Transcript The Organization of the Firm

 Jeremy Bentham was an English philosopher
and political radical. He is primarily known
today for his moral philosophy, especially his
principle of utilitarianism, which evaluates
actions based upon their consequences. The
relevant consequences, in particular, are the
overall happiness created for everyone
affected by the action. Influenced by many
enlightenment thinkers, especially empiricists
such as John Locke and David Hume, Bentham
developed an ethical theory grounded in a
largely empiricist account of human nature. He
famously held a hedonistic account of both
motivation and value according to which what
is fundamentally valuable and what ultimately
motivates us is pleasure and pain. Happiness,
according to Bentham, is thus a matter of
experiencing pleasure and lack of pain.
 http://www.iep.utm.edu/bentham/
 Asperger’s Syndrome and the Ecentricity and Genius of Jeremy
Bentham
 It is well known that Bentham was eccentric. He was ‘reclusive and inaccessible
[...] had a favourite walking stick named Dapple [...] an ancient cat [...] called the
Reverend Dr John Langborn, and a jokey vocabulary [...] [using] expressions like
“antejentacular circumgyration”, meaning a walk before breakfast’.2 After his
death his body was dissected, in accordance with his will, in front of a group of his
friends. Bentham was also a genius, producing remarkable work of undisputed
contemporary importance. Clearly he had an extraordinary mind. We asked
ourselves whether an explanation for Jeremy Bentham’s unusua positive and
negative qualities might emerge if his life were assessed from a present-day
psychological, psychodynamic or psychiatric perspective. While aware of the
reductionist pitfalls of psychobiography, we believed such an effort might
illuminate aspects of Bentham’s character and motivations and thereby assist
future biographers. Our findings suggested that, had he lived in the present
century, it is likely he would have received the diagnosis of Asperger’s syndrome.
 The Auto-Icon Story: http://www.ucl.ac.uk/Bentham-
Project/who/autoicon
 At the beginning of the Introduction to the Principles of Morals
and Legislation, Bentham writes:
 Nature has placed mankind under the governance of two
sovereign masters, pain and pleasure. It is for them alone to point
out what we ought to do, as well as to determine what we shall do.
On the one hand the standard of right and wrong, on the other the
chain of causes and effects, are fastened to their throne. They
govern us in all we do, in all we say, in all we think: every effort we
can make to throw off our subjection, will serve but to
demonstrate and confirm it. (Ch. 1)
 http://www.iep.utm.edu/bentham
 ….Bentham’s moral philosophy reflects what he calls at different times “the
greatest happiness principle” or “the principle of utility”—a term which he
borrows from Hume. In adverting to this principle, however, he was not
referring to just the usefulness of things or actions, but to the extent to which
these things or actions promote the general happiness. Specifically, then, what
is morally obligatory is that which produces the greatest amount of happiness
for the greatest number of people, happiness being determined by reference to
the presence of pleasure and the absence of pain.
 Thus, Bentham writes, “By the principle of utility is meant that principle which
approves or disapproves of every action whatsoever, according to the tendency
which it appears to have to augment or diminish the happiness of the party whose
interest is in question: or, what is the same thing in other words, to promote or to
oppose that happiness.”
 And Bentham emphasizes that this applies to “every action whatsoever” (Ch. 1).
That which does not maximize the greatest happiness (such as an act of pure
ascetic sacrifice) is, therefore, morally wrong.
 http://www.iep.utm.edu/bentham
 Natural Rights – the idea that there exists universal rights the exist
independent of social organizations.
 For Bentham, the term “natural rights” is “simple nonsense: natural
and imprescriptible rights, rhetorical nonsense,—nonsense upon
stilts.” http://www.iep.utm.edu/bentham
 Bentham’s ideas are also echoed in the work of John Stuart Mill
 http://www.csus.edu/indiv/g/gaskilld/ethics/utilitarianism%20notes.htm
 The Greatest Happiness Principle:
 “Actions are right in proportion as they
tend to promote happiness, wrong
as they tend to produce the reverse of
happiness” –John Stuart Mill
 Happiness = pleasure, and the absence of
pain
 Unhappiness = pain, and the absence of
pleasure
 http://www.csus.edu/indiv/g/gaskilld/ethics/utilitarianism%20notes.htm
 English philosophers John Stuart Mill (1806-1873) and
Jeremy Bentham (1748-1832) were the leading proponents
of what is now called “classic utilitarianism”.
 The Utilitarians were social reformers
 They supported suffrage for women and those without
property, and the abolition of slavery. Utilitarians argued
that criminals ought to be reformed and not merely
punished (although Mill did support capital punishment as
a deterrent). Bentham spoke out against cruelty to
animals. Mill was a strong supporter of meritocracy.
 Proponents emphasized that utilitarianism was an
egalitarian doctrine. Everyone’s happiness counts equally.
 http://www.csus.edu/indiv/g/gaskilld/ethics/utilitarianism%20notes.htm
 Utilitarianism = Hedonism?
 Objection: There is more to life than pleasure; knowledge, virtue
and other things are important too. Utilitarianism is a doctrine
worthy only of swine.
 Reply: Utilitarianism requires that we
consider everyone’s pleasure, not just our own. Also, says Mill,
there is more to life than physical pleasure. Pleasures of the
“higher faculties” (including intellectual pleasures inaccessible
to lower animals) are of higher quality than physical pleasures
(and thus count for more).
 Mill: "It is better to be a human being dissatisfied than a pig
satisfied; better to be Socrates dissatisfied than a fool satisfied. And
if the fool, or the pig, are of adifferent opinion, it is only because they
only know their own side of the question".

Jeremy Bentham (1748-1832) and the
utilitarians

Bentham offered the following argument for an
equal distribution of income:

The diminishing marginal utility of income
suggests that an equal distribution of income
would maximize social welfare.
1. As noted by Bentham: Equality diminishes
incentives, thus diminishing long-run social
welfare. Hence the distribution of income should
be more equal, but not perfectly equal.
2. Interpersonal utility comparison - comparing the
utility one person receives from a good with the
utility another person receives from the same
good.
 We cannot empirically measure utility. As a person
accumulates more income we can expect marginal
utility of each dollar to decline. However, we do not
know the starting point. So it may not be the case
that the marginal utility of an additional dollar for a
rich person is necessarily lower than the marginal
utility of an additional dollar for a poor person.
JOHN S. MILL
MAY 20, 1806-MAY 8, 1873
HTTP://WWW.ECON.UNT.EDU/~DMOLINA/ECON4510.HTM
JOHN S. MILL
HTTP://WWW.ECON.UNT.EDU/~DMOLINA/ECON4510.HTM
The particulars of Mill's life are laid out in his famous Autobiography
(1873)
In a nutshell: son of the Ricardian economist James Mill, trained from an
early age to be a genius,
"lent" by his father to utilitarian philosopher Jeremy Bentham,
became a utilitarian, followed his father into the British East India
Company,
broke with Bentham, had an existentialist crisis,
turned to the doctrines of Saint-Simon and Comte,
met Harriet Taylor and waited twenty years for her husband to die
became a Whig politician, etc., etc.
DIFFICULT CHILDHOOD
HTTP://WWW.ECON.UNT.EDU/~DMOLINA/ECON4510.HTM
Father James Mill,
disciple of Jeremy
Bentham MADE HIM a
CHILD PRODIGY
3 yrs read Greek
8 yrs had read the
Greeks in their own
language
CHILDHOOD
HTTP://WWW.ECON.UNT.EDU/~DMOLINA/ECON4510.HTM
8-13 read Hume and
other philosophers and
was taught mathematics
by his father
At 13 learn Latin and
became teacher to his
siblings
At twenty suffered
mental depression
http://www.econ.unt.edu/~dmolina/econ4510.htm
WORKS
A System of Logic (1843)
Principles of Political Economy (1848)
On Liberty (1859)
Considerations of Representative Government (1861)
Utilitarianism (1863)
Auguste Comte and Positivism (1865)
The Subjection of Women (1869)
One can argue that the primary text in economics moves from
Adam Smith: The Wealth of Nation (1776)
David Ricardo: Principles of Political Economy and Taxation (1817)
John Stuart Mill: Principles of Political Economy (1848)
Alfred Marshall: Principles of Economics (1890)
John Maynard Keynes: The General Theory (1936)
Paul Samuelson: Foundations of Economic Analysis (1947)
RICARDO AND MARX
Mill is in essence a hybrid of Ricardo and
Marx.
From Ricardo he takes much of his economic
theory.
To Marx, in principle but not literally, he is
similar in his critique of 19th century English
society.
BACK TO RICARDO’S IRON LAW OF WAGES
http://www.econlib.org/library/Ricardo/ricP2.html#Ch.5, Of Wages
http://www.fordham.edu/halsall/mod/ricardo-wages.asp
It is when the market price of labour exceeds its natural price, that the condition of the labourer is flourishing and happy, that he has it in
his power to command a greater proportion of the necessaries and enjoyments of life, and therefore to rear a healthy and numerous family.
When, however, by the encouragement which high wages give to the increase of population, the number of labourers is increased, wages
again fall to their natural price, and indeed from a reaction sometimes fall below it.
Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite
period, be constantly above it; for no sooner may the impulse, which an increased capital gives to a new demand for labour, be obeyed,
than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for
labour may give a continued stimulus to an increase of people....
Thus, then, with every improvement of society, with every increase in its capital, the market wages of labour will rise; but the permanence of
their rise will depend on the question, whether the natural price of labour has also risen; and this again will depend on the rise in the natural
price of those necessaries on which the wages of labour are expended....
As population increases, these necessaries will be constantly rising in price, because more labour will be necessary to produce them. If, then,
the money wages of labour should fall, whilst every commodity on which the wages of labour were expended rose, the labourer would be
doubly affected, and would be soon totally deprived of subsistence. Instead, therefore, of the money wages of labour falling, they would
rise; but they would not rise sufficiently to enable the labourer to purchase as many comforts and necessaries as he did before the rise in
the price of those commodities....
These, then, are the laws by which wages are regulated, and by which the happiness of far the greatest part of every community is
governed. Like all other contracts, wages should be left to the fair and free competition of the market, and should never be controlled by
the interference of the legislature.
THE PRINCIPAL PROBLEM OF POLITICAL ECONOMY
“Political Economy, you think, is an enquiry into the nature and causes of wealth -- I think it should
rather be called an enquiry into the laws which determine the division of produce of industry
amongst the classes that concur in its formation. No law can be laid down respecting quantity, but
a tolerably correct one can be laid down respecting proportions. Every day I am more satisfied
that the former enquiry is vain and delusive, and the latter the only true object of the science.”
 David Ricardo, “Letter to T. R. Malthus, October 9, 1820”, in Collected Works, Vol. VIII: p.278-9.
From the Preface of “Principles of Political Economy and Taxation”
 The produce of the earth—all that is derived from its surface by the united application of
labour, machinery, and capital, is divided among three classes of the community; namely, the
proprietor of the land, the owner of the stock or capital necessary for its cultivation, and the
labourers by whose industry it is cultivated. But in different stages of society, the proportions of
the whole produce of the earth which will be allotted to each of these classes, under the names
of rent, profit, and wages, will be essentially different; depending mainly on the actual fertility
of the soil, on the accumulation of capital and population, and on the skill, ingenuity, and
instruments employed in agriculture. To determine the laws which regulate this distribution, is
the principal problem in Political Economy.
DISTRIBUTION OF RESOURCES
“The things once there mankind, individually or collectively, can do
with them as they please. They can place them at the disposal of
whomsoever they please, and on whatever terms..... Even what a
person has produced by his individual toil, unaided by anyone, he
cannot keep, unless by the permission of society. Not only can society
take it from him, but individuals would and could take it from him, if
society ... did not employ and pay people for the purpose of
preventing him from being disturbed in [his] possession. The
distribution of wealth, therefore, depends on the laws and customs of
society. The rules by which it is determined are what the opinions and
feelings of the ruling portion of the community make them, and are
very different in different ages and countries, and might be still more
different, if mankind chose....” John Stuart Mill [Heilbroner: 129-130].
MILL A SOCIALIST?
Not in the sense of Marx.
Mill believe that if workingmen are educated to control their passions,
the problem raised by Malthus would be removed. Consequently
wages would rise, and eventually the bargaining power of labor
would eventually lay claim to the capital and a “higher stationary
state” (relative to Ricardo) would emerge.
VERY BASIC LABOR ECONOMICS
Output is produced via the efforts of capital (i.e. machinery, etc..) and
labor
The owner of the firm provides the capital. Workers are obviously the
labor.
After the output is sold, the returns are then given to the capital or labor.
How much should capital and labor be paid?
 If capital and labor markets are competitive, then each input is paid according to their
economic contribution (i.e. how productive the input is and the value of that production in the
competitive market). This comes from the work of John Bates Clark
 If the market is not competitive… well, it all depends on the bargaining power of the owner
and workers. Marx thought workers were at a disadvantage. Mill didn’t seem to think that
had to be the case.
THE SUBJECTION OF WOMEN (1869)
HTTP://WWW.ECON.UNT.EDU/~DMOLINA/ECON4510.HTM
There is much debate whether he authored this or he was a ghost
writer for Harriet Taylor Mill
He (or she) addresses such issues as wage disparity.
 When, however, we ask why the existence of onehalf the species should be merely ancillary to that
of the other – why each woman should be a mere
appendage to a man, allowed to have no interests
of her own, that there may be nothing to compete
in her mind with his interests and his pleasure, the
only reason that can be given is, that men like it.
VALUE THEORY
Three possibilities
1. Perfectly inelastic supply (good is of absolutely limited supply)
2. Perfectly elastic supply (cost of production determines pricee
3. Traditional supply and demand
W.r.t. Mill explained clearly how equilibrium prices are
determined by the forces of supply and demand.
“Happily, there is nothing in the laws of value which
remains for the present or any future writer to clear up;
the theory of the subject is complete.”
INTERNATIONAL TRADE THEORY
Ricardo’s Theory of Comparative Advantage
argues that all nations benefit from free trade
But how much do nation’s benefit?
More specifically, what are the “terms of trade”
and how are they determined?
Terms of trade are determined by the relative
demand for imports. (i.e. the elasticity of demand)
THE DEFENSE OF SAY’S LAW AND
MONETARY THEORY
Mill made the distinction between excess supply for a market vs. the economy.
Mill discussed three possible economies
 Barter system
 Money w/o credit
 Money with credit
In the first two, supply must equal demand. However, if money is also a store of value, supply
could exceed demand in the current period.
The process is as follows:
 Credit is extended in periods of expansion.
 Credit is withdrawn during contractions.
If credit is scarce, people will wish to hold onto money, thus demand for goods will fall.
Hence, supply could exceed demand. As prices adjust, however, supply will once again equal
demand and full employment will be achieved.
Mill discussed a “psychological theory of business cycles” which is a forerunner of Keynes’s
“animal spirits”.
THE ROLE OF THEORY AND CONTEXTUAL
ANALYSIS
Mill concurred with Richard Jones [Essay on the Distribution of Wealth
(1831)]
Abstract theory must be tempered by a consideration of prevailing
institutions. The economic scientist desires precision and predictability,
hence the tendency to rely on abstract theory.
The economic artist attempts to marry the two approaches.
CAPITALISM AND DEMOCRACY
In general, Mill supports both
Capitalism and Democracy, but he
wishes to have the votes of the
educated to be worth more and
government action to mitigate the
negative consequences of Capitalism.
NECESSARY ROLES OF GOVERNMENT
HTTP://WWW.ECON.UNT.EDU/~DMOLINA/ECON4510.HTM
 Power to Tax
 Coin Money
 Establish Uniform System of Weights and Measurements
 Protection against Force and Fraud
 Administration of Justice and enforcement of Contracts
 Establishment and Protection of Property Rights
 Protection of Minors and Mental Incompetents
MORE NECESSARY ROLES
HTTP://WWW.ECON.UNT.EDU/~DMOLINA/ECON4510.HTM
Provision of certain Public Goods and Services:
 roads
 canals
 dams
 bridges
 harbors
 lighthouses
 sanitation
OPTIONAL ROLE OF GOVERNMENT
HTTP://WWW.ECON.UNT.EDU/~DMOLINA/ECON4510.HTM
Interference of the
Government into the market
could be required by some
great good.
Thus, Mill might have
supported
 Consumer Protection
 EPA
 FDA
 Public utility regulation
 etc.
Thomas Carlyle (1795-1881)
Idealized the military society of Prussia and preferred society to be led
by a charismatic leader, not a democratically elected official. (Carlyle
sided with the Prussians in the war of 1870-71; in 1874 he was awarded
the high Prussian order "Pour le Merite
http://www.victorianweb.org/authors/carlyle/carlyle4.html)
Believed that genuine freedom could only be achieved in the context of
a society based on shared values and common goals.
Carlyle favored a hierarchical society where each member of society
understood his/her role and function.
Gave us the phrase “Dismal Science”
Why is Economics a “dismal science”?
http://www.econlib.org/library/Columns/LevyPeartdismal.html
The Myth:
Everyone knows that economics is the dismal science. And almost
everyone knows that it was given this description by Thomas Carlyle,
who was inspired to coin the phrase by T. R. Malthus's gloomy
prediction that population would always grow faster than food,
dooming mankind to unending poverty and hardship
Carlyle and Race
http://www.econlib.org/library/Columns/LevyPeartdismal.html
The essay, which was the opening salvo in a battle that raged over the next fifty
years, was entitled "An Occasional discourse on the Negro Question." First
published in 1849, it contains the following paragraph:
◦ Truly, my philanthropic friends, Exeter Hall Philanthropy is wonderful; and the Social
Science—not a "gay science," but a rueful—which finds the secret of this universe in "supplyand-demand," and reduces the duty of human governors to that of letting men alone, is also
wonderful. Not a "gay science," I should say, like some we have heard of; no, a dreary,
desolate, and indeed quite abject and distressing one; what we might call, by way of
eminence, thedismal science. These two, Exeter Hall Philanthropy and the Dismal Science,
led by any sacred cause of Black Emancipation, or the like, to fall in love and make a
wedding of it,—will give birth to progenies and prodigies; dark extensive moon-calves,
unnameable abortions, wide-coiled monstrosities, such as the world has not seen hitherto!
Even this short excerpt illustrates the spirit of Carlyle's argument: When
economics joins with Exeter Hall, in support of such causes as ending slavery,
bad things will happen.
The Anti-Slavery Coalition
http://www.econlib.org/library/Columns/LevyPeartdismal.html
The Exeter Hall that Carlyle mentioned was a real building. Located on the Strand in
London, it served as the political center of British evangelicalism. By invoking the marriage
of economics and Exeter Hall, Carlyle is reminding us of a vastly important fact about 19th
century British politics: Exeter Hall was not the only moral center of the British anti-slave
movement. In the fight against slavery, Christian evangelicals such as William Wilberforce
and Thomas Macaulay were joined by political economists, such as James Mill, Harriet
Martineau, J. S. Mill, Archbishop Richard Whately and John Bright. The two sides agreed
that slavery was wrong because Africans are humans, and all humans have the same
rights. They however disagreed over exactly what it is that ties us together. The
economists drew on their assumption that deep down, we all share the same basic human
nature. The evangelicals drew on their assumption that we are literally all brothers and
sisters since we share the same first parents, Adam and Eve.
Carlyle disagreed with the conclusion that slavery was wrong because he disagreed with
the assumption that under the skin, people are all the same. He argued that blacks were
subhumans ("two-legged cattle"), who needed the tutelage of whites wielding the
"beneficent whip" if they were to contribute to the good of society
Carlyle’s Influence
http://www.econlib.org/library/Columns/LevyPeartdismal.html
By laying out the argument against economics in detail, Carlyle revived the pro-slavery
movement in mid-19th century Britain. His argument was taken up by calmer critics, who
eschewed his polemical excesses while retaining his basic assumptions. For example, W. R.
Greg, who together with Francis Galton, founded the eugenics movement, attacked Mill
for arguing that land-reform would help solve the problem of poverty in Ireland:
◦ "Make them peasant-proprietors," says Mr. Mill. But Mr. Mill forgets that, till you
change the character of the Irish cottier, peasant-proprietorship would work no
miracles. He would fall behind the instalments of his purchase-money, and would be
called upon to surrender his farm. He would often neglect it in idleness, ignorance,
jollity and drink, get into debt, and have to sell his property to the newest owner of a
great estate. ... In two generations Ireland would again be England's difficulty, come
back upon her in an aggravated form. Mr. Mill never deigns to consider that an
Irishman is an Irishman, and not an average human being—an idiomatic and
idiosyncractic, not an abstract, man
John Stuart Mill on Race
http://www.econlib.org/library/Columns/LevyPeartdismal.html
In choosing Mill as their target, Carlyle and his allies chose well. Like
most classical economists, Mill treated such characteristics as race as
analytically irrelevant. When doing economics, one would simply ignore
race, and look at incentives. Here are Mill's acidic words on the matter,
words which might have drawn Greg's ire:
◦ Is it not, then, a bitter satire on the mode in which opinions are
formed on the most important problems of human nature and life, to
find public instructors of the greatest pretensions, imputing the
backwardness of Irish industry, and the want of energy of the Irish
people in improving their condition, to a peculiar indolence
andinsouciance in the Celtic race? Of all vulgar modes of escaping
from the consideration of the effect of social and moral influences on
the human mind, the most vulgar is that of attributing the diversities
of conduct and character to inherent natural differences
Adam Smith on Race
http://www.econlib.org/library/Columns/LevyPeartdismal.html
This idea, that people are just people, can be traced from Mill back to Adam
Smith's Wealth of Nations. In it, Smith put forward the hard rational choice doctrine that
there are no natural differences among people. There are no natural masters; there are no
natural slaves. All human differences can be explained by incentives, history and luck:
◦ The difference of natural talents in different men is, in reality, much less than we are
aware of; and the very different genius which appears to distinguish men of different
professions, when grown up to maturity, is not upon many occasions so much the
cause, as the effect of the division of labour. The difference between the most
dissimilar characters, between a philosopher and a common street porter, for example,
seems to arise not so much from nature as from habit, custom, and education. When
they came into the world, and for the first six or eight years of their existence, they
were, perhaps, very much alike, and neither their parents nor playfellows could
perceive any remarkable difference. About that age, or soon after, they come to be
employed in very different occupations. The difference of talents comes then to be
taken notice of, and widens by degrees, till at last the vanity of the philosopher is
willing to acknowledge scarce any resemblance."