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

The genesis of an idea 127Stuart Mill. I will argue that Mill’s insights represent the start of monetarydisequilibrium theory as that theory is conceived of today.The Classical macroeconomic tradition as popularlyinterpretedThat the genesis of monetary disequilibrium theory can rightly be attributed to theClassical economists – by which I mean Hume, Smith, Say, Ricardo, James andJohn Stuart Mill, and their contemporary like-thinkers on money and macroeconomicissues 1 – will come as a surprise to some. The reputation of the Classicaleconomists has never quite recovered from the tarring delivered by Keynes in TheGeneral Theory (1965 [1936]). In Chapters 2 and 3 of that book, Keynes portrayedthe Classicals (as well as early twentieth-century theorists, whom he also, strangely,labeled “Classical”) as cloddish believers in simplistic versions of Say’s Law, price/wage flexibility and the strict neutrality of money. Despite the qualified rebuke ofKeynes on this point by Robert Skidelsky (arguably the world’s leading authorityon Keynes), 2 modern macroeconomists have, too often, picked up Keynes’ interpretationwholesale.Thus, Snowdon et al. (1994: 52), writing on Say’s Law, state “That the act ofsupply created an equivalent demand seemed obvious to the Classical writers.” TheClassicals allowed for “the possibility that a misallocation of resources can occurand that a glut of certain commodities can develop, but this problem would be temporaryand no such excess supply could occur for goods as a whole” (ibid.). Likewiseechoing Keynes on flexible prices and wages, Abel and Bernanke (2005: 355) maintainthat, “Classical macroeconomists assume that prices and wages adjust quicklyto equate quantities supplied and demanded in each market.” 3 Stiglitz (1993: 680)also emphasizes price and wage flexibility, stating that Classical economics “recognizedthat the economy might have short periods of unemployment, but believedthat market forces would quickly restore the economy to full employment.” 4, 5Regarding the strict neutrality of money, Mankiw (2000: 187) tells us that “inclassical economic theory, changes in the money supply do not influence realvariables.” Snowdon et al. make the link between the neutrality of money and Say’sLaw explicit:In general classical economists, notably Ricardo and Mill, gave support to Say’slaw, which they believed also held true for a monetary exchange economy.Money was nothing more than a convenient medium of exchange which enabledmarket participants to avoid the awkwardness and inconvenience of barter.(Snowdon et al. 1994: 52)The over-emphasis on price flexibility in interpretationsof Classical theoryActually, it is quite possible to argue plausibly that none of these three propositions– Say’s Law, price/wage flexibility, the neutrality of money – accurately