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

130 Michael R. Montgomeryto those who would portray Classical theory as implying rapid adjustment to fullemployment in response to macroeconomic shocks. The fly in the ointment is thespecter of expensive, illiquid, debt-creating, industry-specific, and often also firmspecific,capital goods. 10 As Ricardo notes, “[i]t is often impossible to divert themachinery which may have been erected for one manufacture, to the purposes ofanother . . . ” (1951 [1817]: 266).It is true that, if pressed, Ricardo and Mill might without contradiction haveclaimed that these were industry-specific problems, tending to cause someindustries to decline while others prospered in precisely inverse proportion, so thatfull employment overall would be maintained. This would almost certainly havebeen Say’s view. 11 However, Ricardo and Mill choose not to proceed in this way.Ricardo does not say how long “temporary” is in his prediction of a temporaryfailing health of the economy given sudden changes in the “channels of trade.”Later in his essay, Mill emphasizes the transitory nature of the commercial crisis hedescribes – but his “repent at leisure” remark (see above) raises concerns likeRicardo’s about the speed of recovery.Neither Mill nor Ricardo denies that the widespread capital losses alluded to willbring on a general decline in economic activity – indeed, Mill affirms it specifically. 12Neither believes the distress should be confused with a secular overproductionproblem like that which, say, Malthus would have suggested (Mill 1983 [1844]:43–5). On the other hand, neither Ricardo nor Mill is prepared to put theirthoughts about the length of the “temporary” period of distress into calendar units.How long, then, will the period of general distress last? Once nonmarketablefixed capital enters the picture, it is not enough for the crisis in confidence to end inorder to guarantee recovery. The large capital losses associated with the overhangof excess capital will continue to hold the economy down for some period of time.Nor did Ricardo and Mill seem prepared to invoke wage/price flexibility as thesolution to the economy’s “wrong-capital” problem. So it is hard to imagine theirperceived adjustment period as failing to be quite a bit more lengthy than, forexample, Snowdon et al.’s brisk characterization of it as “very short-lived” (1994: 52).Based on how Ricardo and Mill raised and addressed these issues, I suggest thatthe Classicals, generally speaking, were aware, in an intuitive sort of way, of thepotential problems such capital-based speculations posed for any argument thatpure wage and price flexibility was enough to guarantee rapid return to fullemployment. 13 On this interpretation, the original Classical Economists, unlikesome working recently in the New Classical and Real Business Cycle schools, didnot see the role played by price flexibility in achieving economy-wide equilibrium tobe simple and clear-cut; for example, as a straightforward blowup of the role playedby price flexibility in a microeconomic problem. It would appear that they saw themacro-version of this problem as considerably more complex.The Classicals had great respect for, and confidence in, the power of prices toalter behavior in socially desirable ways. They had also a general understandingthat the invisible-hand idea depended crucially on such price flexibility. But theydid not rely explicitly on price flexibility as the thing that guaranteed fullemployment in the economy. Nor did they have to understand the subtleties of the