I find Roger Backhouse's contribution rather confusing.  On one hand, he 
says "Mill was addressing policy problems as they had emerged in the 
1840s, not those of the 1930s and simply did not engage with Keynesian 
economics."  On the other hand, he refers to Mill's "position, both in 
Unsettled Questions and in the Principles (chapters XIV and XXIV), with 
its talk of situations after financial crises in which people choose not 
to consume," and claims such to be "far more open to development in a 
'Keynesian' direction than Steve suggests."   But what Mill says in 
chapter XIV, Bk 3 (it is important to cite the books, too, for easy 
reference) about decreased consumption spending during a commercial 
crisis is applicable to the situation of the 1930s, when significantly 
disturbed confidence in the banking system led to people resorting to 
cash hoarding, a significant contraction of credit, and a falling price 
level:

"From the sudden annihilation of a great mass of credit, every one 
dislikes to part with ready money, and many are anxious to procure it at 
any sacrifice.  Almost everybody therefore is a seller, and there are 
scarcely any buyers; so that there may really be, though only while the 
crisis lasts, an extreme depression of general prices, from what may be 
indiscriminately called a glut of commodities or a dearth of money" (561).

But Mill did not prescribe government "stimulus" expenditures as remedy 
for such a situation -- the sort of Keynesian stimulus spending that has 
been preached in the U.S., e.g. by the likes of Paul Krugman and Robert 
Reich.  Rather, Mill says, "It is not a gradual advent of low prices, 
but a sudden recoil from prices extravagantly high: its immediate cause 
is a contraction of credit, and the remedy is, not a diminution of 
supply, but the *restoration of confidence*" (ibid.; my emphasis).  
Indeed, Mill concludes that paragraph with a denial of the "insufficient 
aggregate demand" proposition: "The permanent decline in the 
circumstances of producers, for want of markets, which those writers 
[including Sismondi] contemplate, is a conception to which the nature of 
commercial crisis *gives no support*."  In fact, we can find 
recommendations to deal with commercial crises that result in a falling 
price level from Henry Thornton, David Ricardo, J.S. Mill, and Alfred 
Marshall (I have summarized these in /HOPE/, Fall 2010), all pointing to 
the need to increase the quantity of money (cash) and restore public 
confidence in order to restore the flow of savings (not cash hoarding).  
The financial crisis in the U.S. did not result in a sharp contraction 
of prices, neither did the public rush to withdraw deposits into cash 
hoarding -- the deposit protection afforded by the FDIC assured against 
that.  Both M1 and M2 have increased since 2008, and so has the price 
level.  Countries that do not have deposit insurance may react 
differently in dealing with their banking system in the situation of 
bank runs.

I also think there is a useful insight from Mill's "badly" formulated 
fourth fundamental principle (Marshall's (1920, 680-81) own explanation 
of Mill's bad formulation couldn't be any clearer) that can be used 
against the Keynesian view that increased consumer spending is what is 
needed to recover from a recession.   Mill explains that current 
purchasers of commodities did not make the funds available for hiring 
the labor to produce them.  Those funds came from past savings.  
Similarly, when one asks, What makes it possible for consumers to 
purchase commodities?  The answer must be, from their having earned 
income from having been hired or from having produced and sold something 
(or borrowed from some other income earners).  Government stimulus 
spending mostly shuffles expenditures in the economy without adding to 
the total (unless funded by central bank new money).  So that, rather 
than focusing on consumption spending, one needs correctly to focus on 
understanding what could have disrupted the production process as to 
have reduced the demand for labor (increased unemployment).  In fact, 
that line of thought is what is developed in Say's Law of Market to 
which Mill contributed both in the /Principles/ and in the /Essays on 
Some Unsettled Questions/ ("Of the Influence of Consumption upon 
Production"), for which Keynes had, and Keynesians seem to have, little 
use.  So, I'm again at a loss in seeing how Mill's fourth principle 
regarding capital can be developed in a "Keynesian" direction, as Roger 
suggests.

James Ahiakpor

Roger Backhouse wrote:
> Though I have views on lessons that might be drawn from Mill in 
> relation to our present policy concerns, I will not explain them, as I 
> am not convinced that this is the right forum on which to get involved 
> in such a discussion: this is a forum on history of economics, not 
> macroeconomics. That might be one reason for lack of response to the 
> posting.
>
> What I would like to comment on is what I consider the absurd claim 
> that Mill's statement "is a judgment ... on Keynesian economics". Mill 
> was addressing policy problems as they had emerged in the 1840s, not 
> those of the 1930s and simply did not engage with Keynesian economics. 
> It is entirely legitimate for Steve to draw on Mill in order to 
> construct an argument about Keynes and modern economics. However, even 
> if it is right for him to acknowledge his debt to Mill, what we are 
> given is Steve's judgement on Keynesian economics, not Mill's. There 
> is nothing wrong with this, but it should be presented as a 
> contribution to contemporary macroeconomics, to be judged as such, and 
> not as an interpretation of history.
>
> There is, of course a historical point in Steve's arguments, and, 
> without wishing to suggest that Mill anticipated Keynes, his position, 
> both in Unsettled Questions and in the Principles (chapters XIV and 
> XXIV), with its talk of situations after financial crises in which 
> people choose not to consume, is far more open to development in a 
> "Keynesian" direction than Steve suggests. Mill's macroeconomics is 
> surely too complex to be captured by his Fourth Proposition on Capital 
> alone.
>
> Roger Backhouse
>
-- 
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542

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