Yet, despite Mill's inconsistency and muddle, his stance of humility suddenly dissolved into his astonishingly arrogant claim that his pronouncements would be the last word for all time on the theory of value. In a famous faux pas, Mill proclaimed 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’. Now, it is true that Mill had the bad luck to be writing these words only two decades before the ‘marginalist revolution’ completely overturned value theory. But, even so, it was inexcusable for anyone as knowledgeable as Mill was supposed to be in scientific method and the history of science to be caught writing this sort of statement. And Schumpeter tells us that the same sort of hubris had marked Mill's System of Logic.7 It is an odd paradox indeed to see a thinker habitually changing course and qualifying every thought and deed, and yet insisting that his is the last conceivable word on any particular subject!
Upholding and restoring the dominance of Ricardo's theory of profit, Mill insisted on returning to the Ricardian dictum that profits are dependent on, and inversely proportionate to, wages. Cleverly paying obeisance to his friend Nassau Senior's concept of ‘abstinence’, and agreeing with Senior that profits (interest) were ‘the remuneration of abstinence’, Mill managed to weaken the concept and to return somehow to insisting on labour as the sole cause of profits.
On wages, too, Mill returned squarely to Malthus, differing only by holding out the hope of ameliorating the alleged problem of population growth by enthusiastic and determined use of birth control. The change over the half-century was the difference between the stern preacher and the ‘progressive’ feminist. Alexander Gray's comment on Mill's passion against what he considered to be excessive births is both witty and apposite:
In writing on the population question, his [Mill's] voice quivers with a righteous indignation which leads him to a violence of language nowhere to be found in Malthus. Excessive procreation is for Mill on the same level as drunkenness or any other physical excess, and those who are guilty should be discountenanced and despised accordingly.
One of John Stuart Mill's most famous moves in economic theory was his typically dramatic, emotional, and yet carefully hedged ‘recantation’ of the wages fund doctrine. In company with other classical economists, having explained the supply of labour by the quantity of population, Mill then went on to explain the demand for labour, rather sensibly, as the sum of gross savings, or circulating capital, available for paying workers until the product was produced and sold: this available amount he called the ‘wages fund’. This concept was used, again quite intelligently, to demonstrate that should labour unions be able to raise wages for one part of the labour force, this rise could only be at the expense of lowering wages somewhere else.
The wages fund analysis of the demand for labour was, in one important sense, a retreat from Say and others who emphasized that the demand for and prices of factors of production are determined by their productivity in producing consumer goods desired and demanded by the public. For Mill, this retreat was part and parcel of his orchestrated shift back to Ricardo. On the other hand, the wages fund doctrine was correct as far as it went: at any given time, there is a certain amount of gross savings to be invested in paying factors of production. Therefore, paying more in one place because of pressure by suppliers of labour will necessarily reduce demand and payment elsewhere. On the other hand, the wages fund is clearly only a first approximation: for the fund of circulating capital at any given time is not only used to pay wages, but also to pay rent to landlords and interest (profit) to capitalists.
In 1869, Mill's friend and fellow high official at the East India Company, William Thomas Thornton (1813–80), wrote a book entitled On Labour critical of Mill's wages fund doctrine. Partly this came as a needed attempt to bring consumer demand, and notably expected consumer demand, back into the analysis. But Thornton's main thrust was that the capital fund was not only a fund for wages but also a fund out of which to pay profits to capitalists (and, he might have added, rents on land).
Mill's review of Thornton's book in the Fortnightly Review was overly dramatic enough to be seized upon as a ‘recantation’, and as an indication that unions could indeed raise the average level of wages for workers. Actually Mill, as Schumpeter points out, was simply explaining the doctrine more carefully, and pointing out what should have been obvious: that yes, wages could conceivably increase at the expense of driving profits to zero, but that in the not too long run the result would be failure to maintain as well as to expand capital, and hence the impoverishment of everyone, not least of all the working class. There is nothing here contradictory to the wages fund doctrine. It should be added that Colonel Robert Torrens had made the very same ‘concession’ on the wages fund 35 years before, and had received none of the attention and noise.10 The essence of the misnamed ‘wages fund’ theory was simply a fundamental part of the solidly grounded and established Turgot-Smith theory of capital.11 How little real significance Mill attached to his ‘recantation’ is demonstrated by his failure to alter any of his discussion of the wages fund in the seventh and last edition of the Principles published during his lifetime (1871), explaining in his new preface that the discussion had not ripened sufficiently to make such a change.
As Professor Hutt has pointed out in his classic work, the prevalent idea that modifying the wages fund theory led straight to economists justifying unionism and collective bargaining was a canard and a red herring created for the occasion by Mill. Adam Smith and McCulloch had justified collective bargaining on the vague notion of labour's alleged ‘disadvantage’ in bargaining in the labour market. Indeed, Mill himself in the Principles, while continuing to hold his original wages fund view, offered the same justification, plus the Ricardian theme that without such collective bargaining wages would be driven down to subsistence level (the iron law of wages once more!). And indeed, Henry Fawcett (1833–84), professor of political economy at Cambridge and a devoted Millian, continued to cling to the original version of the wages fund theory as well as labour's ‘disadvantage’ argument for trade unions. On the other hand, for example, Mountifort Longfield, a proto-marginal productivity theorist, took the hard line in opposing unions as never being able to effect a general wage increase.
Mill's persistent adherence to the Turgot-Smith-Ricardo theory of savings and capital is demonstrated by one of his famous ‘fundamental propositions’ on capital, that ‘the demand for commodities is not the demand for labour’. Mill was correct on the fundamental nature of this proposition, on the failure of most economists to grasp it, and in hailing Ricardo and Say as two of the economists to stress it particularly. It is no wonder that modern economists, steeped in the fallacies of Keynes, find the proposition ‘puzzling’. What it means is that at least the proximate demand for labour is supplied by savings, even though the ultimate demand may be supplied by consumers. More than that: Mill here had hold of the basic Turgot discovery of the time-structure of capital, the fact that savings pays for the factors ahead of production and sale, and that the consumers are last down the line of production. Furthermore, savings builds up a capital structure and increases funds paid to wages and other factors, which cannot get paid unless savings are first taken out of income previously supplied to producers by consumers. This theory of capital provided the building-block for the developed Austrian theory of the time-structure of capital.
It is then not surprising that Mill also supported Say's law, to which his father had contributed so much.13 In monetary theory, Mill stood squarely in the Ricardian tradition in fervent opposition to irredeemable paper money. However, he deserted that tradition, as we have seen, in favour of the banking school. And while from his banking school mentor, James Wilson, Mill learned of the malinvestments, especially in fixed capital, that occur in business cycle booms, he also adopted the disastrous Wilsonian belief that money plays a passive and unimportant role in these cyclical booms and busts. In this belief, significantly, he harked back to his father's only difference from Ricardo. Indeed, he also adopted a pre-Schumpeterian view that these overinvestment booms, followed by corrective recessions, were necessary to economic growth.