In 1844, John Stuart Mill published his Essays on Some Unsettled Questions of Political Economy. In his sights was a famous doctrine, Say’s Law, which then defined – and for many economists still does define – the central theorem of macroeconomics: supply creates its own demand. Everything that is produced is bound to be consumed, because otherwise there would be no point in producing it. The problem that obsessed the first generation of ‘scientific’ economists was the pressure of population on resources, especially food supply. Such a world of scarcity seemed to rule out the possibility of what Mill called a ‘general glut’ of commodities.1 The problem was a general glut of people. Yet economic life exhibited cycles of boom and bust. In the bust period, masses of commodities were produced for which there was no market.
How could this experience of the real world, Mill asked, be reconciled with a doctrine which held that a general surplus of goods was impossible?
Mill argued as follows. Say’s Law depended on ‘a supposition of a state of barter’. In barter, buying and selling are ‘simultaneously confounded’. But money offers the possibility of postponing purchases. Instead of spending money people may want to hoard it. Such postponement of purchase may arise from a ‘general anxiety’. So all that is produced for consumption need not be bought. However, if money is a commodity, like gold, an excess demand for money will lead to resources being switched to gold production. Thus Say’s Law, that ‘every increase of production, if distributed without miscalculation among all kinds of produce in the proportion which private interest would dictate, creates, or rather constitutes, its own demand’, was valid as a general principle. By this fudge, Mill escaped from the dilemma he had posed.2
Nevertheless, his essay raised the most fundamental issue in macroeconomics: the relationship between money and the production economy. Following hard on its heels was a second issue, also raised by Mill, which lies at the heart of macroeconomic policy: how to stop money ‘getting out of order’. The two are interlinked, in the sense that they involve the conditions under which money can be made to serve rather than disturb production. They are unsettled in the sense that people have been arguing about them ever since money started to be used. Our own attempt to make sense of these arguments takes us back to the origins of money itself. Why did people start using money? Was it inseparable from production, or was it something added on? What is its place in the scheme of social life?