7.John Stuart Mill's theory of value

John Stuart Mill's theory of value

John Stuart Mill's theory of value and relative prices presents a departure from Ricardo's labor theory of value. Mill emphasized the continuity between his theory and the classical tradition. He proposed a cost of production theory of value, where money costs reflect the real costs of labor and abstinence. Mill and Senior had comparable theories of value, though Mill abandoned the search for an absolute value and focused on explaining relative prices. He recognized that land rent could be a social cost when alternative land uses exist.

Mill categorized commodities into three groups based on supply elasticity. Rare, Manufacturing and Agriculture. He argued that prices depended on cost of production for manufactured goods with perfectly elastic supply, while agricultural goods' prices depended on cost in the least favorable conditions due to increasing costs. He applied the principle of diminishing marginal returns to agriculture but not to manufacturing. Although he acknowledged that both utility and difficulty of attainment were necessary for a commodity to have a price, his terminology sometimes obscured the application of supply and demand laws to all three commodity groups.

Mill discussed equilibrium prices and recognized how competition equalized demand and supply, resulting in price adjustments. He did not use mathematical equations but laid the foundation for supply-and-demand functions. Mill made original contributions to value theory in areas like non-competing labor markets, pricing for firms producing multiple products in fixed proportions, rent as a price-determining factor when land has alternative uses, and economies of scale. He believed that value theory was complete by his time.

Despite some humorous criticism of his belief that the theory of value was complete, it can be argued that our understanding of supply and demand in competitive markets hasn't fundamentally changed since Mill, although more technical advancements and insights have been made. Mill's main gap was his inability to analyze less-than-perfectly competitive markets, a gap that some argue still exists today.

Written by,

K.P.P.Madusanka

 

(Oxford University Press, 1981)

References

Oxford University Press. (1981). John Stuart Mill on value. The Cambridge Journal of Economics,(67-69).