Let me cut through this discussion in this way. I believe I understand
Mill’s Fourth Proposition on Capital to have a particular meaning. Based
on my interpretation, you will find published a major piece that
appeared as the cover story in “Quadrant”, one of the major political
magazines in Australia.  Its title was “The Dangerous Return of
Keynesian Economics” and was published in its online edition on 3
February 2009 before being published in the magazine itself in March.
And in the article I wrote this: 

“But just as the causes of this downturn cannot be charted through a
Keynesian demand-deficiency model neither can the solution. The world’s
economies are not suffering from a lack of demand and the right policy
response is not a demand stimulus. Increased public sector spending will
only add to the market confusions that already exist. 

“What is potentially catastrophic would be to try to spend our way to
recovery. The recession that will follow will be deep, prolonged and
potentially take years to overcome.” 

(
http://www.quadrant.org.au/blogs/qed/2009/02/the-dangerous-return-to-keynesian-economics
) 

In my view, I was explaining things as closely as I could to the way I
understood Mill. Although it is very unusual in these times to use Mill
as the basis for one’s macroeconomic ideas, I have nevertheless been
judging macro issues for many years in terms of my interpretation of
“demand for commodities is not demand for labour”. Precisely for that
reason and for no other I was convinced that the stimulus would prove
disastrous. Everything that has followed since has completely mirrored
my expectation. 

The choice is therefore this. Either what I said is a correct
interpretation of Mill and the consequences of the stimulus are just
what Mill, or any other classical economist would have said and for
straightforward reasons as they tried to explain things back in the
nineteenth century. Or I did not interpret Mill correctly – thought I
did but didn’t –  but have nevertheless been able to exactly predict
what would happen if the stimulus was introduced. 

I think I have been following Mill but who can ever say. But this I can
say. From the moment the stimulus began, I was so disgusted at the
reversion to Keynesian policy that I immediately began to write a text
on how economies work, right down to having a major section on Mill’s
Four Propositions on Capital. The book is my updated and very humble
version of Mill’s Principles, but has been modernised enough to have
included marginal analysis (as well as an extended section on the
history of economic thought). It was published in the United States just
this month as Free Market Economics: an Introduction for the General
Reader. Some of you may recognise the title as a knock off from Henry
Clay’s brilliant 1916 introductory text, Economics: an Introduction for
the General Reader. Clay has also been a major influence on my thought. 

Economics is at a crossroads. In my view the economics of The General
Theory are now so thoroughly discredited that there is no return. We
will continue to teach Y=C+I+G at our peril. A very good place to start
the reorganisation of the macro half of our discipline would be with
Mill’s Four Propositions on Capital, especially with the second, that
investment is the result of saving. I will finish this post with Mill’s
judgment on those who fail to understand the meaning of his Fourth
proposition, on those who do not understand that the demand for
commodities is not demand for labour: 

“It is, to common apprehension, a paradox; and even amongst political
economists of reputation, I can hardly point to any, except Mr. Ricardo
and M. Say, who have kept it constantly and steadily in view. Almost all
others occasionally express themselves as if a person who buys
commodities, the produce of labour, was an employer of labour, and
created a demand for it as really, and in the same sense, as if he
bought the labour directly, by the payme“It is no wonder that political economy advances slowly, when such a
question as this still remains open at its very threshold.” 

This is a judgment made by Mill on Keynesian economics, and on our
economics today as well. The financial crisis was as nothing in
comparison with the crisis that now exists within economic theory. 



Dr Steven Kates
School of Economics, Finance
    and Marketing
RMIT University
Level 12 / 239 Bourke Street
Melbourne Vic 3000

Phone: (03) 9925 5878
Mobile: 042 7297 529