John Stuart Mill opens his treatise by defining political economy and examining the three primary requisites of production: labor, natural agents, and capital. Capital, which is wealth appropriated to reproductive employment, is the result of saving and is entirely consumed in the process of production through the maintenance of labor and the provision of tools and materials. Industry is strictly limited by capital, meaning every increase in capital allows for an expansion of labor without assignable bounds. However, production from land is governed by the law of diminishing returns, wherein every additional application of labor and capital yields a proportionally smaller increase in produce, unless counteracted by improvements in the arts of agriculture and manufacturing.
In the distribution of wealth, Mill contrasts the institution of private property with various socialist and communistic schemes. Unlike the laws of production, which partake of the character of physical truths, the distribution of wealth depends on the laws and customs of society and can be altered by human institution. Mill evaluates the claims of socialism, emphasizing that any sustainable economic arrangement must account for the pressures of population growth and preserve human liberty and incentives for productivity.
Moving to exchange, Mill analyzes the laws of value, explaining how commodities limited in quantity depend on demand and supply, while those susceptible of indefinite multiplication are regulated by their cost of production. Money serves as a medium of exchange and a common denominator of value, its worth depending on its quantity and the rapidity of its circulation. Credit acts as a powerful substitute for money, influencing prices and facilitating commercial transactions, though excessive expansion can precipitate economic crises. International trade is governed by comparative costs rather than absolute advantages, leading to an international equation of demand that determines the terms of exchange between nations.
Finally, Mill investigates the influence of the progress of society on production and distribution, noting the long-term tendency of profits to a minimum in old and opulent countries. He discusses the principles of taxation, arguing for equality of sacrifice and examining the distinct economic effects of direct and indirect taxes. Throughout the work, Mill maintains that while natural laws govern economic forces, human institutions and education possess the capacity to elevate the condition of the laboring classes and shape the future evolution of society.
