Some Defunct Economist - John Stuart Mill - 8/2/2010

"Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist" - JMK

- From Brad DeLong's recent article at Project Syndicate:

"In 1829, John Stuart Mill made the key intellectual leap in figuring out how to fight what he called “general gluts.” Mill saw that excess demand for some particular set of assets in financial markets was mirrored by excess supply of goods and services in product markets, which in turn generated excess supply of workers in labor markets.

The implication of this was clear. If you relieved the excess demand for financial assets, you also cured the excess supply of goods and services (the shortfall of aggregate demand) and the excess supply of labor (mass unemployment).

Now, there are many ways to relieve excess demand for financial assets. When the excess demand is for liquid assets used as means of payment – for “money” – the natural response is to have the central bank buy government bonds for cash, thus increasing the money stock and bringing supply back into balance with demand. We call this "monetary policy."

When the excess demand is for longer-term assets – bonds to serve as vehicles for savings that move purchasing power from the present into the future – the natural response is twofold: induce businesses to borrow more and build more capacity, and encourage the government to borrow and spend, thus bringing the supply of bonds back into balance with demand. We call the first of these “restoring confidence,” and the second “fiscal policy.”

When excess demand is for high-quality assets – places where you can park your wealth and be assured that it will still be there when you come back – the natural response is to have credit-worthy governments guarantee some private assets and buy up others, swapping them out for their own liabilities and thus diminishing the supply of risky assets and increasing the supply of safe assets. We call this “banking policy.”"

What's interesting is that he has an entirely money-demand-centric depiction of fiscal policy here. That's important, but I don't think it's really exhaustive of the case for fiscal policy. Putting it this way, though, makes it sound like a lot of the stuff the MMT school says.

- A couple months ago, Harper's Magazine had this post on John Stuart Mill and independent judgement. The first thing I thought of reading the passage was Emerson. The author of the article then of course went on to connect the sentiments with Emerson, as well as Shopenhauer. It's an interesting piece - it ties in some literary treatment of the sort of lack of judgement that Mill was concerned with, and then it questions the extent to which technological development has dulled our ability to make these essential judgements.

- This is the New School for Social Research's John Stuart Mill page.

- This is a post I wrote a little while back on Mill's "fourth principle" that "demand for commodities is not demand for labor". This point has actually come up in some research I've done recently on the interwar literature on technological unemployment, which I'm going to be incorporating into the Lovecraft piece and in an encyclopedia entry on technological unemployment that it looks likely that I'll get to write.

- Finally, Ayaan Hirsi Ali is quite smitten with John Stuart Mill (and John Locke, and Jon Stewart). She recently told Stephen Colbert that she prefers all three of them to Jesus Christ.