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

128 Michael R. Montgomerycharacterize Classical macroeconomic thought, at least not in the simplistic formsin which modern parlance asserts them. Take, for example, wage and price flexibility,supposedly at the very heart of eighteenth- and nineteenth-century Classicalmacroeconomic doctrine. If the Classical economists were apostles of a wage/priceflexibility so powerful as to guarantee that deviations from equilibrium output“would be temporary and very short-lived” (Snowdon et al. 1994: 43), then why dowe not read more about such flexibility and its mechanics in the most importantmacroeconomic writings of the leading Classical economists? John Stuart Mill’sfamous chapter in The Principles of Political Economy “Of Excess of Supply” mentionsprice (not wage) flexibility only in passing and only at the start of the chapter, preliminaryto the main argument, in order to establish early on how there can be aglut of an individual commodity (Mill 1965 [1848]: 570) – an argument which hethen invalidates as an argument for general gluts. His earlier essay on the samegeneral topic, “On the Influence of Consumption on Production,” in Essays on SomeUnsettled Questions in Political Economy, is similarly bereft of any focus on flexible wagesor prices (Mill 1983 [1844]). 6 J.B. Say’s chapter “Of the Demand or Market forProducts” in his Traite d’Economie Politique (Treatise on Political Economy) (1983 [1803])discusses price and wage flexibility only briefly and as an aside after the core of hisargument is complete. 7 Ricardo has even less to say about price and wage flexibilityin his macroeconomic musings in the Principles (1951 [1817]: Ch. XXI, “Effectsof Accumulation on Profits and Interest”). He follows Say in arguing for the insatiabilityof “effectual” demand in ways that do not appeal to price, wage, or interestrateflexibility; his occasional references to the latter concepts are very muchby-the-way and, on the face of it, inessential to his argument. 8Naturally it is tempting to argue that the Classical economists did fully endorsethe necessary-and-sufficient role of wage/price flexibility in guaranteeing fullemployment, and that their failure to focus explicitly on how such flexibility providessuch a guarantee is merely additional evidence that such flexibility was somuch part of their thinking that it never occurred to them to actually discuss it indetail. The fact is, however, that the Classical economists did not openly emphasizewage/price flexibility as the core adjustment mechanism guaranteeing macroeconomicstability. What the Classicals did emphasize repeatedly is the notion thatevery act of production is an act of potential-demand creation. Such potentialwould be rapidly and inevitably transformed into spending due to the self-interestof the producer – either by the producer’s direct consumption or by the producer’slending to another who would in turn consume.Just how that actualization would occur was not detailed. Certainly given theClassicals’ microeconomics, one may presume that wage- and price- (and interestrate-)flexibility would play an important role in this actualization. But presumptionsaside, the fact remains that, precisely where one might have expected them to makethe details of their adjustment mechanism explicit, the Framers of moderneconomic theory left an inkblot.Since the Classical economists were not slipshod thinkers, it is worth consideringthe possibility that the inkblot is there because they meant it to be there. In particular,there are those occasional jarring passages where the Classical economists