THE AUSTRIAN-NEOCLASSICAL RELATION: A STUDY IN MONETARY DYNAMICS

The Austrian school, identified in terms of its attention to the complexities of the economy's capital structure, differs systematically and markedly on many macroeconomic issues when compared to the more orthodox neoclassical school. The Austrian-neoclassical relation can be brought into focus by identifying two divergent developments of the macroeconomic theory offered by Knut Wicksell. Wicksell had formalized the capital theory spelled out by Bohm-Bawerk to serve as the basis for the exposition of his monetary theory. His theory highlighted what has come to be known as the real-cash-balance effect, and it identified the associated cumulative process that is triggered by a reduction of the bank rate of interest relative to the natural rate. The Austrian origins of Wicksell's contribution and his attention to both money and capital meant that Wicksell's formulation was a natural starting point for further developments within the Austrian school. At the same time the formalization of the theory made it ripe for development along neoclassical lines. Casual acquaintance with the subsequent literature reveals that Wicksell in the hands of the Austrians was one thing, and Wicksell in the hands of the neoclassicals was something else. The present study is an inquiry into the nature and significance of this difference.; The degree of macroeconomic aggregation is found to constitute an important dimension in the difference between the Austrian and neoclassical schools. Ludwig von Mises of the Austrian school and Don Patinkin of the neoclassical school are offered as polar extremes on the issue of aggregation. Mises allowed the locus of decision making to dictate the level of aggregation. This led him to embroider on the Wicksellian idea in the context of a highly decentralized economy involving a large assortment of consumer goods and interrelated capital goods. The Austrian development reflects the view that capital is a complex and multidimensional structure, money is a medium of exchange, and the price system is a network for the communication of economic information. By contrast, Patinkin's development of the Wicksellian idea consists of putting the real-cash-balance effect through its paces in the context of a four-sector macroeconomic model in which one sector is always in equilibrium. The neoclassical development in its most extreme form reflects the view that capital can be treated as a homogeneous quantity, that money is nothing other than a non-interest bearing asset, and the belief that the price system can be proxied with two relative prices.; In the Patinkin model where the market forces associated with the cumulative process play a major role in moving the economy from one equilibrium position to another, forced savings and other distribution effects are simply assumed away. By contrast, Mises argues that because of the very nature of market forces, these relative-price effects are the key to a fundamental understanding of monetary disturbances. Closely related to these conflicting views are the conflicting views of the cumulative process itself. While Patinkin sees the cumulative process as a stable, equilibrating process, Mises sees it as a disequilibrating process that ultimately leads to an economic crisis. Putting the contrast in still another form, Patinkin uses the Wicksellian idea to demonstrate the essential neutrality of money, while Mises uses the same idea to show why changes in the money stock can never be neutral.; The comparison of Patinkin and Mises suggests that these two theorists are on opposite ends of an analytical spectrum in macroeconomics. The contrast of these two polar views is considered to be worthwhile for its own sake, but it also provides a framework for putting intermediate views into perspective. More specifically, locating Keynes on the Patinkin-Mises spectrum is shown to yield a new perspective on Keynesian macroeconomics.