JS Mill is one of the most misunderstood Economists.
Blaug for example credits his ‘Principles of Political Economy’ (1848) with ‘abandoning’ the labour theory of value.
Schumpeter slightly more accurately sees this work as a mid way point in value theory between Ricardo and Mill. This though has led to a whiggish interpretation whereby Mill’s work is seen as simply a stepping stone towards the ‘correct; theory of Marshall, The assumption being that Mill is only correct to the extent to which he departs from Ricardo.
For Marx however writing at the time when Mills popularity as an exponent of political economy was at its highest treated JS Mill’s writing only briefly and contemptuously. His thesis of ‘Vulgar’ political economy was that political economy had been overtaken by the bourgeois class since the writings of Ricardo and that JS Mill and other were simply justifying an ideological view about the compatibility of class interests.
All three strands essentially ignore the extent to which JS Milll himself thought he had extended and completed the theoretical project of classical economics since Ricardo (which he always saw himself in deference to). Indeed one takes his most infamous statement
‘there is nothing in the laws of Value which remains for the present or any future writer to clear up; the theory of the subject is complete’ (Principles B3 C1 P1)
Much mocked given the coming tide of the marginal revolution.
However JS Mill was full of confidence because the period after Ricardo’s death was marked by a fracturing of political Economy into camps, and Mill thought that the theoretical arguments that had divided them had been solved.
Though there were divided on many policy issues there were broadly two camps:
1) A Ricardian Labour Theory of Value School – led my James Mill and Mc Culloch – who considered that Ricardo’s theory could be extended to capital if capital was considered accumulated labour. Mill calculated the cost of this capital over time (in the case of fixed capital) through use of a perpetuity method which calculated the price of a perpetuity which has the same value.
2) A Cost of Production School – of Senior, Scrope, Longfield and Torrens principally which added capital costs to the price of production – as the price or return for ‘abstinence’ or ‘waiting’. Therefore price was not not solely determined by labour values but by a broader costs of production. Some of these writers also argued that rent or some portion of rent also entered into cost. Many of this school in effect were reviving Adam Smith’s ‘adding up’ theory of value.
These schools were exemplified by a debate of the Political Economy Society in 1831 chaired by Torrens in which he introduced the issue of which parts of Ricardos theory remained relevant.
However Mill realised that the two theories were equivalent. Even before publication of the Principles Torrens wrote to JS Mill (Mill, Earlier Letters, Collected Works, 13 : 624) in 1843 that his objections to Ricardo’s theory of profit could be met by the device of reducing all capital to its labor equivalent. Credit for this realisation was given to Longfield (1802-84) n his Lectures on Political Economy (Dublin, 1834). In here he set out the calculation of the value of interest on a fixed capital good in terms of discounted labour values, which Torrens realised produced the same results as Mills perpetuity theory. Therefore the Ricardian School and the Cost of Production School could be reconciled they were both talking about different sides of the same coin (see see Robbins, Robert Torrens and the Evolution of Classical Economics, pp. 55-57 and here. According to De Marchi JS Mill had independently come of the same view C1830).
The importance of this cannot be overstated. Torrens had published a series of pamphlets on value theory all expressing various forms of his capital theory of value where ‘equal capitals produce equal value’, and because of different proportions between fixed and variable capital price was no longer proportional to immediate labour. Torrens saw the composition of capital as a ratio between immediate labour and ‘accumulated labour’ In accepting this discounting or perpetuity approach however price did depend on ‘accumulated labour'(discounted) plus immediate labour. His objection to the Labour Theory of Value goes away. Also because of the problem of differing compositions of capital Torrens generally assumed fixed input proportions of fixed and variable capital. This enabled him to retain the same ‘corn model’ approach of his and Ricardo’s earliest writings – where profits where simply a surplus of the same input good, whilst avoiding Malthus critique which led Ricardo to abandon the earliest corn models – that variations in proportions of input costs (for example capital goods used by labourers such as plough’s) meant that profits were no longer proportional to the labour surpluses of input goods.
Sadly Torrens no longer wrote on value theory, but JS Mill did.
In his Principles he sets this out
What the production of a thing costs to its producer, or its series of producers, is the labour expended in producing it. If we consider as the producer the capitalist who makes the advances, the word Labour may be replaced by the word Wages: what the produce costs to him, is the wages which he has had to pay. At the first glance indeed this seems to be only a part of his outlay, since he has not only paid wages to labourers, but has likewise provided them with tools, materials, and perhaps buildings. These tools, materials, and buildings, however, were produced by labour and capital; and their value, like that of the article to the production of which they are subservient, depends on cost of production, which again is resolvable into labour. (p265)
So JS Mill clearly believed in an approach in which costs of production were ‘resolvable into labour’. He also repeated his father example of fixed capital and wine – with again wine being an example of fixed capital. Now we have a puzzle. JS Mill like his father James Mill could have taken this as proof if his proposition that fixed capital was an example of accumulated labour. But this led to a problem – what was the cause of interest which led to the discounting of labour costs over time in James Mill’s perpetuity approach. Enither theory alone will suffice, the perpetuity approach does not explain the source of interest, the waiting theory the source of costs other than interest or rates of profit over and above the cost of interest or discounted factor inputs.
JS Mill instead seemed to have assumed that because the ‘waiting’ theory and the ‘perpetuity theory’ were mathematically equivalent in the case of fixed capital the latter could be subsumed to the former and therefore his exposition of the ‘abstinence theory’ was pretty much identical to that of Senior and Cairnes.
there is another necessary element in [cost of production] besides labor. There is also capital; and this being the result of abstinence, the produce, or its value, must be sufficient to remunerate, not only all the labor required, but the abstinence of all the persons by whom the remuneration of the different classes of laborers was advanced. The return from abstinence is Profit. 
This approach though is flawed. Even if you accept that the return from abstinence is profit that does not mean all profit is return from abstinence. There is also the source of profits from economic rent including monopoly. There is also an interpretation of the ‘waiting’ approach that is more in keeping with James Mills and Mc Culloch’s thinking. In their view time by itself required no compensation because it added by itself nothing, what was important was the release of value over time. To quote Scrope
No-one will sacrifice time by [merely] allowing it to operate on his property…that they do this acquire additional value due to natural laws –the sown wheat multiplying itself in its crop, the kept wine improving its flavour – is notorious. [p147]
So what is being sacrificed is the productivity of land and labour over that time. If as in James Mills view money is seen as crystallization of accumulated labour matching the commodities that have been produced over the period of turnover of capital then if there has been a period of growth and positive profits money left idle will lose value in comparison with the same amount of money invested and compounded from the start till the end of that period. The value that must be compensated for therefore is the value of goods that could have been purchased if that money had been invested alternatively. It is the cost of maintaining the purchasing power of money, or put alternatively it is the cost of maintaining the labour value of money during economic growth.
It is not clear that JS Mill despite being taught at the knee political economy by his father full understood the issues regarding interest and fixed capital. Though James Mill held the view that fixed capital was an example of joint production and that the perpetuity method could be used to value the cost of production of the capital good, in the section of the principles of joint production JS Mill argued that joint production did not follow the cost of production principle but that of the supply and demand of individual elements. This is arguably true for examples of joint production where the proportions of each good production vary by scale of production but through the elder Mills method is palpably not the case for where they have fixed proportions including the case of fixed capital. Value theory was relegated to the end not the start of the principles, perhaps bored by the decades of argument of the issue and now considering it a problem solved it was no longer the centre of political economy.
So JS Mill’s Principles has caused some confusion. Though he relied on the assumption that the great problems with Ricardian Value theory had been solved he did not set out those problems and relied on the solution as an assumption rather than to be demonstrated. Also he did not properly explain the relation of James Mills perpetuity theory, which he quoted and relied on in his chapter on value (part II chapter II) . Marx also seemed to have missed JS Mills assumptions, but then he did not understand and made no notes on the elder Mills perpetuity theory either.
Oh how political economy might have been different if either Torrens of Mills had set out a comprehensive, possibly even mathematical explanation of the reconciliation of the ricardian and waiting theories in the 1840s. Would then would we have had the marginal revolution in anything like the form it emerged, would Marx have developed a more sophisticated approach to fixed capital avoiding the transformation problem? Would Sraffa have needed to rediscover these issues at all a century later? Would Bohn_Bawerk have needed to go around the houses again on interest rate theory half a century later?
Perhaps I am being a little unfair. John Rae’s work on capital theory – which Fisher and Bohm Berwick realised presented the correct approach to treatment in time in capital theory though written in 1834 was not known in Europe for many years, neither was Gesell’s (which offered clues on the declining real value of money left idle) published in Europe till 1907. By then the marginal theory was so dominant, and the ricardian arguements over value so forgotten that no connection was made.