John Carney has written a series of excellent articles pertaining to Modern Monetary Theory and why he believes there are many similarities between Austrian economics and MMT. I’ve previously described some of my issues with Austrian economics (see here and here), but I must admit that the Austrian school makes many significant contributions to the field of economics. For instance, I have previously expressed my displeasure (or uncertainty) regarding the MMT Job Guarantee due to praxeological elements. This is a component of Austrian economics that is particularly strong. When it comes to understanding the uncertainties surrounding human behavior the Austrians make many excellent contributions. Most mainstream economists don’t appreciate the fact that human behavior can’t be modeled in pretty equations that lead to best selling textbooks. Unfortunately, it’s this lack of provable mathematics that often leads to criticism of Austrian economics. But while there are certainly elements of Austrian economics that MMTers agree with there is one large hurdle….
I agree with John that there are more overlaps than most presume. But the largest hurdle is substantial. MMT is based on the state theory of money. We acknowledge that anything can be money. Gold can be money, pieces of paper can be money, credit cards can be money, a simple promise can be money. But what MMTers are very precise about is the fact that a sovereign nation with endless supply of currency in a floating exchange rate system names that which is money as defined in economic terms within that particular nation. In the USA, the US government deems “money” to be the US dollar. You might claim that gold is money (and it certainly is in some regard), but if you take a bar of gold to the IRS on April 15th they will request that you exchange that gold into US Dollars before they can extinguish your tax liability. In other words, while gold might be money to you and your neighbor, it is not money when it comes to extinguishing your liabilities to the Federal government. When it comes to transacting within the US economy, this is the crucial distinction when it comes to “money”. But there is a more complex disagreement in these schools of thought.
MMTers understand that “money” is always a social construct (whether it be gold, pieces of paper, social agreements, etc). In the same regard, money is always a debt that helps fulfill some particular social construct. And since “money”, in a modern society, is always a creature of the state (as described above) then the “money” that a government creates is merely a social construct of the society that creates that government.
As human beings we have evolved to the point where we reside in these incredibly vast and complex societies. We are, after all, the ultimate pack animals. We like to think we’re these independent creatures, but we’re actually incredibly dependent on one another for our survival and success. And as a society, we choose to maintain some semblance of order, rules, law, social structure, nationality and economic coordination through a centralized government. We can quibble over the size of that government (I tend to prefer less government than most other MMTers), but we cannot ignore the reality that governments exist for very practical purposes and will likely always exist in some form (if for no other purpose than to provide a legal system and a coordinated military). Austrians tend to veer towards the misconception that governments are these exogenous entities that infringe on our personal liberties when the truth is that we create governments for some public purpose. We do not create governments to impose hardship on ourselves. That’s not to say that governments can’t become corrupt or excessive, but it’s rather naive to claim that a moderately sized government cannot provide some level of services that benefit the society as a whole.
The most hardcore of Austrians take this myth to another level in believing we can reside in these “Crusoe Islands” where no government is necessary at all. Never mind that no such fantasy island exists in reality….The problem is, this totally misunderstands the evolutionary aspect of society, government, money and why we have the social constructs and infrastructure that we do today. Austrians want to attach “money” to a shiny rock or the detach it from the reality where humans reside in complex social structures which require complex entities to help these societies achieve goals. Both ideas are misguided as they misinterpret the intricate link between money and society.
Ironically, the greatest strength of Austrian economics is also the cause of its broadest misconceptions. Ultimately, they misinterpret human nature and the very nature of the societies in which we reside. The idea that the human being can survive and thrive entirely independent of complex social constructs is a sheer myth. Even worse, they assume that small factions of the society can regulate and behave rationally and responsibly enough to eliminate the need for government. As I often say, government becomes corrupted when the power of the many falls into the hands of the few. This applies to the small factions on Crusoe Island as well. The point being, in trying to prove this ideological argument they create myths that lead people to believe that we do not need strict social constructs to survive. In doing so, they try to separate a society from the social constructs (thereby breaking the links between society and money) that make up its very essence.
This idea of money being a creature of the state is a substantial hurdle that some Austrians like John Carney are willing to overcome. But I fear most Austrians cannot overcome their political biases that lead them to conclude that government is always bad and therefore, the state issued fiat money is always bad. And in doing so they misinterpret the nature of society, the role of government in society and the “money” that governments create.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.