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

The genesis of an idea 135half of modern macro-theory. “New Classical” economics (including Real BusinessCycle theory) is not very “Classical” either – at least not in the sense that Classicaleconomists would have understood the term.The regrettable projection of Keynesian ideas ontoClassical traditionUpon reflection, it makes sense that this would be so. It is hardly surprising, forexample, to find that the Classicals differ fundamentally with those coming afterKeynes on the question of the proper emphasis to be placed on wage/price flexibilityas the guarantor of full employment. Those coming after Keynes started withthe proposition that Aggregate Demand would, in general, be insufficient to securefull employment. To them, in the absence of activist government stimulus, theentire, massive burden of returning the economy to full employment would fall uponthe wage/price/interest-rate adjustment mechanism. In the absence of governmentaid on the demand side, it was up to wage/price/interest-rate flexibility tocreate the additional demand that would be needed for full employment. TheClassicals, by contrast, started with the idea that there was, by definition, alwaysenough demand already created to assure full employment. Wage/price/interestrateflexibility did not need to create new demand, it only needed to allocate productioninto channels that would call forth into activity the demand that wasalready there.The difference in perspective is far more than just semantics. The problem asconceived by Keynes and his followers is a massive one, while the difficultyperceived by the Classicals is much smaller. The problem of creating new demanddemanded, quite naturally, all the complexities and subtleties of the macroeconomictheories emphasized by Keynes and his followers. The problem of allocating existingdemand, by contrast, was much simpler. It was far more easily conceived as beingsolvable by merely a wave of the Invisible Hand.Mill made the Classical argument more complex, but weaker, by broadening theframework to include routinely storable money. Now the necessity-of-sufficientdemandidea held good as a “long run,” not an immediate, proposition, where the“long run” was the unspecified period of time required for the excess demand formoney to end (in his Unsettled Questions framework, this was the time required forthose spooked by the commercial crisis who have postponed buying for now butwho “must buy at last,” to re-enter the demand side of the market). But even thepost-Mill Classical framework took the return of demand as automatic, so that thesolution to the short-term crisis was not to create new demand, but merely to allowthe pent-up demand stored in money to return to the markets.The invention of monetary disequilibrium theory andmodern macroeconomicsMill’s discovery in the Unsettled Questions of a way in which demand for goods-ingeneralcould for a time be deficient due to the unique role played by money in the