Austrian and New Classical Schools Differ on the Homogeneity Postulate So They Produce Different Business Cycle Theories

The difference between Austrians and New Classicals as regards the appropriateness of the homogeneity postulate for agents and goods leads to a difference in their respective business cycle theories. Austrians explain such cycles in terms of coordination failures between the agents’ savings and investment decisions. These failures arise from non-neutral monetary injections in the economy, which disturb the structure of relative prices. This disturbance bring about malinvestments, culminating in distortions of the structure of production.

New Classicals, on the other hand, assume that there is ‘helicopter money’, which can be spread immediately and proportionately over the economy. From a full-information point of view, money is then neutral in a comparative-static sense. Furthermore, the homogeneity postulate for goods eliminates malinvestments. Consequently, the NCE [New Classical Economics] explains business cycles in terms of overinvestments.

—Rudy van Zijp, “Austrian and New Classical Business Cycle Theories” (PhD diss., Free University of Amsterdam, 1992), 257-258.