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

The genesis of an idea 1398 “M. Say has, however, most satisfactorily shown that there is no amount of capital thatmay not be employed in a country, because a demand is only limited by production”(Ricardo 1951 [1817]: 290). In a footnote, Ricardo has a backhanded reference tomarket forces, though not specifically to price- or wage-flexibility. He criticizes AdamSmith for seeming to imply that England’s capital might remain unemployed in theabsence of a foreign market for British products. Ricardo argues that the capital will finduse domestically, and, within this specific context, argues thatIt is, however, always a matter of choice in what way a capital will be employed, andtherefore there can never for any length of time be a surplus of any commodity; for ifthere were, it would fall below its natural price, and capital would be removed tosome more profitable employment. No writer has more ably and satisfactorily shownthan Dr. Smith the tendency of capital to move from employments in which thegoods produced do not repay by their price the whole expenses, including theordinary profits, of producing and bringing them to market.(Ricardo 1951 [1817]: n. 3, 193–4)As is often the case for Ricardo, the question of the speed of the implied adjustment isdeftly finessed (what is “any length of time”? how fast-acting is “a tendency”?). Back inthe text, as part of his argument that demand for luxuries is infinite, he seeks to establishthat the supply of such goods will be readily forthcoming: “The poor, in order to obtainfood, exert themselves to gratify those fancies of the rich; and to obtain it more certainly,they vie with one another in the cheapness and perfection of their work .. . Hence arisesa demand for every sort of material which human invention can employ ... ” (Ricardo1951 [1817]: 197).These isolated passages, however, do not add up to an argument that Ricardo’sprimary macroeconomic focus was on wage and price flexibility. Like Mill and Say, thecrucial point to be established was that demand was unlimited, given the means topurchase. On the other hand, when challenged by Malthus specifically on the questionof wage-flexibility, Ricardo was quick to contest the assertion of wage-stickiness. WhenMalthus claimed that “We know from repeated experience that the money price oflabour never falls till many workmen have been for some time out of work” (Letter ofMalthus to Ricardo, 16 July, 1821), Ricardo denied it vigorously, responding thatI know no such thing, and if wages were previously high, I can see no reason whateverwhy they should not fall before many labourers are thrown out of work. All generalreasoning I apprehend is in favour of my view of this question, for why should someagree to go without any wages while others were most liberally rewarded.(Letter from Ricardo to Malthus, 21 July, 1821)The question however is not whether Ricardo and, presumably, the other Classicalsbelieved in wage/price flexibility, but rather, as discussed in the text, what was its role intheir macroeconomics.9 While Ricardo emphasized transitions from war to peace in his discussion, we can easilyimagine macroeconomic disturbances such as confusion between nominal and realforces (Principles, 297–8) as likely causes of similar events, if we assume they lead to aconsiderable build-up of excess capital stock.10 A glance at recent graduate macro (or micro) textbooks, with their now-standardassumptions of (1) infinitely-divisible (2) homogeneous capital that is (3) exclusivelyacquired in debt-free ways, suggests that the field has yet to seriously confront the thornydifficulties posed by true-to-life capital. For two useful treatments from outside the mainstreamof such difficulties, see Garrison (2001) and Davidson (2002). For a broad,insightful survey on capital’s role in economic theory, see Lewin (1999).11 “It is observable, moreover, that precisely at the same time that one commodity makes aloss, another commodity is making excessive profit” (Say 1983 [1803]: 16).12 “ ... as there may be a temporary excess of any one article considered separately, so may