Mill’s lost ‘supply-side’ perspective has now been found

Here’s the subhead to an article on the editorial page of the AFR today with the title: Job creators don’t need subsidy.

The billions spent on industry support seems to make very little difference to new job creation.

This is the rediscovery of classical economic theory, and here let me quote John Stuart Mill:

“Demand for commodities is not demand for labour.”

Alas, the amount of unlearning that would have to happen for Mill’s point to be understood is an impossibility, but it is interesting that someone has noticed the actual facts on the ground even if they don’t understand why it’s true. As a wonderful example of someone who sees the point but doesn’t understand it, here is the abstract of a paper by an economist by name of Roy Grieve criticising my paper on Mill’s Fourth Proposition on Capital in which I have, for the first time in more than a century, explained what Mill and the classics meant:

Steven Kates has recently (2015a) attempted to explain and justify J S Mill’s paradoxical “fourth proposition on capital”, which states that “demand for commodities is not demand for labour”, a proposition which notoriously – over generations – has baffled many eminent commentators. Kates intends to resolve the puzzle by offering “a proper understanding of Say’s Law as it was understood by Mill and his contemporaries.” We conclude that Kates does indeed reveal the logic of Mill’s proposition, making it clear that from Mill’s lost “supply-side” perspective, it is in no way puzzling or paradoxical. However, at the same time it becomes evident that Mill’s whole position is undermined by his acceptance of the untenable belief that “demand is constituted by supply”, which leaves us with the clear understanding that his fourth proposition, despite Kates’s rationalisation and defence thereof, as well as certainly being paradoxical, is simply untrue.

I hadn’t even known the paper had been published until just now, but found it only because I was looking online for my own. But this is wonderful since he says five things I am extraordinarily happy to have said about what I wrote:

1) I really am the first economist in well over a century to understand Mill’s Fourth Proposition.

2) I do indeed “reveal the logic of Mill’s proposition”.

3) And what is shown by the Fourth Proposition on Capital is “Mill’s lost ‘supply-side’ perspective”.

4) Say’s Law is the central proposition of supply-side economic theory.

5) And what does Say’s Law teach: that “demand is constituted by supply”, that it is only through increased production that increased demand can occur.

That Grieve thinks Mill’s Fourth Proposition is untrue only has him lining up with around 98% of modern economists. That it actually is true is demonstrated by the failure of every single peacetime stimulus package in history to increase the level of employment. There has never been an exception to this rule.

This entry was posted in Classical Economics, Economics and economy. Bookmark the permalink.

11 Responses to Mill’s lost ‘supply-side’ perspective has now been found

  1. Roger

    Demand for labour is created by investors, not consumers.

    Do I get a star?

  2. Entropy

    That Grieve thinks Mill’s Fourth Proposition is untrue only has him lining up with around 98% of modern economists. That it actually is true is demonstrated by the failure of every single peacetime stimulus package in history to increase the level of employment. There has never been an exception to this rule.

    To quibble, just because stimulus packages never work out the way their proponents say they will (until the next time of course, where MOAR stimulus is used till we are all stimulused to the grave) does not automatically make what Mill said true. Just that the evidence says the modern economist tools of the ruling classes are wrong.

  3. eb

    “demand is constituted by supply”

    Steve, did Mill actually say this? And what does it mean?

  4. Many, many, years ago I was doing an MBA (it was the in thing at the time) at RMIT and macro/micro-economics was a big part of that course. Keynesian economics was ‘the’ big thing and I don’t know why, but all of it seemed absolute tosh. I couldn’t identify why it was tosh, but just had this gut feeling. I gave up in my second year and decided there was was more to life than this rubbish.

  5. Louis Hissink

    It boils down to the state, more or less, strangling the entrepreneurs to near death with regulations and other interferences, and expecting the thus comatose entrepreneur to respond positively to a deluge of money supplied by the state,

    Another example of the logical fallacy of arguing the consequent.

    Years ago I complained to lefty friends that mineral exploration was being regulated to death – their response? Innovate. Well the usual innovation was to supply brown paper bags of incentives but apparently there is a moral side to that. Can’t see why since allocating administrative incentives to the trade unions was always considered a morally uplifting innovation.

  6. john

    Grieve is an occasional contributor to The Guardian. That won’t surprise you.

  7. john

    I am very grateful to you, actually. In 1978 I was in Grade 12 Economics and I could not make sense of Keynesian economics. Especially the paradox of thrift which I could neither follow nor explain. For 40 years I considered myself an average, try-hard, economist because I could only follow classical economic theory. Now I see I was right all along. A bit late to help my career, unfortunately, but it does make me feel much better. Thank you very much. Cheers John.

  8. Pusnip

    Steve has been supplying his Say’s Law diatribes for several years now and I have seen little change in demand.

  9. If you want to see “supply economy” at work, visit Vietnam.

  10. Roger

    Demand for labour is created by investors, not consumers.

    Do I get a star?

    Not sure what the policy on stars is here, but that is interesting. Investors also need consumers. But first the investor must create the thing that the consumers want and can afford to buy.

  11. rtp

    it is too difficult to get people to understand supply side economics because most of them don’t want to.

    You need to show why the alternative makes no sense instead.

    And to do this you say:

    “Demand is, by definition, a relative concept. How much of one good give you are prepared to sacrifice to get another. You can sacrifice (conceptually) all other goods for one – that is what handing over money means – but you cannot sacrifice all goods for nothing or nothing for all goods.

    So there is no such thing as aggregating demand because you are asking how much of nothing you will sacrifice to get something. The answer of course is not a curve but a shaded area from zero to infinity.

    As there is no aggregate demand curve then there can be no intersection of that with an aggegate supply curve – no matter what such a beast might look like.

    From there we can say that all Keynesian economic analysis fall apart. The reason it proffers up such conterintuitive conclusions (eg that natural disasters and wars are good for the economy) is because you have actually divided by zero along the way but not recognised it.”

Leave a Reply

Your email address will not be published. Required fields are marked *