CHAPTER

12
Mills Theory Mills Theory
INTRODUCTION
John Stuart Mill, the eldest son of James Mill, was known to his contemporaries as an infant prodigy. He learnt Greek at the age of three; arithmetic and history at the age of six; Latin at the age of eight; logic at the age of twelve; economics at the age of thirteen; and Benthamite political philosophy at the age of fifteen. He read and learnt all this at home under his father, James Mill, and acquired the habit of going for walks with him and narrating to him what he had read the previous day. Ricardo was a close friend of James Mill at whose instigation he had written his Principles of Political Economy and Taxation. So John Stuart Mill knew Ricardo personally, visited him and as a child had been taken on walks by the latter. Naturally, he became the defender of Ricardian doctrines against critics. In 1848, Mill published his Principles of Political Economy with Some of their Applications to Social Philosophy.l This book saw seven editions during Mills life-time, and was the accepted text book both in British and American universities for about 50 years when Marshalls Principles of Economics (1890) replaced it by 1900.

1. Its 7th edition, 1871, ed., W.J. Ashley, was first published in 1909. Also available in Collected Works of John Stuart Mill, Vols. II and III, ed., J.M. Robson. 1965.

102

The Economics of Development and Planning

THE THEORY
Mill regarded economic development as a function of land, labour and capital. While land and labour are the two original factors of production, capital is a stock, previously accumulated of the products of former labour. Increase in wealth is possible only if land and capital help to increase production faster than the labour force. Wealth consists of tools, machines, and skills of the labour force. It is productive labour that is productive of wealth and of capital accumulation. The rate of capital accumulation is a function of the proportion of the labour force employed productively . Profits earned by employing unproductive labour are merely transfers of income; unproductive labour does not generate wealth or income. It is the productive labourers who do productive consumption. Productive consumption is that which goes to maintain and increase the productive powers of the community. It implies that productive consumption is an input necessary to maintain productive labourers. Control of Population Growth. Mill believed in the Malthusian Theory of Population. By population he meant the number only of the working class. He was, therefore, worried about the growth in number of productive labourers who worked for hire. He believed that population control was essential for improving the conditions of the working class so that they might enjoy the fruits of technological progress and capital accumulation. He propagated birth control as against moral restraint. Wages Fund. According to Mill, the elasticity of supply of labour is very high in response to a rise in wages. Wages generally exceed the minimum subsistence level. Wages are paid out of capital. Hence they are limited by the existing fund of capital meant for paying wages. Thus wage per head can be arrived at by dividing the total circulating capital by the working population. Wages can increase by an increase in the aggregate fund of capital employed in hiring labour or by a decrease in the number of workers. If wages rise, supply of labour will be high. Competition among workers will not only bring down wages but also keep some labourers out of employment. This is explained in Fig. 1 where D is the demand curve for labour. It is determined by the marginal product of labour. The supply of labour is given by S. When the labour is scarce relative to land and other means of production, the supply curve is S and the equilibrium wage S is OW. When labour is abundant relative to the S means of production, the supply curve is S and S the equilibrium wage is OW. The initial equilibrium is at point E where D and S curves interE W sect at a higher wage rate OW and the supply of E U labour is OL. But the competition among workW D ers will bring down the wage rate to the subsis- W E tence level OW and OL labour is employed. Further decline in the wage rate below the subsistence level to OW means increase in the consumption level of workers and EU unemployment exists. O L L L This is based on Mills notion that demand for Labour commodities is not demand for labour. It means Fig. 1 that income invested as advances of wages to Wages

Mills Theory

103

labour creates employment and not income spent on consumer goods. An increase in consumption will mean a decline in investment. So increase in investment leads to increase in the wage fund and to economic progress. Rate of Capital Accumulation. According to Mill, the rate of capital accumulation depends upon: (i) the amount of the fund from which savings can be made or the size of the net produce of industry, and (ii) the strength of the disposition to save. Capital is the result of saving, and savings come from the abstinence from present consumption for the sake of future goods. Although capital is the result of saving, it is nevertheless consumed. This means that saving is spending. Since savings depend upon the size of the net produce of industry, they increase with increase in profit and rent which go to make the net produce. On the other hand, the strength of the disposition to save depends upon: (a) the rate of profit, and (b) the desire to save or what Mill called the effective desire of accumulation. For Mill, profits depend on the cost of labour. So the rate of profit is the ratio of profit to wages. When profits rise or wages fall, the rate of profit increases which, in turn, raises the rate of capital accumulation. Similarly, it is the desire to save which tends to increase the rate of capital accumulation. Rate of Profit. According to Mill, the ultimate tendency in an economy is for the rate of profit to decline due to diminishing returns in agriculture and increase in population at the Malthusian rate. In the absence of technical improvement in agriculture and the growth rate of population being higher than the rate of capital accumulation, the rate of profit is within a hands breadth of the minimum, and the country is on the verge of the stationary state. However, the tendency of profits to be minimum can be checked by a number of factors: (1) capital losses during a crisis; (2) technical improvement; (3) the expansion of foreign trade; (4) government borrowing for unproductive expenditure; and (5), by capital exports to colonies to produce consumer goods for the home country. But none of these factors can continue indefinitely. So ultimately profits would have the tendency to be at the minimum level and the rate of accumulation to decline. The Stationary State. Mill thought that the stationary state was imminentat most a few years ahead and no moreits arrival being postponed by the above factors. He welcomed its arrival because it would ultimately lead to improvement in income-distribution and a large remuneration for labour. But this could only be possible by control on the increase in numbers among the working classes through provident habits and education. Thus in Mills stationary state, there could be no increase in either population or stock of capital, profit having reached the minimum necessary to prevent net dissaving by the economy as a whole. However, there might still be a rising standard of living due to improvement in the art of living and increased leisure through technical progress. Role of the State. Mill was in favour of the policy of laissez-faire which should be the general rule: every departure from it, unless required by some great good, is a certain evil. He, therefore, assigned the minimum role to the state in economic affairs. For instance, he thought it a necessary intervention by the state to reform the redistribution of the ownership of the means of production with such schemes as a ceiling on inheritance, peasant proprietorship, profit sharing, and co-operation. Even as the believer of laissez-faire, Mill favoured reforms in the institutional framework of the market. He wanted the state to pass laws against commercial

104

The Economics of Development and Planning

frauds and enforce them strictly. He also recommended compulsory education and a system of examinations by the state because the uneducated cannot be a competent judge of the commodity. And, successful production depends more on the qualities of the human agents, than on the circumstances in which they work. Similarly, Mill declared himself in favour of the regulation of working hours on the ground that public action is sometimes necessary to give effect to self-interests of individuals. Further, Mill was in favour of free trade and against protection and defended the imposition of protective duties temporarily in the case of infant industries. A CRITICAL APPRAISAL Of all the classical economists, Mill stands unique in that he built a theory in which he discussed almost all the factors which are essential for economic development in the present times. He stressed the importance of such factors as the rate of saving, the profit rate, the rate of capital accumulation, technical improvement, equitable distribution, expansion of foreign trade, institutional changes, etc. But Mill was not original as an economist, according to Prof. E. Roll. Prof. Stigler is more forthright when he says, Mill was not trying to build a new system but only to add improvements here and there to the Ricardian system. He tried to improve upon Ricardo fundamentally in two respects, viz., the stationary state and the wages-fund doctrine. But these have also been subjected to criticisms along with his other notions. 1. Stationary State not a Reality. Ricardo believed that the stationary state would come about in the future when capital accumulation stopped. For Mill, the stationary state was very near. He welcomed its arrival because it would lead to improvement in the distribution of income. But Mill turned out to be a false prophet because the stationary state that he foresaw has not arrived, nor does it show any signs of arrival. 2. Wrong Notion of Wages Fund. Unlike Ricardo, Mill believed that the wages fund depended upon the aggregate fund of capital and that wages were paid out of capital as advances. He, therefore, argued that trade unions could raise wages. Economists have vehemently criticised Mills wages-fund theory. Cannon called it the biggest blunder made in economic theory in modern times. Marshall called it the vulgar form of the wages-fund theory on which Mill expresses his meaning badly. The reason being that he related the wages fund to capital rather than to the national dividend. 3. Malthusian Theory is Wrong. Mill was unduly pessimistic about the growth of population in terms of the Malthusian theory. The Malthusian theory has been proved wrong in the capitalist countries of the world. 4. Law of Diminishing Returns not Operative. Similarly, Mills belief in the operation of the law of diminishing returns on land has also been proved wrong by the technological progress that has taken place in the advanced countries. 5. Laissez-faire not a Practical Policy. Mill favoured the policy of laissez-faire in economic affairs, but such a policy is impractical. In fact, no economy can function in which there is perfect competition, and no economy can grow without state help in one form or the other. APPLICABILITY OF MILLS THEORY ON UNDERDEVELOPED COUNTRIES Mills views about capital accumulation, diminishing returns, population growth and limited role of the state are applicable to underdeveloped countries.

Mills Theory

105

According to Mill, the principle of accumulation is weak in UDCs. People neither save nor work in order to save except in response to enormously high profits. Productivity is low because capital is scarce. Drudgery is great due to lack of mechanical implements. Therefore, it is necessary to wait a considerable time for profits to emerge. What is needed in these countries is an increase of industry and of the effective desire for accumulation. For this, Mills suggested the following: (1) a better government; (2) moderate taxes; (3) more complete security of property and freedom from arbitrary extraction under the names of taxes. (4) a more permanent and more advantageous tenure of land securing to the cultivator as far as possible, the undivided benefits of the industry, skill and economy; (5) improvement of public intelligence, the decay of usages or superstitions which interface with the effective employment of industry and the growth of mental activity, and making the people alive to new objects of desire; (6) the introduction of foreign technology which would raise the marginal product of capital that is scarce because of the low profitability and saving; (7) importance of foreign capital which would make the increase of production independent of the adequate domestic supply of capital, stimulate the growth of capital and by its example, break the chain of habits, stimulate new ideas, develop the sense of economic aspiration and foresight and generate new wants. Mill believed that foreign capital might not raise the levels of living at any rate in the short run, but it could at least be a powerful stimulus to economic development. Mill believed in the Malthusian theory of population but with the difference that he favoured population control through birth control and not by moral restraint alone. The experience of underdeveloped countries proves that the Malthusian theory is applicable and that population can be controlled only by adopting birth control, as recommended by Mill. Mill was a staunch free trader and believed in the policy of laissez-faire. Naturally, he assigned minimum role to the state. But whatever state intervention Mill wanted that is applicable in full to underdeveloped countries. He recommended reforms in the redistribution of the ownership of the means of production through such measures as ceiling on inheritance, peasant proprietorship, profit sharing and cooperation. These are very relevant in the context of underdeveloped countries because there are inequalities of income and wealth. Similarly, Mill suggested reforms in the institutional framework of the market. Since underdeveloped countries are characterised by market imperfections, reforms in the institutional set-up are essential. Last but not the least, his emphasis on compulsory education and reduction of working hours of labourers is as true as it was when he wrote his Principles in 1848. As a matter of fact, no development is possible in underdeveloped countries without assigning some role to the state.