On Nonneutral Relative Price Effects in Monetarist Thought : Some Austrian Misconceptions

The resurgence of monetarism has been one of the more Celebrated developments in postwar macroeconomic thought. Since Milton Friedman's influential 1956 restatement of the quantity theory of money, monetarism has become increasingly prominent in policy deliberations and academic theorizing alike. Matching this rise has been a corresponding revival of interest in the monetarist view of the monetary transmission mechanism-i.e., the mechanism or process that links money to nominal income and through which the economy adjusts to, monetary changes.This article deals with the monetarist version of the monetary mechanism as expounded by Friedman and his late-19th and 20th century American quantity theory predecessors; in particular, it deals with a key misconception concerning that view. More precisely, it examines the Austrian School's contention that monetarists invariably ignore relative price and real output effects in the monetary mechanism. The term Austrian here of course refers to those modern followers of the monetary overinvestment business cycle theories of Ludwig von Mises and Friedrich A. Hayek. Those theories explain how monetaryinduced declines in the rate of interest from its real equilibrium level stimulate overinvestment of capital in projects that prove unsustainable once the rate returns to equilibrium