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

The genesis of an idea 129suggest that the idea of full-employment equilibrium, and the path to that equilibrium,is longer, more treacherous and more mysterious at the macro-level than atthe micro-level. In these musings, one can infer a certain skepticism that price/wage flexibility would assure rapid convergence to macro-equilibrium. Adam Smith(1937 [1776]: 406) writes about a sometimes general complaint of a “scarcity ofmoney” occurring throughout “whole mercantile towns” due to “over-trading.” Inthe Unsettled Questions, Mill builds on this line of thought, associating such a statewith times when “general delusion is afloat” (1983 [1844]: 40), and even emphasizing,as a cause, the thoroughly modern notion that the “increase in productionreally takes place during the progress of [currency] depreciation, as long as theexistence of depreciation is not suspected” (ibid.). So far all is still much in line withSmith’s “over-trading” story. Next, however, Mill introduces something new,pointing out that:when the delusion vanishes and the truth is disclosed, those whose commoditiesare relatively in excess must diminish their production or be ruined: and if duringthe high prices they have built mills and erected machinery, they will be likely to repent at leisure.(1983 [1844]: 40, italics added)Repent at leisure? How is such a thing to be reconciled with full price flexibility?Will not this unwanted capital see its price fall until it is disposed of to the highestbidder, and will not the economy quickly return to equilibrium? It is a clear-cutimplication of the price flexibility assumption allegedly at the core of Classicalmacro-thought, and yet no such suggestion is forthcoming from Mill at thisjuncture. The same question may be raised of certain passages by Ricardo in his“On Sudden Changes in the Channels of Trade,” in the Principles (Ch. XIX).Ricardo, however, spells out the fixed-capital mechanism more carefully (he haddoubtless had opportunity to contemplate numerous such cases during his career asa stockbroker). Says Ricardo, “A great manufacturing country is peculiarly exposedto temporary reverses . . . produced by the removal of capital from one employmentto another” (1951 [1817]: 263). When there is such a sudden shift in relativedemands for products, 9It changes in a great degree the nature of the employments to which therespective capitals of countries were before devoted; and during the intervalwhile they are settling in the situations which new circumstances have made themost beneficial, much fixed capital is unemployed, perhaps wholly lost, andlabourers are without full employment. The duration of this distress will belonger or shorter according to the strength of that disinclination, which mostmen feel to abandon that employment of their capital to which they have longbeen accustomed.(1951 [1817]: 265)This link between fixed capital and potentially lengthy periods of stress on business– during which time “labourers are without full employment” – poses a challenge