JS Mill and the firm

Another, possible, proto-neoclassical, who wrote on the economics of the firm, if not strictly on the theory of the firm, was John Stuart Mill. While Mill is most often thought of as a classical economist, Ekelund and Hebert (2002: 198) argue he can be considered as a proto-neoclassical economist.

According to Schumpeter (1954: 556), Mill introduced the concept of the entrepreneur to the English speaking economics literature. The influence of J. B. Say helped Mill go beyond just analysing the role of the owner of the factors of production and begin focusing on the role of the entrepreneur and on the internal organization of the firm (Zouboulakis 2015: ???).

For Mill, the number of collective organisations, including firms - both investor controlled and co-operatives, would increase as wealth increases,

"[a]s wealth increases and business capacity improves, we may look forward to a great extension of establishments, both for industrial and other purposes, formed by the collective contributions of large numbers ; establishments like those called by the technical name of joint-stock companies, or the associations less formally constituted, which are so numerous in England, to raise funds for public or philanthropic objects, or, lastly, those associations of workpeople either for production, or to buy goods for their common consumption, which are now specially known by the name of co-operative societies" (Mill 1848: 699).

Mill gave the first discussion of joint production and of the importance of the scale of production. With regard to joint production, George Stigler writes,

"Mill clearly formulated the problem of joint production, i.e., production of two or more products in fixed proportions. He gave the complete and correct solution: the sum of the prices of the products must equal their joint cost, and the price of each product is determined by the equality in equilibrium of quantity supplied and quantity demanded" (Stigler 1955: 297).

As to the significance of the scale of production Stigler adds that,

"Mill's chapter (Bk. I, c. IX), " Of production on a large, and production on small, scale", is the first systematic discussion of the economies of scale of the firm to be found in a general economic treatise. It would take us afield to analyse this chapter in detail, but we may point out that Mill was the first economist to notice that one can deduce information on the costs of firms of different sizes from their varying fortunes through time" (Stigler 1955: 298).

Zouboulakis (2015: ???) writes that "[a]mong the advantages of production on a large scale, he [Mill] mentions the more advanced division of labour, the less than proportionate increase of "the expenses of a business”, the greater possibility of investment to "expensive machinery" and ``the saving in the labour of the capitalists themselves" (1848, 132-6)".

Mill also scrutinised the advantages and disadvantages of the joint stock company. "On the one hand, only such a company can afford the amount of capital necessary to build important projects such as a railway, and to guarantee the continuity of such costly and risky business operations such as banking and insurance. On the other hand, he recognizes that "joint stock or associated management" has some disadvantages over ``individual management"" (Zouboulakis 2015: ???). Mill, like Smith, saw the potential for, what today we would call, principal-agent problems in the relationship between the owners and the managers of joint stock companies. The interests of the managers may not be aligned with the interests of the owners. When discussing methods to the alleviate such problems Mill makes the observation that

"[i]n the case of the managers of joint stock companies, and of the superintending and controlling officers in many private establishments, it is a common enough practice to connect their pecuniary interest with the interest of their employers, by giving them part of their remuneration in the form of a percentage on the profits. The personal interest thus given to hired servants is not comparable in intensity to that of the owner of the capital ; but it is sufficient to be a very material stimulus to zeal and carefulness, and, when added to the advantage of superior intelligence, often raises the quality of the service much above that which the generality of masters are capable of rendering to themselves" (Mill 1848: 141).

Interestingly, such observations give Mill more of a proto-modern feel than a proto-neoclassical feel. But, again, like Smith, Mill did not develop his insights into a full-blown theory of the firm.

Refs.:

• Mill, J.S. (1848). Principles of Political Economy with some of their Applications to Social Philosophy, 7 th edition 1873, re-edited by William J. Ashley 1909, New York: A. Kelley reprint, 1973.
• Schumpeter, J.A. (1954). History of Economic Analysis, London: Allen & Unwin.
• Zouboulakis, Michel S. (2015). 'Elements of a Theory of the Firm in Adam Smith and John Stuart Mill'. In George C. Bitros and Nicholas C. Kyriazis (eds.), Essays in Contemporary Economics: A Festschrift in Memory of A. D. Karayiannis (pp. 45-52), Heidelberg: Springer Cham.