‘What a country wants to make it richer, is never consumption, but production’

There was a passage in the Wall Street Journal’s Notable & Quotable column the other day from an essay written by John Stuart Mill in 1844, which I suppose was included because of how oddly pertinent it seemed. The final sentence argued that ‘what a country wants to make it richer, is never consumption, but production’, which seems to say something to our own current concerns but from a far distant past.

The passage quoted is from one of the most important economic statements ever made. It was Mill summing up conclusions reached by virtually the entire economics profession at the end of one of the most important economic debates ever held. And it was a conclusion that would remain in place until overturned by John Maynard Keynes in his General Theory published almost a century later in 1936. Because this passage was taken from classical economic theory’s definitive defence of Say’s Law.

And the question of whether Say’s Law is in fact valid may be the single most important question we must ourselves deal with today.

It is very difficult, however, to make this point understood. Start with the word ‘consumption’. Our ears are so attuned to Keynesian theory that we hear the word and think the discussion is about purchases made by the final buyers of goods and services bought for their own end use.

That, however, is not what consumption meant to Mill and the classics. When Mill discusses consumption, he is using the term to mean used up, such as we might say that a house was consumed by fire. You could have productive consumption, what we call investment, or unproductive consumption, where resources are used in the production of goods and services for their final buyers. But whatever else, consumption referred to the using up of resources, not buying a new fridge.

Mill’s point was that economies are not made better off simply by consuming our resources – using them up in various kinds of stimulus projects, let us say – but by creating value adding forms of output that contribute to our communal stock of useful products.

That is why Mill also wrote in that same essay that the ‘utility of a large government expenditure, for the purpose of encouraging industry, is no longer maintained’. In 1844, and indeed all the way up until 1936, the idea of using government spending as a stimulus was maintained only by economic cranks. Now, of course, it is the mainstream.

2 thoughts on “‘What a country wants to make it richer, is never consumption, but production’”

  1. Posted 09/03/2012 at 12:28 | Permalink

    I always savour a column on Say’s Law by Professor Kates!

  2. Posted 09/03/2012 at 19:35 | Permalink

    It is of the utmost importance to bring back the classical perspective to economics. For anyone interested in the full story behind the above topic, I highly recommend ‘Free Market Economics. An Introduction to the General Reader’. This excellent book is not just for the general reader, but just as much for the advanced economists that have never been taught the meaning of Say’s Law.

    Another very good introduction, taking into account the forgotten good in classical economics is George Reismans’s ‘Capitalism’. A huge book of 1100 pages, though.

    For beginners, students at any level of advancement, and professional and otherwise accomplished economists ‘Free Market Economics’ by Steven Kates is the best (initial) read. Well-written, intelligible, original, not too lengthy, with an important message that serious economics cannot afford to ignore.

    Best regards from Germany.

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