In my earlier response to Steve, I stated:
> It seems to me that Steve interprets Mill to have been arguing that 
> /only/ the demand (or creation of) /capital goods/ increases the 
> demand for labor. Thus, he says,
> " If you build factories,steel mills, transport networks or whatever 
> which increase an economy’s productivity – that is, if you increase 
> the amount of capital available – you will increase the ability for 
> that economy to employ more employees at the going real wage and even 
> perhaps increase the real wage of those who are already working. If 
> instead resources are used unproductively, in indulging in various 
> forms of current consumption, then the capital base is not extended 
> and an economy’s ability to employ is diminished and may even contract."
> But if that is all Mill meant, then Mill had a problem.  Even 
> consumption goods need labor to cooperate with machinery or equipment 
> for their production.
It turns out that Steve's interpretation of Mill is not what Mill meant 
to say.  Indeed, had Steve taken my suggestion about trying to 
understand the meaning of "capital" in Mill's (and other classical's) 
analysis, he would have recognized the problem with his interpretation 
of Mill's statement.

Mill's declaration that "Demand for commodities is not demand for 
labour" refers to the past, a retrospective analysis.  The funds 
("capital") needed to hire labor to produce a commodity that is 
purchased now must /previously/ have been acquired by the producer 
(savings or loanable capital).  Thus, Mill says, "What supports and 
employs productive labour, is the capital [funds] expended in setting it 
to work, and not the demand of purchasers for the produce of the labour 
when /completed/.  Demand for commodities is not demand for labour.  The 
demand for commodities determines in what particular branch of 
production the labour and capital shall be employed; it determines the 
/direction/ of the labour; but not the more or less of the labour 
itself, or of the maintenance or payment of the labour.  These depend on 
the amount of the capital [funds], or the funds directly devoted to the 
sustenance and remuneration of labour" (my emphasis on "completed").

We also can find the relevance of the wage rate in determining the ratio 
of labor to capital goods in production in Mill's analysis in chapter 9 
of Book 2 where he says, "Wages depend ... on the proportion between the 
number of the labouring population, and the capital [wages fund] or 
other funds devoted to the purchase of labour; we will say, for 
shortness, the capital.  If wages are higher at one time or place than 
at another, ...,  it is for no other reason than because capital bears a 
greater proportion to population.  It is not the absolute amount of 
accumulation or of production, that is of importance to the labouring  
class; it is not the amount even of the funds destined for distribution 
among the labourers: it is the proportion between those funds and the 
numbers among whom they are shared.  The condition of the class can be 
betttered in no other way than by altering that proportion to their 
advantage; and every scheme for their benefit, which does not proceed on 
this as its foundation, is, for all permanent purposes, a delusion."

Did Alfred Marshall understand all this?  You bet, he did.  In 
Marshall's /Principles/, he draws upon Mill's distinction between fixed 
and circulation capital (1920, 63).  And circulation capital includes 
the wages fund.  Thus, I think when Marshall says Mill expresses the 
meaning his "fourth fundamental theorem" of capital "badly," Marshall is 
saying that the appearance of having denied  a prospective or future 
demand for labor from current demand for commodities can be misleading.  
Current demand for commodities validates past demand for labor for 
producing them.  That demand also may encourage a continuing (or 
increased) demand for labor for more production in the future.  How can 
one deny that?

Chapter 4, Bk 1, "Of Capital," in Mill's /Principles/ well clarifies the 
funds meaning of "capital" that is requisite for a clear understanding 
what he says in chapter 5, from which Steve takes the quotation of the 
fourth fundamental theorem regarding capital.  The double meaning of 
"capital" has been a problem for understanding the classical literature 
for a long time.  Hayek (1941, 9) even went along with Schumpeter's 
suggestion that the word be banned entirely from "scientific usage."  We 
will do better in trying to understand the classical language.

Thus, I think Steve errs in his declaration:
> the fact remains that just about no one seems to have understood his point [Mill's fourth fundamental theorem regardng capital] for more than a hundred years.
Alfred Marshall certainly did.  I agree with Mill's statement and also 
with Marshall's point that Mill expresses his theorem "badly."

James Ahiakpor

-- 
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542

(510) 885-3137 Work
(510) 885-4796 Fax (Not Private)