumption] theory of interest.
Senior emphasized both utility on the demand side and disutility as a real cost of production on the supply side.
Interest becomes the price that must be paid to induce capitalists to abstain from consumption.

Question 66

Ways distribuition as deteremined by competition can be changed

Answer 66

• High taxes on inheritance (but no progressive taxation)
• Cooperatives (in which labourers could earn rents and profits along with wages)
• Universal education and suffrage (including women)
• Birth control (against Malthus’s theory of population)
• Legalization of Unions
• Shortening of the working day.

Question 67

John Stuart Mill 1806-1873

Answer 67

Son of James Mill
Ricardo’s friend East India Office (1823-1857)
Member of Parliament (1865-68)

• Mill began studying political economy under the guide of his father at the age of thirteen.
• Mill was strongly influenced by Bentham. After finishing his formal education at 15, in four years he edited a complete edition of Bentham’s work.

Question 68

Mill’s view of the science and political economy

Answer 68

In one of his Essays on Some Unsettled Questions of Political Economy, Mill adopted the distinction between the “science” and the “art” of Political Economy (that can be found also in Bentham)
The distinction between the science and the art corresponds to the distinction between what ‘it is’ (and cannot be changed by human intervention) and what ‘ought to be’ (and can then be considered as a policy goal)
• It is the same distinction as the one between positive and normative economics

Question 69

Mill’s view on income distribuition

Answer 69

“Competition, however, must be regarded, in the present state of society, as the principal regulator of wages, and custom or individual character only as a modifying circumstance, and that in a comparatively slight degree. Wages , then, depend mainly upon the demand and supply of labour; or, as it is often expressed , on the proportion between population and capital”.

Question 70

Mill’s productive labour theory

Answer 70

• Mill presents an amendment of Smith’s concept of productive labour in which it is ‘permanence’, rather than ‘materiality’ that is decisive in distinguishing productive from non-productive labour
• Productive labour is productive of “wealth” and “it is essential to the idea of wealth to be susceptible of accumulation”
• As wealth = accumulation, and as the rate of accumulation is a function of the proportion of the labour force employed ‘productively’, a profit earned by employing unproductive labour corresponds to a mere transfer (not a creation) of wealth.

Question 71

Dsitribuition: institutional perspective

Answer 71

• Private property as the product of history (there is no ‘natural’ right to private property in Mill)
• Communism and socialism: Mill’s Principles is the first important work on Political Economy in which these two systems are considered
• Custom and competition

Question 72

Mill on demand and supply

Answer 72

Mill suggested that, in order to represent supply and demand:
“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”

Question 73

Distribution: the three classes

Answer 73

The three requisites of production … are labour, capital, and land
Since each of these elements of production may be separately appropriated, the industrial community may be considered as divided into landowners, capitalists, and productive labourers.
Each of these classes, as such, obtains a share of the produce: no other person or class obtains anything, except by concession from them.
The remainder of the community is, in fact, supported at their expense, giving, if any equivalent, one consisting of unproductive services”.

Question 74

Mills theory of value with supply is absolutely limited.

Answer 74

If supply is absolutely limited, the supply curve is perfectly inelastic (vertical), and price depends upon supply and demand.

Graph
x-axis: quantity
y-axies: price

Supply is vertical line interesecting with a demand line that is decreasing.

Question 75

Mills theory of value with Mill assuming that all manufacturing industries are constant-cost

Answer 75

Situations: costs do not change as output increases.

In this case, price is determined by the cost of production

Graph
x-axis: quantity
y-axies: price

Supply is a fully horizontal line and
Both supply and demand do not touch any of the axes.
Demand is decreasing line.

Question 76

Mills theory of value in Agriculture

Answer 76

For Mill, this is the situation that prevails in agriculture.

Graph
x-axis: quantity
y-axies: price

Supply is an increasing line.
Both supply and demand do not touch any of the axes.
Demand is decreasing line.