An Origin of the Neoclassical Revolution: Mill’s “Reversion” and Its Consequences

Abstract

The neoclassical revolution was a shift from economics of production to economics of exchange. The study shows from an internalist point of view that one of the origins of the neoclassical revolution can be traced back to young John Stuart Mill, who tried to sort out a problem left unresolved by David Ricardo. Due to a peculiar reason that I would later clarify, he was led toward examining a pure exchange economy. In this setting, Ricardo’s cost of production theory of value was invalid. When Mills found the answer to this, he came to the following conclusion: “we must revert to a principle anterior to that of cost of production, and from which this last flows as a consequence,—namely, the principle of demand and supply” (On Laws of Interchange between Nations. First essay in J.S. Mill, Essays on some unsettled questions of political economy, 1844. Citation is made from Library of Economics and Liberty, 1844, I.19). This thesis caused a long-lasting and strong influence on the research programs in economics. The study describes how Mill’s thesis profoundly influenced three founding fathers of British neoclassical economics, namely, Stanley Jevons, Francis Ysidro Edgeworth, and Alfred Marshall. Different alternatives were researched and discovered, but it was Alfred Marshall, with his concept of demand and supply functions, who paved the way for today’s mainstream economics.