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