Demand for commodities is not demand for labour

I am off to the UK today, the main purpose being to attend the UK History of Economics Conference at Oxford. There I will be giving a paper on possibly the most enigmatic statement every written by a great economist. In 1848 John Stuart Mill wrote in his Principles of Political Economy, as the fourth of his fundamental proposition in respect of capital, that “demand for commodities is not demand for labour”. It is a statement that was never challenged in his own lifetime. Indeed, in 1876, Leslie Stephen – now best known as Virginia Wolf’s father – described Mill’s fourth proposition in this way:

The doctrine – so rarely understood, that its complete apprehension is, perhaps, the best test of a sound economist – that demand for commodities is not demand for labour.

Since the 1870s, in my view because of the focus shift to the demand side because of the arrival of marginal analysis, it is not an exaggeration to say that no one has been able to make sense of what Mill wrote. I describe it as the Fermat’s Last Theorem of economics.

The two most important attempts to reinterpret this statement since the 1870s have been by two of the greatest economists who have ever lived, Alfred Marshall in 1890 and Friedrich Hayek in 1931. Both had written to explain why Mill had been right but had somehow misfired in his explanation.

In his discussion, what Marshall eventually concluded was this: “demand for commodities is in general demand for labour”. The “not” had completely disappeared and been replaced by the words “in general”.

Hayek’s conclusion was a slight paraphrase of Leslie Stephen: “More than ever it seems to me to be true that the complete apprehension of the doctrine that ‘demand for commodities is not demand for labour’ – and of its limitations – is ‘the best test of an economist’.” Did Mill really have some limitations in mind?

Marshall for all practical purposes contradicts Mill writing that “in general” demand for commodities is indeed demand for labour. Hayek puts in a qualification – “and of its limitations” – that I do not think belongs. Hayek more or less states that demand for commodities is not demand for labour except where it is. Not such a fundamental principle after all when you put it that way but I think Hayek is wrong.

I do not myself believe that any of the commentaries over the years have actually shone much light on what Mill meant and on what had received virtually unanimous assent from his contemporaries. And the fact remains, given the way our economies have unfolded in the past two years, demand for commodities does not seem to have been demand for labour. Mill’s conclusion has been demonstrated to be absolutely true. No stimulus package anywhere has brought with it a return to anything like the level of employment that had previously prevailed. In some places, the US most notably, employment levels have actually fallen. That the demand for commodities is not the demand for labour is being demonstrated every day across the world. The only question is whether Mill’s explanation for why this is the case is also the right explanation. I think it is, but the fact remains that just about no one seems to have understood his point for more than a hundred years. And with the coming of the Keynesian Revolution in the 1930s it was completely obliterated.

What no one seems to have recognised is that this proposition is just a restatement of Say’s Law. It has always seemed absolutely and obviously true since the day I first read Mill’s fourth proposition back in 1982. It ended my days as a Keynesian on the spot and that is literally true. So now I am off to Oxford to add my own explanation to the others that have come before.

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2 Responses to Demand for commodities is not demand for labour

  1. coz

    so who pays for your travel, accomodation and attendtance?

  2. Shirley

    I’m not an economist, but came across Mill’s quote while re-reading Hayek’s “The Fatal Conceit”. Through the wonders of Google, came across your post. As a mere plebian, my immediate thought when I came across Mill’s statement was that the dynamics of our economy if changing so much that it seems obvious that a demand for commodities is not a demand for labor, at least not in the traditional sense of “labor”. The “demand” for WiFi service does not result in employment of thousands of people. There are many similar examples. The dynamics of the economy is changing. There are few economists whose ideas can stand true despite these changes. I think Hayek is one of them.

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