Monday, November 27, 2017

J.S. Mill ignores the internal factor

Keynes quotes J.S. Mill:

What constitutes the means of payment for commodities is simply commodities. Each person’s means of paying for the productions of other people consist of those which he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because every one would have twice as much to offer in exchange. [Principles of Political Economy, Book III, Chap. xiv. § 2.]

But we do not exchange commodities for commodities. We exchange commodities for money, and money for commodities.

Does it matter? Yes, because if somebody saves a dollar, it means that someone else will fail to sell a dollar's worth of their commodities. That puts a small wrinkle in Mill's picture of the economy.

As the economy "matures", more and more dollars are saved. Instead of showing one small wrinkle, the economy comes to look like a crumpled ball of waste paper. And at that point, that's about all it is.

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