D. Mill’s Theory of Development– Explained!

J.S. Mill made a valuable contribution to the theory of economic development. He analyzed various factors of economic growth.

He regarded economic development as a function of land, labour and capital.

While land and labour are two original factors of production and capital is stock previously accumulated of the products of former labour.

The wealth of a nation can increase only if land and capital help to increase production faster than labour force. Wealth refers to those things which can be kept for sometime before they are put to use. It consists of tools, machines and the skill of labour force.

Mill emphasizes the materiality of the product. He also distinguishes between productive consumption and unproductive consumption. Productive consumption is that which goes to maintain and increase the productive powers of the community. Only the productive consumers are productive labourers but all consumption is not productive. Worker’s consumption of subsistence goods is productive while that of luxuries is unproductive.

Control of Population Growth:

Mill believed in Malthusian theory of production. The law of population growth throws light on the tendency of population to increase faster than the increase in the means of living. The result is restriction on population growth by the checks or preventive checks. Positive checks are made in UDC and among laboring classes, preventive checks are generally practiced among the middle classes of advanced countries. Emigration is an effective measure to relieve the excessive population problem.

Wage Fund:

The elasticity of labour supply is very high in response to rise in wages. Wages generally exceed the subsistence level. Wages are paid out of capital and hence they are limited by the existing fund of capital. Wages are determined by the demand and supply of labour. By capital, Mills means “only circulating capital and not even the whole of that but the part of which is expanded in the direct purchase of labour” and by population is meant “the numbers only of the laboring class, or rather of those who work for hire”. Any change in wage rate is affected by change in capital or population.

Mill pointed out that wages cannot rise buy by an increase of the aggregate funds employed in hiring labourers, or a diminution in the number of the competitors for hire, nor fall except either by a diminution of the funds devoted to paying labour or by an increase in the numbers of labourers to be paid. Thus, the rise and fall in wages depends upon whether capital grows faster than population or population than capital. This is based on Mill’s notion that, “demand for commodities is not demand for labour”.

It implies that income invested on advances of wages to labour create employment and not income spent on consumer goods. Thus, increase in consumption will lead to decline in the investment. So increase in investment leads to increase in the wage fund and it leads to economic progress.

Role of Capital Accumulation:

Capital is defined as the stock previously accumulated of the products of formal labour. Greater the capital larger will be the size of wage fund and higher will be the demand for productive labour. Capital is the result of saving and saving means the abstinence from present consumption for the sake of future goods.

According to Mill, capital accumulation depends upon:

(а) The amount of fund from which saving can be made.

(b) The strength of the disposition to save which, in turn, depends upon the rate of return of saving or the rate of profit and the willingness to save at a given rate of profit.

For Mill, profit depends upon cost of labour, so that rate of profit is the ratio of profit to wages. When profit rises or wages fall, the rate of profit increases which, in turn, increases the rate of capital accumulation.

Similarly, the rate of capital accumulation can be increased by increasing the desire to save.

Rate of Profit:

According to Mill, the ultimate tendency in an economy is for the rate of profit to decline due to diminishing returns in agriculture and increase in population at a Malthusian rate. In the absence of technical improvements in agriculture and the growth rate of population being higher than rate of capital accumulation, the rate of profit is “within a hand’s breadth of minimum”, and the country is “on the verge of stationary state”.

The preventive measures for minimum rate of profits are as under:

1. Capital losses during crisis.

2. Technical improvements.

3. Expansion of foreign trade.

4. Government borrowing for unproductive expenditure.

5. By capital exports to colonies to produce consumer goods for home country.

But none of these factors can continue indefinitely so ultimately the profits would have the tendency to be at the minimum level and the rate of accumulation declines.

Role of State:

J.S. Mill was a staunch supporter of the policy of laissez-faire. Every departure from it unless required by some great good is a certain evil. He, therefore, assigned the minimum role to the state in economic affairs. Mill recognized a number of exceptions to the general rule of Laissez-faire and felt the necessity of government intervention.

The government has an important function to civilize the citizens by educational facilities. Education must be compulsory. Mill was first to put forward an economic justification for government intervention in the field of education. ‘The uncultivated cannot be competent judges of cultivation’ i.e. the buyer of education is not a competent judge of commodity.

Mill did not think of education as an investment in human capital which directly stimulates economic growth, but education contributes to economic growth indirectly by raising the character of people, by promoting civic peace and by reducing the numbers. Mill further favoured free trade and was against protection and defended the imposition of protective duties temporarily in the case of infant industries.

Stationary State:

Mill thought that stationary state was imminent—”at the most a few years ahead and no more”—its arrival postponed by above factors. He welcomed the stationary state as it leads to improvement in income distribution and large remuneration for labour. But this is possible only through control on increase in numbers of working classes, through provident habits and education.

Thus, “In Mill’s stationary state, there could be no increase in either population or stock of capital, profit having reached the minimum necessary to prevent net disserving by the economy as a whole. However, there might still be a rising standard of living due to improvements in the art of living and increased leisure through technical progress”.