J.S. Mill, W. Roscher and D.H. Robertson: The Early History of the Monetary Misperceptions Hypothesis

ABSTRACT

Around 50 years ago, Edmund Phelps and Robert Lucas proposed an answer to the question of why changes in aggregate nominal spending bring about output and employment effects, instead of purely proportional variations in prices. The Phelps–Lucas monetary misperception hypothesis asserted that imperfect information about the state of the economy may cause sluggish price or wage adjustment to emerge as reactions to monetary shocks in an otherwise perfectly flexible prices economy. The present paper documents how J.S. Mill, W. Roscher and D.H. Robertson addressed that issue in their respective notions of ‘general delusion’, ‘generally prevailing error’ and ‘monetary misapprehension’, formulated between mid-19th and early 20th centuries. It also discusses how their contributions were not acknowledged until after Phelps and Lucas.

KEYWORDS:

• Monetary misperceptions
• Mill
• Roscher
• Robertson
• misinformation

JEL CODES:

• B3
• E3

Acknowledgements

I have benefitted from helpful comments by two anonymous referees, David Laidler, Francesco Sergi, Edward Nelson, Sylvie Rivot, Robert Dimand, Peter Galbács, Roger Backhouse, Joaquim Andrade, Gilberto Lima, Rogério Arthmar, Carlo Zappia and (other) participants at the 2021 virtual meetings of the History of Economics Society. I would like to thank Guido Erreygers for bibliographical support, and Peter Galbács for providing a paragraph from the Lucas Papers.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 Barro (1981, p. 1095) was the first to use the term, followed by McCallum (1989).

2 Evans and Aligica (2016) have suggested a reading of Austrian economics through the lens of Lucas’ islands parable and monetary misperception hypothesis, but that is distinct from arguing that Austrian economics anticipated such notions. See also Hoover (1988) for the argument — eventually accepted by Lucas — that Austrian and New Classical economics represent quite distinct research programs.

3 Mill (1848 [1909], pp. 550–551) put Attwood in the company of Hume’s 1752 Essay on money as proposers of the ‘fallacy’ that ‘currency quickens industry’. Unlike Attwood, Hume had assumed that all commodities would not rise in price simultaneously, that is, price inertia. Mill (1848 [1909], pp. 491–492) acknowledged the Hume-Cantillon effect caused by the impact of money injection on price structure.

4 [A producer] ‘would be a little discouraged if he thought that the price of his goods would fall more than the prices of others; but even then he would not be very likely to stop work’ (Marshall and Marshall 1879 [1994], pp. 155–156).

5 The equivalent passage reads slightly different in Roscher (1849, p. 726, 1861b, p. 297): ‘The mere introduction of trade by money is quite sufficient to rule out Say’s rigorous theory in the strict sense’.

6 This may be alternatively translated from the German original as: ‘This will last as long as those engaged in commercial transactions have not become fully aware of the price swing’.

7 Cf. Lucas (1981, pp. 7–8): ‘It is exactly’ the misinformation ‘that permits all producers simultaneously to believe they have gained relative to others as the consequence of a monetary shock’.

8 In his description of a ‘typical’ industrial fluctuation — reminiscent of his Study (pp. 239–241) — Robertson (1957–59 [1963], pp. 409–415) mentioned how the stimulus to expand production in the boom is intensified by ‘irrational optimism’, as people are ‘slow to realize that other people’s selling-prices will raise as well as their own’, and vice-versa for ‘irrational pessimism’ in the downswing.

9 Bonar (1911, p. 719) wrote that Mill’s essay did not retain the ‘respect of economists’. Edgeworth (1899), based on Mill’s essay, was an exception, but he did not mention ‘general delusion’.

10 Lucas would later remark that ‘the idea that changes in the quantity of money … are an important causal factor in real economic instability is a very old one. Indeed, many nineteenth century economists defined business cycles to be monetary or financial “crises”’ (Lucas Papers, Duke University, Box 13, undated folder).

Additional information

Funding

Research funding from CNPq (Brazilian Research Council) is gratefully acknowledged.