Tuesday, August 18, 2009

How silly were J.S. Mill's views about income distribution?

J S Mill wrote: “The laws and conditions of the Production of wealth partake of the character of physical truths. There is nothing optional or arbitrary in them. ... It is not so with the Distribution of wealth. That is a matter of human institution solely. The things once there, mankind, individually or collectively, can do with them as they like. They can place them at the disposal of whomsoever they please, and on whatever terms” (Principles of Political Economy, 1848, II,1.1).

In 1983, Friedrich Hayek commented that this view of J S Mill “is really an incredible stupidity, showing a complete unawareness of the crucial guide function of prices ...” Hayek explains: “We must face the truth that it is not the magnitude of a given aggregate product which allows us to decide what to do with it, but rather the other way around: that a process which tells us how to reward the several contributions to this product is also the indispensable source of information for the individuals, telling them where they can make the aggregate product as large as possible” (Conference paper published in Nishiyama and Leube, “The Essence of Hayek”, p 323). This must have been one of the most intemperate remarks that Hayek ever made about anyone.

One of the things I have learned from Richard Reeves book, “John Stuart Mill, Victorian Firebrand” is that Karl Marx was also unimpressed by Mill’s attempt to separate the laws of production and distribution. Marx viewed this as “a shallow syncretism” (Reeves, p 210). He thought Mill was attempting to reconcile irreconcilables.

How silly were Mill’s views about distribution? In order to answer this question I think we need to understand Mill’s views about property and inheritance.

I see a lot of merit in much of what Mill wrote about property. For example: “The institution of property, when limited to its essential elements, consists in the recognition, in each person, of a right to the exclusive disposal of what he or she have produced by their own exertions, or received either by gift or by fair agreement, without force or fraud, from those who produced it” (“Principles of Political Economy”, II, 2.2).

It is when Mill writes about “landed property” that I begin to see problems: “When the "sacredness of property" is talked of, it should always be remembered, that any such sacredness does not belong in the same degree to landed property. No man made the land. It is the original inheritance of the whole species. Its appropriation is wholly a question of general expediency” (“Principles of Political Economy”, II,2.26). Given that land can be exchanged for other goods I don’t see how it is possible to argue that rights to ownership should not be recognized as the same for land as for other goods.

The problem that Mill had with “landed property” seems to be associated with the potential for a relatively small number of families to have a disproportionate amount of wealth and to exercise disproportionate political power. He was against the inheritance of “enormous fortunes which no one needs for any personal purpose but ostentation or improper power”. Richard Reeves points out that Mill was particularly concerned to distinguish between “earned” and “unearned” income. Mill viewed inheritances as “unearned” and argued that it would be socially beneficial to impose a limit on the amount any person could inherit.

Mill’s views about redistributive taxation were also influenced by his aversion to inherited wealth: “To tax the larger incomes at a higher percentage than the smaller is to lay a tax on industry and economy; to impose a penalty on people for having worked harder and saved more than their neighbours. It is not the fortunes which are earned, but those which are unearned, that it is for the public good to place under limitation. ...I conceive that inheritances and legacies, exceeding a certain amount, are highly proper subjects for taxation: and that the revenue from them should be as great as it can be made without giving rise to evasions ... such as it would be impossible adequately to check” (“Principles of Political Economy”, V, 2.14).

It seems to me that Mill’s claim that distribution of wealth should be viewed as entirely separate from production was silly – and contradicted by his own views about the adverse consequences of progressive taxation. Mill’s idea for an upper limit on the amount that anyone could inherit also seems extremely silly. I can see some wisdom in his views about taxation of inheritances, but even here it seems to me that he was fooling himself if he thought that inheritance taxes would impose no disincentives to working and saving. Despite all this silliness, however, Mill still had many sensible things to say about property rights and taxation.

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