John Stuart Mill and the theory of value

Classical Economic Theory and the Modern Economy

I posted the note below onto the Societies for the History of Economics website in regard to François Quesnay, an eighteenth century French economist, but it’s really about John Stuart Mill. No one has responded among the 1200 who are part of this website. Lots here that is scandalous to me, but the easy peasy way it is to demonstrate that at the very centre of the study of the history of economic thought, there is no one who has the slightest idea what Mill said about the theory of value which they nevertheless continue to ridicule. This is part of the reason I wrote my Classical Economic Theory and the Modern Economy.

I found this, from Spencer Banzhaf, the most astonishing sentence I may have seen in quite some time, and I could not agree more.

“One cannot possibly discuss what happened to the role of agriculture/nature in value between Quesnay and today without talking about what happened to the meaning of “value,” conceived of as a moving target.  Rival theories of surplus value from Quesnay to Jevons will have to come into play.”

I often go on about the disastrous effect on economic theory of the Keynesian Revolution, but almost equally disastrous was the Marginal Revolution which undermined the classical theory of value, which was outlined comprehensively by John Stuart Mill in Book III Chapter VI of his Principles. Before I state my conclusion, I will just mention this, which comes from the brief profile of Mill that is on the HET website:

“John Stuart Mill’s greater economic performance was his magnificent 1848 Principles of Political Economy, a two-volume extended restatement of the Classical Ricardian theory.  He believed  Ricardo’s labor theory of value to be so conclusive that, in the beginning of a discussion on the theory of value, Mill confidently notes that:

‘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: the only difficulty to be overcome is that of so stating it as to solve by anticipation the chief perplexities which occur in applying it.’ (J.S. Mill, Principles, 1848: Book III, Ch. 1).

“Thus putting a stone on the matter, and burying supply-and-demand theory for another quarter-century.  When Jevons’s later grumbled at the ‘noxious influence of authority’ preventing the development of economics, there is little doubt he was referring to J.S. Mill.”

That is all we think we know about the classical theory of value and it could not be more completely wrong. Mill did not restate “Classical Ricardian theory”. He explicitly discussed supply and demand. If you go to Mill, the first two of the seventeen elements in his theory of value are firstly, that the issue is not price as such, but relative prices, and then secondly, that the “temporary or market value” of something can be determined by supply and demand. There is no labour theory of value to be found anywhere. This is what Mill wrote:

“I. Value is a relative term. The value of a thing means the quantity of some other thing, or of things in general, which it exchanges for. The values of all things can never, therefore, rise or fall simultaneously. There is no such thing as a general rise or a general fall of values. Every rise of value supposes a fall, and every fall a rise.

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.

The shallow reasoning and lack of depth in a modern textbook is a scandal, but is kept from most of us because no one knows what the economic theory of the past actually consisted of. If Spencer Banzhaf intends to be stating that “rival theories of value from Quesnay to Jevons” will need to be examined, then that is absolutely the case. What astonishes me is that both macro (which has replaced the classical theory of the cycle) and micro were much more profound among the later classical economists than amongst the majority of the economics profession today. We have more diagrams, they had a deeper understanding.

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5 Responses to John Stuart Mill and the theory of value

  1. TPL001

    The labour theory of value is bunk, as you know. At the least, however, is that modern textbooks purport to discuss value and pay lip service to marginal (subjective) value, while advocating objective value that ensues from some sort of post hoc objective notion of equilibrium. Just try and sell that idea to entrepreneurs – those who have to run businesses and sell real goods to real people in order to make a profit so that they can feed their families!
    Macroeconomics has replaced individual value in their modelling in favour of apparent Keynesian or socialist or state notion of objective value, revealed in general equilibrium. Rubbish.
    Further, one concern, though related, is the current expansion of state debt through the socialisation of credit. The element that the state controls here is indeed the time price of money – interest rates – which effect the value of money and all other things over time.

  2. I wonder if we’d understand value better if we understood the bartering system.
    Modern money seems to confuse value, making it too difficult to understand.
    No wonder classic economists of yor understood value better than we ever can. They existed in a time where bartering was much more common.

  3. David Brewer

    Steve, are you sure you go along with the other 15 of Mill’s 17 points?

    They seem to be a lot of mumbo-jumbo to me. Point three starts off with:

    Besides their temporary value, things have also a permanent, or as it may be called, a Natural Value, to which the market value, after every variation, always tends to return

    Evidence? Where do we find “natural value” beyond subjective marginal utility, which varies from one society and technology to another, and from one individual to another, and from one time and situation to another?

    Mill’s first answer is to posit a “scarcity value” which depends on limits on supply, whether natural or artificial (e.g. monopoly). If scarcity does not apply, and the supply can be increased indefinitely, then he says “natural value” depends on “cost value”, which seems to be just the crude labour theory of value – a thing’s “natural value” is its cost of production plus the level of profit acceptable to the producer.

    But where do we find all these “natural values”, supposedly determined by scarcity or cost, in nature? They seem to exist only in the realm of pure theory. All we can observe is price, for which subjective marginalism seems to provide a satisfactory explanation.

  4. Watch Your Back

    There’s no such thing as a Labour Theory of Value that is of any merit whatsoever.

    In one of his few lapses Adam Smith spent some wasted time trying to apportion prices to capital, labour and rent. He couldn’t find a fit.

    His friend David Hume observed “I think you’ll find the price is the price’.

  5. Steve Kates

    Dear David

    All 17 make perfect sense but you have to know what the words mean and the ideas that lie behind them. No one in Mill’s time had any problem with any of it or for quite a long time after, and we are looking at a period from say 1848 to 1916 at least. The notion of Natural Value was still being taught well into the twentieth century. If you wish to see the point more clearly, you will have to buy my book in June or go back into the classical theory of value. You could even read Mill who tries to explain the point but as I say, Mill is virtually impossible to understand today because economic theory has become so misbegotten that it is all but impossible to see what he meant if you start with a modern economics education.

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