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Why is demand for commodities not demand for labour?

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ITGF posted on Mon, Apr 19 2010 5:02 AM

JS Mill once wrote that "...demand for commodities does not constitute demand for labour." And Hayek said that understanding this was the best test of an economist.

Well, I'm no economist. And I don't understand it. Can someone explain this, because it seems completely counter-intuitive to me.

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Answered (Verified) yessir replied on Mon, Apr 19 2010 3:02 PM
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check out page 258, i believe the key is the structure of production

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The full quote is as follows:

We now pass to a fourth fundamental theorem respecting Capital, which is, perhaps, oftener overlooked or misconceived than even any of the foregoing. What supports and employs productive labour, is the capital expended in setting it to work, and not the demand of purchasers for the produce of the labour when completed. Demand for commodities is not demand for labour. The demand for commodities determines in what particular branch of production the labour and capital shall be employed; it determines the direction of the labour; but not the more or less of the labour itself, or of the maintenance or payment of the labour. These depend on the amount of the capital, or other funds directly devoted to the sustenance and remuneration of labour.

This is not dissimilar from the idea that "production creates demand".  What Mill was saying is that the demand for a product does not itself create demand for labor.  What creates demand for labor is the investment which leads to the production of that product.  So, by extending a million dollars to consumers to increase demand, that doesn't necessarily mean that the demand for labor will be increased.  In other words, it doesn't mean that entrepreneurs will have to means to invest and fulfill that demand. 

Mill concluded that demand only tells the entrepreneur what to invest into.

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