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

136 Michael R. Montgomeryeconomy marks the beginnings of a transition from the Classical to the modern“macro-view.” It is, in a sense, the start of mainstream macroeconomic theory. Millshowed how demand for goods-in-general could be inadequate to guarantee fullemployment, without a decline in the money supply, and independently of thequestion of whether or not there is in place the correct “proportionality” inproduction. He did this while still maintaining that overproduction in the longterm,Malthusian sense was impossible. 15 In other words, he identified the keyaspect of modern business cycle theory: that deviations from full employment areself-correcting but occur for reasons that, since they occur in truly economy-widefashion, are not essentially microeconomic in nature.This was a new idea. To the extent that the earlier Classicals had a theory ofaggregate economic difficulties, it involved circumstances where problems in individualcommodity markets were large enough to exert a significant aggregateeffect, as in Ricardo’s “sudden changes in the channels of trade” argument (seeabove). The notion that something might occur that would push more or lessuniformly downward on goods-in-general is, to be sure, not entirely missing fromearlier Classical thought, 16 but it is safe to say that it plays little role in Classicalthinking (with the exception of Hume in the specific context of a change in themoney supply). Aggregate economic issues, to the pre-Mill Classicals, were just theaggregate outcome of the issues of all the individual industries, a problem of microeconomicswrit large. There were no “exclusively macro problems” that needed tobe tackled in a manner separate from microeconomics. 17 In the Unsettled Questions,Mill showed otherwise: Monetary disequilibrium, whether originating from thedemand side or the supply side of the “money market,” could generate aggregateeconomic disturbances that were superimposed onto the microeconomic structureof the economy.Mill’s framework was broader than that presented by Hume, whose analysispredicted problems only in the event of a change in money supply. Moreover, Millwas able to explicitly integrate his idea into the guiding macroeconomic principleof his day: Say’s Law. Finally, Mill’s macro-framework implied that the sole causeof aggregate economic problems on the demand side was money – either its supply orits demand. Thus, Mill is also founding Monetarist business-cycle theory at thismoment. This, then, is arguably one of the most fundamental contributions in all ofmacroeconomic theory.What makes it all the more remarkable is that Mill chose to carry over virtuallynone of these insights into his far-more-influential Principles of Political Economy, whichhe published in 1848, four years after the publication of the Unsettled Questions. In“Of Excess of Supply” in the Principles, after referring to a prior discussion ofcommercial crises, he simply announces perfunctorily that “[a]t such times there isreally an excess of all commodities above the money demand: in other words, thereis an under-supply of money” (1965 [1848]: 574). In the crisis, due to “the suddenannihilation of a great mass of credit . . . [a]lmost everybody therefore is a seller, andthere are scarcely any buyers” (ibid.). The analysis linking money’s role as a storeof-valueto the need to amend the interpretation of Say’s Law is omitted from thediscussion. Also notably absent is the careful explanation he had made in the