Monetary-disequilibrium Theory - Monetary-equilibrium in The Austrian School

Monetary-equilibrium in The Austrian School

The concept of monetary-equilibrium is basically a European one. Much of the work on this doctrine has been done by Swedish, British and Austrian economists. The whole approach begins with the work of Knut Wicksell in the development of the concepts of natural and market rates of interest. Wicksell believed that if the two rates are equal then the price level will be constant and any difference in the two rates will manifest themselves as changes in the value of money. Wicksell's work had a clear Austrian connection as he relied on Eugen Ritter von Böhm-Bawerk's theory of capital in developing the concepts. The representative of the British monetary-equilibrium approach was mainly Dennis Robertson.

Mises relationship to the theory is ambiguous. According to Ludwig von Mises, monetary equilibrium happens first at the individual level. Each actor wants to keep a cash balance on hand for future transactions,say,both planned and contingent. This desired money balance of the individual constitutes his money demand and is based on his subjective valuation of holding money compared to their valuation of obtaining more goods and services. The amount of the money that the individual possess is his supply of money. Individuals will try to equate their desired and actual cash holdings through their spending behavior.

The theory was further developed by Friedrich August Hayek.

Most of the recent work on this theory has been done by Murray Rothbard.

The Austrian economists in the 1920s and 1930s thus played a central role in the macroeconomic debates of the time.