Industry Is Limited by Capital, BUT There Is NO Upper Limit to Production Imposed on the Demand Side

In Chapter V, Mill provides four propositions with regard to capital which are in his view fundamental for anyone wishing to understand the workings of an economy. The first proposition is that ‘industry is limited by capital’ (John Stuart Mill's Principles of Political Economy, 63), of which he wrote:

While, on the one hand, industry is limited by capital, so on the other, every increase of capital gives, or is capable of giving, additional employment to industry; and this without assignable limit. (Ibid.: 66)

In other words, there is no upper limit to production imposed on the demand side. This was the fundamental issue in question during the debates over the validity of the law of markets, and it was to this section of the chapter (pp. 66-8) that Mill referred during his more comprehensive discussion in Book III, Chapter XIV. Mill contrasts this view with the views held by others:

There is not an opinion more general among mankind than this, that the unproductive expenditure of the rich is necessary to the employment of the poor. Before Adam Smith, the doctrine had hardly been questioned; and even since his time, authors of the highest name and great merit have contended, that if consumers were to save and convert into capital more than a limited portion of their income, and were not to devote to unproductive consumption an amount of means bearing a certain ratio to the capital of the country, the extra accumulation would be merely so much waste, since there would be no market for the commodities which the capital so created would produce. (Ibid.: 66-7)

That is, if unproductive consumers decided to invest instead, and therefore used their capital productively rather than merely consuming it, beyond some upper limit the additional output produced would fail to find buyers. Production, on this view, can therefore rise faster than demand, a situation which only an increase in unproductive spending can forestall. It is this proposition which the law of markets was designed to refute.

—Steven Kates, Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Cheltenham, UK: Edward Elgar Publishing, 2009), 69.