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week 1: 2. classical school (1776-1871): John Stuart Mill (.... Transition…
week 1: 2. classical school (1776-1871):
John Stuart Mill
.... Transition between Classicism and Neo-Classicism:
John Stuart Mill (1806-1873)
No formal education
(letter to Bentham) BEKIJK OP SLIDE
Employed at East India Company
Contributions to philosophy and theoretical economics
Works:
A System of Logic (1843)
Principles of Political Economy (1848)
Essays on Some Unsettled Questions of Political Economy (1844)
Price theory -1
Adam Smith’s and Ricardo’s theory of price formation was driven by supply side of economy.
Prices determined by production costs
Complexities due to lack of influence from demand side:
In Ricardo’s extended price model with decreasing returns, demand must play a more active role in price determination. Ricardo was unable to clarify this in his theory.
Ricardo’s theory of comparative advantage could not explain how surplus from trade was split between two countries (i.e. how international price related to national prices)
Price theory -2
John Stuart Mill introduced the demand side in this economic theory, and hence made 3 major innovations to the theory of value (or price theory):
General situation: prices adjust to the level where supply equals demand of a commodity.
General equilibrium concept: aggregate demand for all commodities equals aggregate supply (Reciprocal demand)
Price elasticity
Price formation in international trade: prices adjust to the level where the value of exports equals the value of imports.
Fundamental principle of price formation is tendency of market mechanism to equate supply and demand.
Theory of the wage fund
Initially, Mill accepted notion of wage fund.
In 1869, Mill supposedly rejected the theory of the wage fund, since it’s implications were not consistent with actual functioning of the economy:
Trade unions are unable to influence wages: actual evidence shows they could!
--> important step forward to new wage formation theory (few years later by marginalists)
Conclusions
Mill made some important adjustments to the existing view of the classical school.
With the death of Mill, classical school ended and the marginalist revolution became visible.