The determinacy of absolute prices in classical economic theory

This paper takes issue with Don Patinkin, who recently argued that the simultaneous equations of classical economic theory are necessarily inconsistent, and that the classical attempt to determine real prices in the real sector of the economy and absolute prices in the monetary sector involves logical contradictions. Since a large part of his argument hinges on a misunderstanding of just what it was that the classical school assumed, the present paper restates the classical theory so as to emphasize its postulational bases. A simple example is then employed to demonstrate that it is quite possible to set up a consistent classical system in which relative prices are determined in the real sector independently of absolute prices in the monetary sector. Next the details of Patinkin's analysis are examined for the flaws that led him to believe that such a system could not be set up. The paper closes with some observations on the ways in which determinacy can be built into a system and on the generally unsatisfactory state of equilibrium theory.