what is the difference between chicago school economics and austrian school?

[fufu]

The most important thing that differentiates these schools is their understanding of money. Monetarism is a branch of Keynesianism because monetarists believe that if you keep the money supply growing at a constant low pace (2-3 % per year) you will create the best conditions for the economy to prosper. Monetarists don't understand that in a prosperous economy prices should be falling because they believe that falling prices are always bad - the lesson they learned from the Great Depression. Monetarists want to beat Keynesians at their own game - we should have inflation but not too much.

Austrians say that the state shouldn't influence the money supply at all. They understand that there is no such a thing as 2-3 % inflation per year. The main problem is that different prices rise or fall at a different pace. During the same period, some prices can rise at 10 % per year (real estate 2000-06) while others can fall at 50 % per year (cellphones and smartphones - when adjusted for the increase in functionality). Government induced (through the central bank) inflation always benefits some parts of the population more than others. Monetarists seem to be unaware of this - they think that when the CPI (an arbitrary index construed in a way to reduce social security payments - see the 1996 Boskin Commission Report - http://www.ritholtz.com/blog/2010/01/eco...-masters/) rises by 2-3 %, everything is ok.

Monetarists take a macro view, while Austrians say that macroeconomics is nonsense and we have to look at the micro structure. Hayek: "Friedman's theory is based on supposed regularities between statistical magnitudes. He is convinced, and he believes he has historically demonstrated that there's a simple relationship between the total quantity of money and the price level." http://www.youtube.com/watch?v=fXqc-yyoVKg