Is the Market a Test of Truth and Beauty?

Ȁȅȃ Partʺ: Economics

sufficiently flexible promptly to absorb the full impact of a monetary dis-
turbance. It recognises the utter reasonableness of that inflexibility from
the standpoint of individual price-setters and wage negotiators. Although
myriad prices and wages are interdependent, they are necessarily set and
adjusted piecemeal in a roundabout process. Whether a contemplated
transaction can take place to the advantage of both potential parties may
well depend on prices besides those subject to the decisions of those
parties.
H.J. Davenport, to mention just one example from early twentieth-
century America, emphasised the monetary nature of depression.

It remains difficult to find a market for products, simply because each

producer is attempting a feat which must in the average be an impossibil-

ity—the selling of goods to others without a corresponding buying from

others.... [T]he prevailing emphasis is upon money, not as intermediate

for present purposes, but as a commodity to be kept.... [T]he psychology

of the time stresses not the goods to be exchanged through the interme-

diary commodity, but the commodity itself. Ļe halfway house becomes

a house of stopping.... Or to put the case in still another way: the sit-

uation is one of withdrawal of a large part of the money supply at the

existing level of prices; it is a change of the entire demand schedule of

money against goods. (ȀȈȀȂ, pp.ȂȀȈ–Ȃȁǿ)

Davenport also recognised (p.ȁȈȈ) that the depression would be milder

and shorter if prices could fall evenly all along the line. In reality, however,

not all prices fall with equal speed. Wages fall only slowly and with painful

struggle, and entrepreneurs may be caught in a cost-price squeeze. Exist-

ing nominal indebtedness also poses resistance to adjustments.Ȃ

Monetary disequilibrium theory not only has a long and venerable his-

tory but was at times the dominant view on macroeconomics (cf. Warbur-

ton’s writings). Much evidence supports it, including statistical evidence

of the sort that present-day monetarists produce.

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Unfortunately, that promising line of analysis was largely crowded out for

a long time by such Keynesian concepts as theIS-LMapparatus, which

ȂFurther quotations from and citations to pre-Keynesian writings on the prevalence

and reasonableness of price and wage stickiness can be found in my “Ļe Keynesian Diver-

sion” (ȀȈȆȂ).