Fifteen years after the Global Financial Crisis: Recessions and Business Cycles in the History of Economic Thought

John Stuart Mill on Economic Fluctuations and Commercial Crises

Zouboulakis Michel, University of Thessaly

During the first six decades of the 19th c. the British economy suffered five major fluctuations that culminated in the crises of 1815, 1825, 1836, 1847 and 1857. Economists of that time, lacking theoretical and statistical tools were only providing “hypotheses as regards the ‘causes’ of crises or cycles” according to Schumpeter (1954, 739, n.2). Among these hypotheses we find ‘underconsumption due to low wages’ (Sismondi), ‘underconsumption due to oversaving’ (Malthus), ‘overproduction due to excessive accumulation of capital’ (Chalmers), or ‘overproduction due to disruptions of trade’ (Tooke and Overstone). Mill (1844) was the first economist to point out the differences between a barter and a monetary economy and the first to apprehend the full consequences of credit money. In his Principles of Political Economy (1848, Book III, ch.12, 14 and 23; Book IV, ch.4) Mill explained cyclical fluctuations in terms of expectations of profits. Against naïve overproduction and/or underconsumption theories, Mill offered a more complete theory based upon the ability of merchants and traders to meet the effective demand. A disequilibrium between supply and demand arises periodically either because the purchasing power of consumers grows artificially through an overextension of credit, either because the production capacity falls as a consequence of the unavailability of circulating capital due to over-investment. Furthermore, Mill believed that economic fluctuations are related to the general tendency of profits to fall as economic accumulation advances. This tendency depends on the strength of the effective desire of accumulation and the degree of security of invested capital (or the risk of investment). Both conditions tend to fall in the long run. But, “commercial revulsions” following “periods of over-trading and rash speculation” may result in a massive waste of capital, giving thus the possibility of profit expectations to rise again. This phenomenon explains “the almost periodical occurrence of commercial crises” and is related to the fluctuations of the rate of interest and the role of money as credit.

Area: Eshet Conference

Keywords: JS Mill, economic fluctuations, commercial crises

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