The Circle of James Mill (1773 -1836)

1. The Circle of James Mill (1773 -1836) Jeremy Bentham(1748-1832) – utilitarianism “Greatest good for the greatest number” Calculus of pleasure and pain Daniel Bernoulli … St. Petersburg Paradox (1738) Diminishing marginal utility of income Everyone’s happiness counts equally  Robin Hood principle Roles for State Employer of last resort Redistribute wealth … but maintain incentives Panopticon: an ideal prison Thomas Robert Malthus David Ricardo John Stuart Mill (1806 – 1873) Prodigy/philosopher/East India Co. administrator Learned Greek @ age 3/Read Plato @ 8 … the Illiad for fun Studied Ricardo & Smith @ 13/Edited father’s & Bentham’s works @ 19 Stayed with Say on trip to France/Nervous breakdown @ ~20 Philosophical Radical: civil liberties; women’s rights… MP, opinion-maker: “Saint of rationalism”

2. Keynes Lived Here Darwin Lived Here Jeremy Bentham

3. Synthesis and Refinement of Classical Economics:Nassau Senior/John Stuart Mill Nassau Senior, Outline of the Science of Political Economy, 1836 Wealth = scarce goods & services that have utility (supply) (demand) Bridge from Classical economics to Neo-classical economics? Not quite. Four postulates: • People want as much wealth as possible at as little sacrifice as possible  Services have value/Demand affects value • Population limited by “moral or physical evil” or by fear of lacking the means of subsistence • Means of subsistence increase faster than population owing to accumulation of capital • Productivity may be increased by accumulating capital (= “abstinence”) • Abstinence (on margin) as factor of production  Profit/Interest • Profit as well as wages enter value: Labor theory of value • Productivity of “waiting”…roundabout production • Increasing returns in manufacturing • Diminishing returns in agriculture

4. John Stuart Mill, Principles of Political Economy, 1848 • Synthesis of Classical Economics • Economic man  self-interest as motive force • Invisible hand  harmony through competition • Minimal government …but still a role • Discern economic laws Say’s Law: Saving is spending Law of Population Iron Law of Wages Law of Diminishing Returns in agriculture (“most significant proposition”) Law of Comparative Advantage • Mill: Competition  Efficient Production …butPolitical Redistribution can enhance utility • Natural science production. But Institutions  distribution • Wiggle room in “wage-fund”  union bargaining not futile • Anticipation of Welfare State • Harriet Taylor’s contribution(?) • "when two persons have their thoughts and speculations completely in common it is of little consequence in respect of the question of originality, which of them holds the pen."

5. Principles in Mill’s Principles text …happily, there is nothing in the laws of value which remains for the present or any future writer to clear up; the theory of the subject is complete. • Operation of Supply and Demand • Value (price) adjusts to clear the market • Short-run / long-run distinction…PLong-Run= Cost • “Productive labor”  Capital/Saving employs “productive labor”Say • Economies of scale  monopoly • Role for public utilities • Free trade  losers as well as winners • Division of gains from trade … reciprocal demand • Tariffs and terms-of-trade  strategic trade theory • Defense of infant industry protection • Socialism  indolence • Competition  efficiency … but thenredistribute • Technology can benefit all positive steady state • Agricultural technology must overtake diminishing returns • Role for government guidance  progress • Human drives + Institutions Economic Outcomes • Institutions are subject to political intervention