This is a follow up on Pat Gunning. It is important to see that the Austrian 
   approach thinks of economics as a study of exchange while the rest regards 
   economics  as  a study of allocation.  Therefore the Austrian approach 
   emphasizes the function of money as a means of payment in an exchange while 
   the rest ignores this role. These points cannot be made clear without long 
   discussions. I believe that a historical review of the evolution of the 
   notion of neutrality of money will occupy a rather long book. 
 
 
   Whether money is neutral or not depends on what money is supposed to be. 
 
 
   (1)        If money is a unit of account, it is by definition neutral in an 
   allocation model: an arbitrary change in the numeraire does not affect the 
   relative prices and hence does not affect any real variables. Whether it is 
   David Hume or Irving Fisher or Robert Lucas, the name of money is applied to 
   a numeraire that has nothing to elucidate the exchange process. One may use 
   the term of velocity of circulation without ever portraying a circuit of 
   payment.  That is, the quantity theory of money is not about money at all: 
   it is about price, in which price is quoted in an arbitrary numeraire unit 
   called money.  The term neutrality of numeraire would be more precise. 
 
   (2)        If money is regarded as a store of value, as in the Keynesian 
   approach, it becomes a part of a theory of value, which is more complex than 
   a theory of price, because value is price times quantity of output. As I see 
   it, there is no proper theory of value in which prices and quantities are 
   independent of each other. 
 
 
   A store of value must affect the output via the equilibrium between savings 
   and investment, and the proper approach would be to do something to keep the 
   nominal prices constant to separate the effect of changes in savings and 
   investments. 
 
 
   An output effect must be shown to occur exactly when all relative prices 
   remain constant. For example, a Lucasian example can be easily reconstructed 
   such that both the supply and the demand curves shift to change the output 
   and employment at precisely the old relative prices. One will only have to 
   remember that an increased supply must be matched by an increased demand to 
   maintain equality of income and expenditure 
 
 
   Keynesian and monetarist analyses fall into an endless loop in which price 
   determines quantity which then determines price and nobody can figure out 
   how to separate the effect of a store of value from that of a unit of value. 
    This endless loop is something that remains unnoticed. Unless one knows 
   what microeconomics means by saying that the equality of demand and supply 
   determines price while macroeconomics says that equality of demand and 
   supply determine output, one would not see the issue. 
 
 
   This is a methodological issue. I seem to think that the methodological 
   problem has not even been recognized. Friedmans mechanistic splitting of the 
   effect of a change in money stock M on prices P and output T is not helpful; 
   it does not give any clue to what causal factors determine the effect on 
   price versus the effect on output. The Keynesian approach did not emancipate 
   itself from the notion of money as a numeraire, and hence it is unsure about 
   the ability of prices to adjust, whether it is for labor or for capital. 
 
 
 
    (3)       If money is regarded as a means of payment as in the Austrian 
   School tradition, then it becomes almost a matter of definition that it must 
   be non-neutral. If real goods are paid for with money, then the structure 
   and the level of output must be affected by the quantity of money as well as 
   by its point of injection and more generally by its path of circulation. 
 
 
   The following link has more on circulation of money as a means of payment to 
   show why money is relevant in a study of market clearing via its effect on 
   both outputs and prices. 
 
 
   Mohammad Gani 
 
 
   Money in Market Clearing at 
   [1]http://econwpa.wustl.edu:80/eps/mac/papers/0410/0410009.pdf 
 
References 
 
   1. http://econwpa.wustl.edu/eps/mac/papers/0410/0410009.pdf