Introduction
I recently watched a video from the Mises Institute (The Human Action Podcast) that presented a conversation between Robert Murphy and Patrick Newman about how the Austrian school of economics should respond to Modern Monetary Theory (MMT). This video provided an excellent example of why, after 20 years as a member of the Mises Institute, I decided to terminate my membership.
The conversation included a lot of banter but never got to the heart of the issue: government intervention in markets using money as the primary instrument. The increasing popularity of MMT represents a particular threat to markets in the United States. It deserves a more substantive and to-the-point discussion.
I will present a more succinct comparison between MMT and Austrian principles and theories by focusing on four elements of a market-based economy: value, exchange, resources, and business cycles.
Value
Economists generally accept that value influences economic activity. Any disagreement focuses on the source and measure of economic value.
MMT
MMT argues that goods exchanged in the market possess intrinsic value. Like many others, it also argues that value can be measured in the aggregate. This assumption supports the concept of centralized management of the national economy.
MMT, along with socialism, consists of a method of interventionism. Since governments produce no goods of their own, they must use some form of violent intervention to achieve their ends. Taxation (theft) provides the incentive for market actors to consume less, while government spending (redistribution) gives market actors an incentive to consume more.
Austrian
Austrian economists realize that individuals always and everywhere determine the source and measure of value. Market actors make value judgments on a product-by-product basis, depending on their individual preferences.
These differing assumptions about value directly affect exchanges in the market.
Exchange
In a modern economy, most transactions occur as exchanges of goods for money.
MMT
MMT assumes that money provides a measure of the aggregate values of goods. Money used in the exchange of goods and services in the market gets its value from the government’s taxing authority. MMT argues that because the government demands that taxes be paid in money, that money also has value in the market. However, MMT does not give a precise and clear definition of money.
Austrian
Discussions about money used in exchange frequently do not provide a clear and concise definition. An Austrian definition consists of the following:
“Money” consists of any economic good, or any claim on such a good, that serves as a general medium of indirect exchange and that acts as a final means of payment.
One must always remember that the use of an economic good determines whether it fits the definition of money. Dollars, for example, only become money when used specifically as a general medium of indirect exchange. As I will describe in other publications, dollars in the Fed do not act as money, whereas dollars in bank accounts do.
The word indirect plays a critical role in the distinction between MMT and Austrian theory regarding the use of money in exchanges. Because dollars used as money are only accepted in anticipation of another exchange, no need exists to increase or decrease the quantity of money in a particular market.
As with other economic goods, only individuals determine the value of money. They accept money in exchange because they anticipate being able to exchange it later for something else. As with any other exchanges, the actors must value what they get more than what they give. The person we generally refer to as the buyer values the goods he receives more than the money he gives up.
Resources
The fundamental economic resources consist of land and labor (some schools of economics include capital, which Austrians argue ultimately comes from land). Producers combine these resources in one form or another to provide goods for exchange.
MMT
In the same manner that MMT believes that goods have an aggregate value they also believe they can measure quantities of resources in the aggregate. They use levels of employment as proxies for these measures of available resources.
For MMT, high unemployment rates indicate shortages of resources. In response, the central planners (i.e., the government) can create more money to give to the unemployed. These people will, in turn, spend the money and stimulate economic growth.
Austrian
Austrians understand that no one can measure aggregate goods. You cannot create a valid quantitative measure for a group of chickens, iPhones, and automobiles. You also cannot create a meaningful aggregate for employment. You cannot take doctors, steelworkers, and auto mechanics and determine a meaningful measure of unemployment.
The only truly meaningful measure of economic resources is one unit at a time. Moderately meaningful aggregates can be used with care when goods are essentially interchangeable or workers have practically identical skills. Economists and market analysts must exercise great care when using any aggregated measures.
Market Cycle
Nearly all economists agree that market cycles occur, but they don’t agree on what causes them or how they can be reduced.
MMT
MMT, which advocates for market intervention, believes that cycles can be controlled by adding and subtracting money from the economy. Government spending (redistribution) would add money to the economy, and taxation (confiscation) would subtract money from the economy.
MMT interventions would operate based on aggregates. For example, it would give money to people categorized as unemployed, and they would take (tax) money from people with relatively large incomes.
Austrian
Most Austrian economists recognize that market resources cannot be measured in aggregates. Individuals make market decisions related to separate resources. Artificial changes in the quantity of money would distort price information and cause resource misallocation.
This argument represents the essence of the Austrian Business Cycle Theory. Artificially rising prices would give producers an erroneous signal that they needed to increase production. Only after time, would they discover they had made “malinvestments,” which they would have to liquidate. When these malinvestments became widespread, what previously looked like a boom would turn into a bust.
Conclusion
At its core, modern monetary theory advocates for the violent intervention by the government into markets. MMT amounts to a dangerous concept. It combines total control of the artificial manipulation of the quantity of money (legalized counterfeiting) with the taxing power of government (legalized theft).
The entire concept of MMT fails based on the four points that I have outlined above:
Value—It does not understand that only individuals can determine economic value. Government officials will always operate based on their own values, which cannot represent the preferences of individuals in the market.
Exchange—It does not understand the role of money. As a medium of indirect exchange, the quantity of money should not be artificially increased or decreased.
Resources—Producers do not use economic resources in aggregates. When left to operate in free markets, individuals will make the most effective and efficient allocation of separate resources.
Business Cycles—Based on a misunderstanding of the source of value and the role of money, MMT proposes centralized intervention in the allocation of resources. Since centralized authorities have no way to calculate the distribution of resources and the intervention in the money system will disrupt the calculations of individual actors, MMT proposes a system that will lead to widespread misallocation of resources and extreme cycles of boom and bust.
Those who advocate for the principles and theories of the Austrian school can expand on each of the points that I have covered in this presentation.
Because of MMT’s emotional appeal, people who profess to teach the methodology of the Austrian school, which itself does not operate in the mainstream, must take more care to ensure the clarity and precision of their explanations.
MMT represents a dangerous concept that must be defeated with well-formed arguments.
Addendum
In her book The Deficit Myth, Stephanie Kelton claims that the MMT model works in terms of stocks (levels) and flows (rates). As a longtime student of system dynamics, I couldn’t resist commenting on this statement’s error.
As part of her argument, she says that the government should provide money to people because of the importance of consumption. Austrians also believe in the importance of consumption. However, they recognize that production must always precede consumption.
I could write an entirely new article discussing this topic, but I wanted to introduce a stock (level) and flow (rate) diagram that illustrates how production must always precede consumption.
