4.Two different ways of conceiving macroeconomics

Austrian School / Neoclassical School
(Monetarists and Keynesians)

1.Time plays an essential role The influence of time is ignored.

2.”Capital” is considered as a heterogeneous set of capital goods that are constantly being used up and must be reproduced / Capital is considered as a homogeneous fund that reproduces itself alone.

3.The productive process is dynamic and broken down into multiple vertical stages. /There is considered to be a horizontal and one-dimensional productive structure in equilibrium.

4.Money affects the process by modifying the structure of relative prices / Money affects the general price level. Changes in relative prices are not considered.

5.Explains macroeconomic phenomena in microeconomic terms (changes in relative prices) / The macroeconomic aggregates prevent the analysis of the underlying microeconomic situations.

6.Has a theory on the endogenous causes of economic crises that explains their recurring nature./ Has no endogenous theory of cycles. Crises occur due to exogenous reasons (psychological and/or errors in monetary policy).

7.Has a developed theory of capital. / Has no theory of capital.

8.Saving plays a leading role and determines a longitudinal change in the productive structure and the type of technology that will be used .Saving is not important. Capital reproduces itself laterally
(more of the same thing) and the production function is fixed and is given by the state of the art.

9.The demand for capital goods varies inversely to the demand for consumer goods. (Any investment requires saving and, therefore, a sacrifice of consumption over time.) / The demand for capital goods varies in the same direction as the demand for consumer goods..

10.It is assumed that production costs are subjective and are not given. / Production costs are objective, real and are considered to be given.

11.Market prices are considered to tend to determine production costs, not vice versa. / It is considered that historical production costs tend to determine market prices

12.The interest rate is considered as a market price determined by subjective valuations of time preference. It is used to discount the present value of the future flow of yields towards which the market price of each capital good tends. / The interest rate is considered to tend to be determined by the marginal productivity or efficiency of capital and is conceived as the internal return rate which makes the expected flow of yields equal to the historical production cost of capital goods (which is considered given and invariable).The rate of interest is considered to be a mainly monetary phenomenon.

Jesús Huerta de Soto
Professor of Political Economy
King Juan Carlos University of Madrid, Spain

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