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

138 Michael R. MontgomeryPresented on the heels of the Classical caricature, the “Keynesians” look pretty good bycomparison. Leland Yeager (1997b) has pointed out that such “Keynesianism” is nothingof the sort: Wage/price stickiness is also a key part of pre-Keynesian macro-theory, anda core working assumption of Monetarist thought. The only people who have disagreedwith this so-called “Keynesian” position are the modern “New Classical” school(including “Real Business Cycle” advocates). “New Classicals” claim to be new-andimprovedversions of Classical thought. Accordingly, it is convenient for exposition if the“old” versions of those labels are packaged to match closely with the “new” ones.Certainly “New Classical Economics” (particularly its Real-Business-Cycle wing)aggressively asserts a simplistic belief in perfect price/wage flexibility, the neutrality ofmoney, and (by implication) Say’s Law. The real Classicals were more sophisticated thantheir self-appointed successors (see discussion below).6 The closest Mill comes is late in the essay when he writes:Nothing can be more chimerical than the fear that the accumulation of capital shouldproduce poverty and not wealth, or that it will ever take place too fast for its own end.Nothing is more true than that it is produce which constitutes the market for produce,and that every increase of production, if distributed without miscalculation among all kinds of producein the proportion which private interest would dictate, creates, or rather constitutes, its own demand.(1983 [1844]: 44, emphasis added)Here one is tempted to presume that such a distribution is created by the “invisiblehand” through wage-, price-, and interest-rate flexibility. Mill himself, however – whoeasily could have emphasized such mechanisms at this juncture – chooses to let thematter of the adjustment process rest. More to the point: To say that “production .. .creates, or rather constitutes . .. its own demand” “if distributed without miscalculation” is not tosay that such miscalculation will not occur. Nor is it to say how long-lasting the resultingdeleterious consequences are likely to be if there is “miscalculation,” or that it is wage/price flexibility that will cure the problem. Mill emphasizes “the return of confidence,”not flexible wages and prices, as the key event that will end the economy’s difficulties. Itshould also be noted that when Mill uses the word “creates” in the context of demand heimmediately corrects himself and substitutes the more apt word “constitutes” (Mill 1983[1844]: 42, 45, emphasis added). Mill’s most well-known passage on the subject is in the“Of Excess of Supply” chapter of the Principles of Political Economy, where he contemplatesan assumed doubling of a country’s productive powers. There Mill states that, shouldthis doubling lead to a “superfluity of certain things,” then “[i]f so, the supply will adoptitself accordingly, and the values of things will continue to accord to their costs ofproduction” (Mill 1965 [1848]: 558). Exactly how this will occur – and how long theprocess will take – is left unaddressed.7 Thus:Having once arrived at the clear conviction, that the general demand for products isbrisk in proportion to the activity of production, we need not trouble ourselves muchto inquire towards what channel of industry production may be most advantageouslydirected. The products created give rise to various degrees of demand, according tothe wants, the manners, the comparative capital, industry, and natural resources ofeach country; the article most in request, owing to the competition of buyers, yieldsthe best interest of money to the capitalist, the largest profits to the adventurer, andthe best wages to the labourer; and the agency of their respective services is naturallyattracted by the advantages towards those particular channels.(Say 1983 [1803]: 21)To Say, the core issue is the demonstration that [Aggregate] Demand cannot beinadequate – having once established that point, price and wage flexibility determine that thedesired types of goods will be produced and in the right quantities. The Adequacy-of-Demand proposition is established prior to, and not because of, wage and price flexibility.