Money and Markets: Essays in Honor of Leland B. Yeager

9 The genesis of an ideaClassical economics and the birth ofmonetary disequilibrium theoryMichael R. MontgomeryIntroductionAs Leland Yeager establishes impressively in The Fluttering Veil (Yeager 1997a), thenotion of monetary disequilibrium is one of the core ideas of macroeconomictheory. That monetary distortions originating on either the supply or demand sideof the “money market” can have important impacts on the price level and on realincome is decisively argued in his volume. That these impacts are likely to bestronger in the event of monetary change than they are for changes in other majormacroeconomic magnitudes is a proposition for which an ample and impressivecase appears in this book. That money has unique status not only as medium ofexchange but also as the sole asset without a “price” of its own, so that consequencesof excess demands for, or supplies of, money must be worked out piecemeal amongthe millions of markets that employ money for transactions purposes, is, properly,the central insight of the volume. That this central insight, which I have not seenemphasized elsewhere in modern macro-theory, substantially simplifies monetarytheory by establishing a uniqueness factor to the monetary asset that the existenceof numerous “near-moneys” cannot overturn is one of the book’s major achievements.That this uniqueness, when considered in combination with the existenceof a complex, interlocking business structure where the fact that costs of somebusinesses are revenues of others, and cost changes for some lag behind pricechanges for others, leads directly to a monetary theory of the business cycle, followsquickly from the analysis. That all this matters crucially for macroeconomic theoryis difficult to deny once one has read the volume.The Fluttering Veil matters not only as a contribution to modern macroeconomictheory. It is also notable in its establishment of numerous links with past thinkersin the monetary disequilibrium tradition. The present paper seeks to make acontribution in this spirit, by exploring the development of the monetarydisequilibrium idea in the hands of the Classical economists. It will be argued belowthat the “Classicals” were considerably more broad-based in their approach tomacroeconomics than is acknowledged by the modern interpretation emphasizingwage/price flexibility, Say’s Law, and the neutrality of money. It was, I will argue,precisely out of this broad-based approach that the monetary disequilibriuminsight emerged – first by Hume, and then, most notably, in the hands of John