Cover text comments revised

I am very grateful for the comments on my previous post, ‘Classical Economic Theory and the Modern Economy’ cover text comments, thoughts and suggestions sought with special thanks to Gerry on how to begin the text, which was also the point raised by Tim Neilson. However this is the length they are looking for. This is now my second draft.

‘Classical Economic Theory and the Modern Economy’

If you are interested in how economic theory became the wasteland it has become, this is the book you must read.

It starts with two premises: First, that economic theory reached its deepest level of understanding in the writings of John Stuart Mill and the classical economists of his time, and then, secondly, the author of this book has understood Mill and has accurately explained what the classical school of the late nineteenth century wrote. From these premises, this then follows.

To have any hope of understanding how an economy works, and how modern economic theory became the dead end it has become, this is where you must begin.

The classical economists, and John Stuart Mill in particular, lived through the Industrial Revolution, saw its astonishing economic transformation before their eyes, and explained, so others could understand for themselves, how their prosperity had been created through the emergence of the market economy.

Classical economics was entirely a supply-side theory.

Mill, the greatest utilitarian philosopher of his age, refused to use utility as anything other than a minor element in his theory of value. Mill explicitly and emphatically denied any role for aggregate demand in the creation of employment. In reaching these conclusions, there was no disagreement among the entire mainstream economics community of his time.

First through the Marginal Revolution of the 1870s, and then through the Keynesian Revolution of the 1930s, the entire edifice of classical theory has been obliterated and made virtually incomprehensible to anyone educated in modern economics. From a classical perspective, modern theory is Mercantilist trash.

This book explains why that is and how to understand the classics as they were meant to be understood.

From the comments, I can see that this business about utility among the classical economists is extraordinarily difficult to accept. Of course no one will produce anything that they do not believe they can sell, and no one will buy things that do not satisfy some need or desire.

Perhaps this will provide a clearer understanding which is taken from the text of the book. The heading in bold is my assertion, the quote that follows is by D.P. O’Brien from his 1975 Classical Economics Revisited which was such a tour de force that a second expanded edition was published thirty years later, in 2005. He says throughout his book many of the things I say myself, with only this difference, if it is a difference, that I believe the classics were right about what they wrote where he is only reporting.

The Classical Theory of Value was Not Based on Utility Although Mill was Himself a Utilitarian
“Mill advances a ‘cost of production’ theory of value…. He was not a subjective value theorist…. He treated utility as merely a condition of value.” (p.96)

Both Marginal Utility and Aggregate Demand are demand-side theories that completely divorce an economist from thinking in relation to supply. There is much more to it, but there are no easy points to score against Mill over his cost of production approach to value. He has 17 elements in his overview of the theory of value with this the second:

II. The temporary or Market Value of a thing, depends on the demand and supply; rising as the demand rises, and falling as the supply rises. The demand, however, varies with the value, being generally greater when the thing is cheap than when it is dear; and the value always adjusts itself in such a manner, that the demand is equal to the supply.

This is pretty well all that is taught about supply and demand today and I doubt most economists know much more than that, although we now have diagrams and pages of terminology to explain it all (e.g. “price elasticity of demand” or the distinction between “demand” and “quantity demanded”).

Mill’s first proposition, by the way, is that value is entirely a relative concept. The classics were not trying to explain just the temporary price of the moment, but how the relative price structure across an economy is determined. That is a much much more difficult question and I doubt most economists today have much of a handle on it assuming it is even brought to their attention. It is also a much more important issue than mere price determination of a single product in isolation from the rest of the economy.

For those interested in a classical approach to economic theory, there is the third edition of my Free Market Economics. I think of it as Mill’s Principles for the twenty-first century. It is, unfortunately, absolutely unique.

WITH THIS LATE ADDITION: This is the original excerpts which had to be cut back for copyright reasons. More detail but the same outcome.

The Classical Theory of Value was Not Based on Utility Although Mill was Himself a Utilitarian
“His [Mill’s] value theory, though representing the best of its type in its discussion of zero elasticity of supply, infinite elasticity of supply, and rising supply price, and in its recognition of joint costs, was of the conventional Classical type, that is by treating value as determined by supply and demand in the short run and by cost of production in the long run. At the same time it should be emphasised that Mill went beyond most of the Classical economists (not excepting Ricardo) in stating his arguments in terms of schedules of supply and demand rather than quantities.” (p.47)

“Mill gives an excellent summary of his theory of value in the short Chapter VI of Book III of his Principles and it is worth quoting at length.” (p.94)

“It should also be noted that although Mill advances a ‘cost of production’ theory of value, he distinguishes quite clearly between cases of horizontal, vertical and positively inclined supply schedules. But he was not a subjective value theorist, and like all the ‘cost of production’ theorists he treated utility as merely a condition of value.” (p.96)

“After a survey of the writings on value from a subjective point of view which appeared in the Classical period, two main conclusions stand out. The first is that there was indisputably a stream of value theory which was different from that associated directly with the ‘cost of production’ theorists. To this extent the Marginal Revolution of the 1870s may seem somewhat less revolutionary that it is sometimes depicted.” (p.106)

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4 Responses to Cover text comments revised

  1. Clam Chowdah

    That draft cover blurb is really confused and dreary. Is the aim to sell the book?

  2. David Brewer

    Steve – I would suggest a different opening as I think people are more likely to buy the book if they think they will learn something positive and useful, rather than just how a particular academic field got into a mess. This and a few more quick suggestions in the below. As indicated, I think you need to expand the shortest paragraph to spotlight what special insight classical economics offers concerning the economy.

    ‘Classical Economic Theory and the Modern Economy’

    In this book Steve Kates demonstrates that classical economic theory explains and predicts 21st century economic realities far better than later schools of thought.

    He shows how economic theory reached its deepest level of understanding in the writings of John Stuart Mill and his contemporaries, and that later doctrines have never matched the subtlety and detail of this understanding.

    The classical economists, and Mill in particular, lived through the Industrial Revolution, saw its astonishing economic transformation before their eyes, and explained, so others could understand for themselves, how their prosperity had been created through the emergence of the market economy.

    Classical economics was entirely a supply-side theory. It [did or asserted what?…need some key points of the theory here]

    Mill anticipated, but rejected, the reductionist theories of later economic doctrines. Though known as the greatest utilitarian philosopher of his age, he saw utility as only a minor element in a comprehensive theory of value. He also explicitly and emphatically denied any role for aggregate demand in the creation of employment. These conclusions were soundly based on his experience and observation of the burgeoning economy of his time, and were the shared wisdom of the entire mainstream economics community of the late 19th century.

    Yet the insights of Mill and his contemporaries all but vanished in the supposedly more advanced theories which followed them. The Marginal Revolution of the 1870s, and then the Keynesian Revolution of the 1930s, first obscured and then practically obliterated the entire edifice of classical theory and made it virtually incomprehensible to anyone educated in modern economics. From a classical perspective, modern theory is largely a reversion to Mercantilist fallacies.

    This book explains classical theory as it was meant to be understood, and shows the depths of the insights that it still provides into contemporary economic conditions and prospects.

  3. Clam Chowdah

    That is an excellent start. If you can compress the last three or four paragraphs it will be far superior to the earlier offerings.

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