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

The genesis of an idea 131macroeconomic implications of price flexibility in order to guarantee that “supplyequaled demand” for the economy as a whole. They had something much simplerthat, they thought, got them to the same result without having to venture into theuncharted territory of price flexibility in a macroeconomic context. It was thisalternate strategy that set them on a path that ended, after considerable resistance,in the recognition of the monetary disequilibrium idea.Say’s Law and moneyThe simple idea, of course, was Say’s Law. The very act of production guaranteedthat an equivalent amount of consuming power would be created. In a bartereconomy, supplying was demanding by definition, and one’s purchasing power wasexactly equal to the value of that which one had produced and then supplied tomarket. It was literally inconceivable that supply could exceed demand or viceversa, regardless of whether or not price ratios were flexible or fixed. Somehow supply wouldhave to equal demand. Price flexibility governed how it would happen, not whether itwould happen. This was the great simplification that the Classicals sought to keepas they turned from the barter to the monetary economy.Keeping this simplification, however, required dealing first with the complicationof money. Money offered a way to put one’s wealth into the form of storablegeneral purchasing power. It constituted a clear threat to the transfer of the analysisbuilt around Say’s Law over from a barter to a monetary economy. The vital needto bottle-up money accounts in large part for the emphasis placed in the classicalliterature on the idea that money is used only for transactions purposes. 14 ToHume, money is “none of the wheels of trade: It is the oil which renders the motionof the wheels more smooth and easy” (1970 [1752]: 33). Smith thinks that “[i]twould be too ridiculous to prove, that . . . [money] is valuable only for purchasing”(1937 [1776]: 406). Say claims that money’s “whole utility” consists in facilitatingtransactions, and compares it to “a public vehicle successively transport[ing]objects one after another” (1983 [1803]: 13). To J.S. Mill, money units “are a sortof tickets or orders” usable in purchasing, and money is “a machine for doingquickly and commodiously, what would be done, though less quickly and commodiously,without it” (1965 [1848]: 506).But if Say’s Law was to be smoothly transferable from a barter to a moneyeconomy, it was also essential that money not be a store of value, so that it could notserve as a “sink” in which unspent purchasing power might accumulate. In writingwhat Blaug has called “a hint of Say’s Law” (Blaug 1978: 56), Smith had beenaware that there were crucial assumptions involved regarding the timing ofspending: “What is annually saved is as regularly consumed as what is annuallyspent, and nearly in the same time too; but it is consumed by a different set of people”(1937 [1776]: 321, emphasis added). As Blaug put it, “[t]he operative propositionhidden away in Smith’s phraseology is that saving is tantamount to investmentbecause ‘hoarding,’ the building up of monetary holdings, is regarded as anexceptional occurrence” (1978: 57).Say goes to great lengths in seeking to establish the irrelevance of the hoarding