The Concept of “Neutral Money” Stems from 3 Fundamental Errors: Static Analysis, Assumptions, and Methodology

I showed that while mainstream economics usually posits neutrality of money in the long term, when addressing short-to-mid-term cycles, it is acknowledged that changes in money supply do have an impact on the real sphere. Different schools of economics present different views on the causes of this phenomenon. Monetarists emphasize adaptive expectations, neoclassicists point to imperfect information with rational expectations and the new Keynesians focus mostly on price rigidity.

On the other hand, the Austrian school emphasizes the case in which “the monetary injection is not distributed among individuals in exact proportion to their previous shares of money holdings” (Blaug, 1985), which is responsible for the non-neutrality of money that exists even in the long term.

The concept of neutral money in its most popular view stems from erroneously applying conclusions drawn from static analysis of two equilibrium states to dynamic market processes, accepting simplified, unrealistic assumptions and holistic methodology. It seems, therefore, that the 11th of the 13 most important issues in economics, according to Morgenstern (1972), that demand resolution —that is departure from studying aggregates like “general price level” and more attention to dynamic analysis of money in Cantillon’s spirit — still remains unresolved.

I trust that my book is a step in the direction suggested by Morgenstern.

—Arkadiusz Sieroń, Money, Inflation and Business Cycles: The Cantillon Effect and the Economy, trans. Martin Turnau, Routledge International Studies in Money and Banking (Milton Park, UK: Routledge, 2019), 11-12.