Weekend Reading: The birth of macroeconomics as we know it back in 1829. But Mill gets one big thing wrong: a depression happens whenever there is an uncompensated sharp rise in the demand for money, and such sharp rises can and do have many causes—nominal illusion in a time of inflation leading to "over investment" is only one of them. And, of course, Mill as absolutely hopeless with respect to the cure: John Stuart Mill (1829): Of the Influence of Consumption on Production https://delong.typepad.com/mill-questions.pdf: "Periods of 'brisk demand' are also the periods of greatest production: the national capital is never called into full employment but at those periods. This, however, is no reason for desiring such times; it is not desirable that the whole capital of the country should be in full employment. For, the calculations of producers and traders being of necessity imperfect, there are always some commodities which are more or less in excess, as there are always some which are in deficiency. If, therefore, the whole truth were known, there would always be some classes of producers contracting, not extending, their operations. If all are endeavouring to extend them, it is a certain proof that some general delusion is afloat…

…The commonest cause of such delusion is some general, or very extensive, rise of prices (whether caused by speculation or by the currency) which persuades all dealers that they are growing rich. And hence, an increase of production really takes place during the progress of depreciation, as long as the existence of depreciation is not suspected; and it is this which gives to the fallacies of the currency school…. But when the delusion vanishes and the truth is disclosed, those whose commodities are relatively in excess must diminish their production or be ruined: and if during the high prices they have built mills and erected machinery, they will be likely to repent at leisure. In the present state of the commercial world… unreasonable hopes and unreasonable fears alternately rule with tyrannical sway… general eagerness to buy and general reluctance to buy succeed one another… at brief intervals.

Except during short periods of transition, there is almost always either great briskness of business or great stagnation; either the principal producers of almost all the leading articles of industry have as many orders as they can possibly execute, or the dealers in almost all commodities have their warehouses full of unsold goods….

It may very well occur, that there may be… a very general inclination to sell with as little delay as possible, accompanied with an equally general inclination to defer all purchases as long as possible….It is true that this state can be only temporary, and must even be succeeded by a reaction of corresponding violence, since those who have sold without buying will certainly buy at last, and there will then be more buyers than sellers. But although the general over-supply is of necessity only temporary, this is no more than may be said of every partial over-supply. An overstocked state of the market is always temporary, and is generally followed by a more than common briskness of demand…

#macro #weekendreading

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