Austrian vs. Neoclassical

[Niccolo]

Alright, this is something I still struggle to understand. What are the specific differences between the Austrian and Neoclassical school of thought - more appropriately the Walrasian school or Neo-Walrasian school.

As far as I can tell the differences lie in the separation of methodologies, but what of specific issues? I know that the Neoclassical school does not generally accept the Austrian Business Cycle, but in light of the apparent failures associated with the Schumpeterian analysis and Real Business Cycle Theory, what more do they have? I’ve heard of the EBCT, which seems almost close enough to ABCT, but without the specific variables and details involved.

What of monetary theory? Where do the Walrasians fall on a quantity theorists proposal? Moreover, where exactly do Austrians fall? I’ve always generally accepted Benajamin Anderson’s book, The Value of Money as being the core for the realist approach to the determination of the origin of the value of money. But I get the feeling it is not as generally accepted with Austrians, or at least there is a different approach.

For example, I often get the feeling that Austrians, when referring to inflation, do not clarify enough that the increase in the money supply does not necessitate price increases at the same rate or even at all, and that it is only ceteris paribus that the prices do increase monetarily. However, money price is actually a reflection of two different supply and demands going on at the same time. The supply and demand for money, and the supply and demand for the good in question.

I’ve tried countless numbers of times to graph this out, but fail each time. Do Austrians and Neoclassicals on either side take this approach to the value and equilibrium price of money?

[newson]

@Niccolò

For example, I often get the feeling that Austrians, when referring to inflation, do not clarify enough that the increase in the money supply does not necessitate price increases at the same rate or even at all, and that it is only ceteris paribus that the prices do increase monetarily.

i’m going to dodge the bulk of your post. regarding the above comment, i believe that an increase in the money supply could possibly be accompanied by falling nominal prices across the board, providing there were a strong desire to hoard cash (fears of war etc.). obviously there would have to come a point where no further cash accumulation were desired or possible, at which point the upward price pressure would start to make itself felt on goods and services. so i think not only are distortions caused in different parts of the economy, but the can be unevenly felt over time as well.

[Niccolo]

What you’re describing is purely on a Supply and Demand basis, but I believe you may be confusing the situation. Purchasing power of money and price of non-monetary goods are not the same thing. When the money supply decreases, purchasing power decreases, it has nothing more to do with prices ceteris paribus.

The price increases come with the increase in the money supply, not with the decrease in purchasing power, which is what I believe you might be thinking of. There is in fact no reason, ceteris paribus, for prices to increase when money supply increases, it is only a reaction to the greater facility to purchase that prices increase, so that it appears that demand increases as people have more nominal dollars to purchase goods at.

The increase demand for cash would have to be quite great to offset an increase in the money supply, so that the demand for cash would not be compensated by the increases in prices, thus not really affecting prices at all - if the money supply is given directly to consumers and the consumers merely desire to “hoard,” then all that occurs is an increase in cash to hoard, and perhaps a decrease in the rate at which prices are falling, but only because more cash is available to hoard.

[newson]

@Niccolò

The increase demand for cash would have to be quite great to offset an increase in the money supply, so that the demand for cash would not be compensated by the increases in prices, thus not really affecting prices at all - if the money supply is given directly to consumers and the consumers merely desire to “hoard,” then all that occurs is an increase in cash to hoard, and perhaps a decrease in the rate at which prices are falling, but only because more cash is available to hoard.

if there were no increase in cash holdings as an offset, the increase in money supply would necessarily put upward pressure on prices of goods and/or services. and since hoarding is only temporarily possible, prices at some stage prices must experience some upward bias from any money supply increase. they may fall in nominal terms if there is offsetting productivity exerting a greater downward price bias.

[Inquisitor]

General equilibrium analysis is partially incorporated into Austrian Economics; Garrison and Hullsman have some articles on this. The areas where neoclassicals (and I mean specifically Chicagoans) and Austrians seem to differ are on monetary theory (Austrians dispute the existence of neutral money, and Chicagoans believe a central bank is necessary), antitrust (up to now Chicagoans have believed antitrust is necessary, but this is changing), economic analysis of the law (although, in specific, it has been argued that Coase is compatible with Austrianism), public goods and general equilibrium analysis. Neoclassicals also make greater use of game theory; Austrians argue they do so naively. Some Austrians seem to think game theory would work well with Austrian economics. Methodological disputes are obvious,

IIRC Anderson is an Austrian, and from what little I know of Mises’ monetary theory he is not a quantity theorist. He puts an emphasis on the demand for money as well as its supply. I am not really sure what the ‘official’ view on money within the Austrian School is.

[martinf]

Niccolò, I would recommend the 2nd chapter of this paper by Jesus Huerta de Soto, which explains the main differences between the two schools in a brief and clear way. There are NOT only differences in methodology, but in many other issues.
It starts from a quote by Mises:

"What distinguishes the Austrian School and will lend it immortal fame is precisely the fact that it
created a theory of economic action and not of economic equilibrium or non-action."

http://mises.org/etexts/methodenstreit.pdf

You can also download an audio lecture of about 1 hour by Robert Murphy called Austrian vs. Neoclassical Analytics: http://mises.org/media.aspx?action=showname&ID=380

Hope this helps

[Niccolo]

@newson

@Niccolò

The increase demand for cash would have to be quite great to offset an increase in the money supply, so that the demand for cash would not be compensated by the increases in prices, thus not really affecting prices at all - if the money supply is given directly to consumers and the consumers merely desire to “hoard,” then all that occurs is an increase in cash to hoard, and perhaps a decrease in the rate at which prices are falling, but only because more cash is available to hoard.

if there were no increase in cash holdings as an offset, the increase in money supply would necessarily put upward pressure on prices of goods and/or services. and since hoarding is only temporarily possible, prices at some stage prices must experience some upward bias from any money supply increase. they may fall in nominal terms if there is offsetting productivity exerting a greater downward price bias.

Correct, but they only do so ex post facto. The increase in the money supply itself should not affect prices ceteris paribus, only when inflation allows for people to increase their purchasing do prices reflect inflation. Except, then how does the supply of money directly influence it’s purchasing power? Hmm… I guess it depends on how you are measuring purchasing power. Confusing.

[newson]

@Niccolò

Purchasing power of money and price of non-monetary goods are not the same thing.

maybe it’s me, but i can’t figure out what you’re saying here.

i understood that the austrians subscribed to the quantity theory of money, but differed from other schools of thought in that they held changes in money supply affect different prices unevenly, in an unpredictable and non-mechanistic way, with an uncertain time lag.

[Niccolo]

@newson

**maybe it’s me, but i can’t figure out what you’re saying here.

**

Perhaps I’m using the wrong terminology - and if I am I hope someone can point that out to me, but what I mean basically comes down to this:

Purchasing power = Equilibrium price of money.

Price of goods = Price of goods in money units.

I suppose you could say, one needs the equilibrium price of money to determine the price of goods, but one does not need the price of goods to determine the equilibrium price of money. Does this speak to the value of money though? I don’t think so - ala Anderson.

Now, however, I am beginning to see the flaws in that definition of purchasing power being equilibrium price of money, mainly that money defined is merely a unit of exchange, and exchange requires trade between two goods, money and X.

Now, I may be incorrect on my assessments here, no doubt, especially considering the complexities and confusion of monetary economics, however, I do believe quite firmly that the price of money as a medium of exchange can not merely be defined in terms of supply and demand for money, but rather it must also incorporate the supply and demand of goods the money unit shall purchase, interest rates it may be sold for in an investment, or inflation/deflation rates for idle-savings. The money unit then is never static in value or price, but constantly fluctuating along with everything, for the money unit defined is merely a unit of exchange, it’s price is dependent on other prices not excluding it’s own price. My problem here is, where is money in equilibrium? Or can money ever find equilibrium? Can we graph it?

I don’t think we can quite honestly, any graph would imply merely that the money supply has shifted, thus ceteris paribus, causing the price equilibrium of money to decrease. But that’s not the end of the story. This is the best graph I could come up with:

I also came across this other graph which I believe may be more professional and less confusing, though I am not certain if I am satisfied with it, given the author’s apparent assumptions that GS = MD and MS = GD

i understood that the austrians subscribed to the quantity theory of money, but differed from other schools of thought in that they held changes in money supply affect different prices unevenly, in an unpredictable and non-mechanistic way, with an uncertain time lag.

You understood wrong. Austrians are quite adherent opponents the quantity theory of money - though strangely at the same time crude quantity theorists themselves!

As all economists usually are crude quantity theorists.

[newson]

@Niccolò

Perhaps I’m using the wrong terminology - and if I am I hope someone can point that out to me, but what I mean basically comes down to this:

Purchasing power = Equilibrium price of money.

Price of goods = Price of goods in money units.

I suppose you could say, one needs the equilibrium price of money to determine the price of goods, but one does not need the price of goods to determine the equilibrium price of money.

i’m sorry, but i don’t see how you can abstract away prices of goods and services in considering money. after all, money’s primary function is precisely that of a means of exchange . i think you’re referring to the demand for money as a unit of storage for future exchanges of goods and services (ie hoarding).

@newson

i understood that the austrians subscribed to the quantity theory of money, but differed from other schools of thought in that they held changes in money supply affect different prices unevenly, in an unpredictable and non-mechanistic way, with an uncertain time lag.

@Niccolò

You understood wrong. Austrians are quite adherent opponents the quantity theory of money - though strangely at the same time crude quantity theorists themselves!

i don’t understand your sentence. nor do i understand where i’m wrong in my claim about austrians and the quantity theory of money.

[Niccolo]

@newson

**i’m sorry, but i don’t see how you can abstract away prices of goods and services in considering money.

**

Who is?

@newson

**after all, money’s primary function is precisely that of a means of exchange .

**

Now, however, I am beginning to see the flaws in that definition of purchasing power being equilibrium price of money, mainly that money defined is merely a unit of exchange, and exchange requires trade between two goods, money and X.

Yes, had you gone a few sentences down you would have seen that I beat you to that punch.

@newson

**i think you’re referring to the demand for money as a unit of storage for future exchanges of goods and services (ie hoarding).

**

Well, supply and demand for money units usually do entail demand functions… [:P]

@newson

i don’t understand your sentence. nor do i understand where i’m wrong in my claim about austrians and the quantity theory of money.

The quantity theory of money is a theory along the following lines described as,

given a number of units of money; given
a number of units of goods to be exchanged; assume these
two numbers to be independent1 of each other; assume all
the goods to be exchanged for all the money; then the average
price will be a simple function of the quantities of goods
and of money respectively, such that an increase in the
amount of money will increase the average price per unit of
goods proportionately, if goods remain unchanged in
amount, or an increase in goods will lower the price per unit
proportionately, money being assumed to remain unchanged
in amount.

Anderson, The Value of Money, 123.

’

Austrians are not quantity theorists because they are not concerned with quantities so much as they are concerned with value relationships This is a defining characteristic of the Austrian school, to miss it signals a huge ignorance in what makes an Austrian fundamentally Austrian. You’re getting confused on the similarities Austrian monetary theories possess with the quantity theory, mainly that as the money supply shifts out ward, aggregate rise; however, though this may be a commonality between the two, it is one of the few and even in this commonality the attributes, specifications, and substance of the argument are not the same.

Quantity theorists give velocity as a constant, and paying little attention to it at all merely plug in the numbers retrieving a number to call it the measure of value for X good or Y money unit. Austrians see this as completely fallible due to the subjectivist leanings inherent in Austrian philosophy.

[newson]

@Niccolò

Austrians are not quantity theorists because they are not concerned with quantities so much as they are concerned with value relationships This is a defining characteristic of the Austrian school, to miss it signals a huge ignorance in what makes an Austrian fundamentally Austrian. You’re getting confused on the similarities Austrian monetary theories possess with the quantity theory, mainly that as the money supply shifts out ward, aggregate rise; however, though this may be a commonality between the two, it is one of the few and even in this commonality the attributes, specifications, and substance of the argument are not the same.

Quantity theorists give velocity as a constant, and paying little attention to it at all merely plug in the numbers retrieving a number to call it the measure of value for X good or Y money unit. Austrians see this as completely fallible due to the subjectivist leanings inherent in Austrian philosophy.

i read the anderson bit, and your piece, too. but cannot find any part of my quote (below) that contradicts the fact that austrian believe changes in money supply have effects, but those effects are unknowable and unquantifiable:

" i understood that the austrians subscribed to the quantity theory of money, but differed from other schools of thought in that they held changes in money supply affect different prices unevenly, in an unpredictable and non-mechanistic way, with an uncertain time lag."

[Niccolo]

@newson

i read the anderson bit, and your piece, too. but cannot find any part of my quote (below) that contradicts the fact that austrian believe changes in money supply have effects, but those effects are unknowable and unquantifiable:

And thus, “unquantity theoretical.”

St. Peter’s Ghost! Open a textbook. [8-)]

[Kirznerian]

@Niccolò

Alright, this is something I still struggle to understand. What are the specific differences between the Austrian and Neoclassical school of thought - more appropriately the Walrasian school or Neo-Walrasian school.

This video of an interview of Kirzner explains the fundamental difference between these two schools of though:

interview

[Kirznerian]

@Niccolò

As far as I can tell the differences lie in the separation of methodologies, but what of specific issues? I know that the Neoclassical school does not generally accept the Austrian Business Cycle, but in light of the apparent failures associated with the Schumpeterian analysis and Real Business Cycle Theory, what more do they have? I’ve heard of the EBCT, which seems almost close enough to ABCT, but without the specific variables and details involved.

The Neoclassical school does not have a business cycle model integrated in their economic theory, with the possible exception of the Real Business Cycle model. With is a model were the economy is always pareto optimal during the cycle| (with means that there is no genuine cycle in the austrian sense).

I’ve tried countless numbers of times to graph this out, but fail each time. Do Austrians and Neoclassicals on either side take this approach to the value and equilibrium price of money?

The equilibrium price of money is zero because money does not exist in equilibrium.

[Donny_with_an_A]

This might be helpful:

What is Wrong With Neoclassical Economics (And What is Still Wrong With Austrian Economics)

[Donald_Lingerfelt]

This thread is a good one and I’ve enjoyed the discussion. Being one who was just into a similar discussion on another thread, I’ve realized that I was mislead by Reisman into the quantity theory of money. He believes in it very much, and I listened to his lectures and read portions of his book on this subject. After re-reading Human Action and Man, Economy, and State, however, I realized that this position is in error as the Austrians believe that there is no such thing as a “Price Level”. There is much to support this view and I have begun to re-assess the whole subject.

I have a few questions for those who may know: If the Austrians believe that there is no such thing as a price level or index, then how is it possible to know if there is such a thing as “Inflation”? If Velocity is nothing either (and the Austrian Business cycle takes into account of an increase of spending and saving), how can one determine if in fact a change in it is taking place? How is it that consumers can tell that inflation is taking place in order to panic?

I agree that marginal utility works on an individual basis for the price of a thing, and consumer’s have different utilities for the same things, which accounts for the variation in prices. However, can we say that price inflation is taking place just because prices rise? Can it not be that consumers just want things more than they did before (and have more money with which to buy them)?