Volume 6, No. 4 (Winter 2003)
The fundamental question we have to confront in the theory of monetary policy is therefore not whether money affects the real economy—yes it does, both in the short run and in the long run—but whether changes of the money supply can make society better off in the aggregate. Austrian economists who follow the approach of Mises and Rothbard believe that it cannot. By contrast, the intellectual edifice of Keynesianism—both old and new—rests squarely on the notion that money does alleviate the problem of scarcity for society as a whole. The entire case for monetary policy is based on the idea that “a decrease of inflation is followed by temporary output losses” (Zimmermann 2003, p. 6). At least in the short run, there is a trade-off between inflation and unemployment. But why should we believe that such a trade-off is more than an accident of history—that is, why should we not believe that a decrease in inflation could with equal probability lead to temporary output gains?
