That still leaves the mystery only half solved. How exogenous (sourced from outside) are the genius and happenstance? Can we coax them along by policy? That isn’t really my field. What seems reasonably clear is that growth flourishes in secular free markets with solid infrastructure and rule of law. How to get those things is the problem. I will suggest that the answers, whatever they are, will be
developed outside the usual marginalist perspective of supply and demand.
The Free Growth Equations
Now back to Mill’s argument. Notice first that he puts it all in the present tense. Modern growth economists have preferred what I called the lagged flows method: spikes in investment are compared to later ones in output. Mill here is substituting what I called a concurrent rates method: he compares changes in consumption rate to changes in capital growth rate at the same time. He writes that “whatever increases the productive power of labor ... enables capital to be enlarged ...
concurrently with an increase of personal consumption.”
Let’s follow that. Mill’s root assumption is the Y =I +C equation in its net form
(4.1b). Put the ex post version as
output = growth + consumption, (4.2) meaning net output, growth of physical capital and all consumption. The Y rule says the same with the hidden asterisks after growth and consumption. So it will continue for the rest of this discussion. (4.2) shows that less consumption implies more growth, or less output, or some of both. Mill was asking which. To show how to find out, first arrange (4.2) as
growth = output —- consumption, (4.2a)
again because terms can change sides if they change signs.
Chapter 4 Mill’s Idea 1/11/16 11
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