John Stuart Mill

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John Stuart Mill : biography

20 May 1806 – 8 May 1873

Wage fund

According to Mill, supply is very elastic in response to wages. Wages generally exceed the minimum subsistence level, and are paid out of capital. Hence, wages are limited by existing capital for paying wages. Thus, wage per worker can be derived by dividing the total circulating capital by the size of the working population. Wages can increase by an increase in the capital used in paying wages, or by decrease in the number of workers. If wages rise, supply of labour will rise. Competition among workers not only brings down wages, but also keeps some workers out of employment. This is based on Mill’s notion that "demand for commodities is not demand for labourers". It means that income invested as advances of wages to labour creates employment, and not income spent on consumer goods. An increase in consumption causes a decline in investment. So increased investment leads to increases in the wage fund and to economic progress.

Rate of capital accumulation

According to Mill, the rate of capital accumulation depends on: (1) "the amount of fund from which saving can be made" or "the size of the net produce of the industry", and (2) the " disposition to save". Capital is the result of savings, and the 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 saving is spending. Since saving depends on the net produce of the industry, it grows with profits and rent which go into making the net produce. On the other hand, the disposition to save depends on (1) the rate of profit and (2) the desire to save, or what Mill called "effective desire of accumulation". However, profit also depends on the cost of labour, and the rate of profit is the ratio of profits to wages. When profits rise or wages fall, the rate of profits increases, which in turn increases 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 a Malthusian rate.