I’m reading John Stuart Mill’s “On the influence of consumption on production” from a book called “The critics of Keynesian Economics” and I’m confused about what J.S. Mill is arguing and which side he is taking.
I understand this to be about Say’s law, but he starts talking about sojourners arriving in a foreign country, living there unproductively upon their means, and spending their incomes there, asking whether or not it will benefit the country that received the foreigner. Is this all an analogy to Say’s law? How does it relate to Say’s law/Keynesian Economics and what side is he taking; that the sojourner will or won’t benefit the foreign country? If you’re familiar with this, can you help me understand?
Mill is arguing that production, not consumption, is what generates wealth. He points out that it is a fallacy to conclude from the fact that an individual producer is better off if more people to buy his output, that everyone is better off if aggregate consumption is larger. He then distinguishes between unproductive consumption and saving, the latter of which provides a fund of consumption for workers who can then specialize in production without having to produce their own consumption goods. This process raises productivity and therefore, the wealth of people in the economy.
So if foreigners come to a country and buy goods for their own consumption, production overall is not stimulated. It is merely shifted away from goods with less demand toward goods with more demand.
Many commentators have viewed this essay as an indication that Mill was half-hearted toward Say’s Law, e.g. that he believed that it was only necessarily true in a state of barter. But this is clearly wrong if you look at the essay in its entirety – Mill’s aim is to show how, even if Say’s Law is true, you can still have a situation where it appears to the uninitiated that there has been general overproduction of all goods. This misunderstanding is pretty clearly caused by the fact that ever since Keynes, economists have tended to implicitly accept that there is empirical content to Say’s Law – that it is designed to show that recession is impossible or unlikely; viewed from this 20th-century perspective, Mill’s discussion does indeed seem like apostasy. But of course, the premise is wrong – Say’s Law does not say anything about the possibility or likelihood of recession.
I highly recommend Steven Kates’s book Say’s Law and the Keynesian Revolution for a deeper look at this question.