Despite many recent excellent articles reporting on the strengths of decentralized federal systems and the failures of highly regulated industries in the face of the current pandemic, the call for ever bigger and more intrusive government has predictably and sadly been on the rise.
Among the most disturbing aspects of this development is the opportunistic positioning of the so-called “new” school of modern monetary theory, MMT.
For many traditional economists of free markets, whether of the Chicago or Austrian schools, MMT theorists present a curious cacophony of mercantilist nominalism and neo-Keynesian pump priming. With few exceptions, however, neither camp has been capable of successfully responding to the MMT challenge in the arena of public debate. It is a failure of some magnitude because without an effective response, MMT will pose a nearly irresistible siren call to political authorities everywhere.
This failure to respond, to my mind, has very much to do with the incompleteness of the subjectivist paradigm in economic thought of either the Chicago or the Austrian variety. Given its penchant for equations and theorems, the Chicago school’s failure is more understandable. Far more tragic though, has been the blind-siding of the Austrian school. It is often said that a generation fights its battles with tools forged yesterday. That is certainly the case here.
Many Austrians have long been anticipating a great collapse. The more radical elements, often derisively dismissed as “gold bugs,” have been adamant that a collapse of industry and the monetary system is imminent and will occur, given enough time, in just the way it did in centuries past. Among the authors most cited in these contentions are Ludwig von Mises and Murray Rothbard.
The more moderate elements take a somewhat more nuanced view, contending that such a collapse might occur if policies continue to encourage the accumulation of malinvestment in capital, or proceed with unabated deficit spending. But the processes that are supposedly involved are essentially the same: monetary expansion leading to the distorting of interest rates which in turn lead to bad investment decisions, or an ever-accelerating attempt to inflate.
Such a belief in what amounts to a fairly fixed pattern of responses to particular price signals and incentives is understandable when institutions are as limited in the effective reach of their powers as they were in the nineteenth and early twentieth century. Interest rates were the single most important means by which individual activities in the market were coordinated. In such an environment, ham-handed central banks and treasury departments offered up an abundance of bad examples of policy the world over.
The classic example of crisis of course was that which came in 1929. Whether one took the view of Milton Friedman or Murray Rothbard in their separate interpretations of the Great Depression, the basic patterns looked very much the same, however much the authors might have differed as to their specific policy prescriptions.
But once you change the institutional configurations to add the far more powerful interventionary institutions of governments today, the expression of the costs and consequences of monetary expansion and debt financing can and will take on different forms.
This was shown clearly, for example, in one highly nuanced historical analysis of the 2008 downturn, when it was pointed out that a combination of both monetary policies and Congressional interventions in the housing and real estate markets had subtly altered the classic expression of Austrian cycle theory. In this case, the downturn worked largely through distortions of mortgage rates and housing prices, creating a bubble that was still the product of inflationary finance and still productive of the accumulation of bad investments, but expressed differently from the classic models based solely on an interpretation of Federal Reserve policy.
I well remember the resistance that was initially given to Jeff Hummel’s interpretation, by many of the economists involved in the debate over the nature of that economic downturn. To my mind, it was Jeff’s historical orientation that gave him the necessary wherewithal to adapt the Austrian model through a more thoroughly subjectivist perspective on the facts. Different signals in the context of different asset and institutional structures will unfold differently. Today an analogous situation is likely developing. The danger now is that we are again awaiting an old pattern that will not quite manifest even to the degree that the 2008 downturn did.
Indeed, how could the classic patterns repeat themselves? The unusual set of factors initiating the current difficulties is itself a profound divergence from the past. Unemployment has come upon us fast and furious as a result of the emergency orders of federal and state executives following hard upon one of the longest periods of uninterrupted economic growth in history.
Whatever further consequences follow from this unprecedented development, they will have to be sorted through very carefully. The interpretation of these events will be won by those who have the most salient narrative of the full costs and consequences. And when those consequences come, the siren call of MMT will be there to lure pundits and politicians alike to the most obvious and visible markers.
Given the aid package recently passed into law, we are now at levels of national debt not seen before, and the degree of monetary expansion necessary to finance those figures will take us deep into uncharted waters. Will this necessarily result in collapse, or more particularly, Weimer style hyper-inflation? MMT theorists say no, and they are itching to take over the controls of our major political and regulatory institutions to prove it.
What the analysts of market processes will need to do is carefully sort facts from the interpretation of facts and be ready to identify the hidden and unseen costs that are always present in every process of exchange, even political ones. The real weakness of MMT lies in the fact that its focus on physically observable factors and its near exclusion of the unseen and unintended will lead its proponents to understate the trade-offs involved in their policy prescriptions.
Here is where the Austrian tradition is uniquely well placed to call MMT theorists out on their narrative of the current situation. That will be the subject of part II.
Hans Eicholz is a historian and Liberty Fund Senior Fellow. He is the author of Harmonizing Sentiments: The Declaration of Independence and the Jeffersonian Idea of Self-Government (2001), and more recently a contributor to The Constitutionalism of American States (2008).
READER COMMENTS
Ed Zimmer
Apr 15 2020 at 1:10pm
A KISS summary of MMT:
<b>GDP is the measure of our PRODUCTIVE economy. GDP is the sum of household, business and government spending (and likewise the income of those sectors equals that spending, because ALL spending is someone else’s income). Our economy depends on household spending (2/3 of GDP). That spending is limited by household income (which comes only from those three sectors). Business provides that income to the extent demand (business opportunity) exists, and government provides the rest. All that’s important to the economy is maintaining this flow, and with a fiat currency (whose value, by definition, depends ONLY on currency-users perception), there are no limits other than that perception.</b>
When you look at the income side of GDP, you find that neither Federal borrowing nor income taxes are part of that income – so they DO NOT (and never have) paid for (or “funded”) that spending. For proof for any of this, just pull up the GDP Primer at https://www.bea.gov/resources/methodologies .
Note that the PRODUCTIVE economy is the production-and-consumption economy. It is NOT the FIRE (Finance, Insurance, Real Estate) economy – which should best be largely destroyed.
Diane Merriam
Apr 19 2020 at 2:40pm
Then why not just let everyone set up printing machines in their basement and print out all the dollars they need or want?
Ed Zimmer
Apr 19 2020 at 4:00pm
A monetary sovereign (such as the US) has a monopoly on its currency – so printing in the basement is illegal. But even if it weren’t, that currency would be worthless. The monetary sovereign’s currency is backed by the nation’s economy. If the users of that currency perceive the economy is stable (ie, that its currency will buy tomorrow pretty much what it can buy today), it has a perceived value that the basement-printed money lacks.
Tracy W
Apr 19 2020 at 6:01pm
Firstly, GDP is a measure of our productive economy. It’s not the same as the economy. Net national income measures are as valid as measures of economic activity as GDP (albeit somewhat harder to collect the data for.)
Secondly, you’re mistaken about where household income comes from, households can produce their own income and expenditure. For example if you own your own home (with or without a mortgage), the production of housing services is calculated as part of GDP (based on the rents of similar houses), with an imputed income and expenditure.
Thirdly, who cares what is important to the economy? People care not merely about nominal flows of money but about whether they have enough food to eat, and shelter, and healthcare, and more fun things like music. The point of the economy is to provide those things for people, not to engage in money flows for the sake of money flows.
Ed Zimmer
Apr 20 2020 at 3:38pm
Tracey,
Your last paragraph is the key. What people care about is access to food, shelter, healthcare, entertainment, etc. But that’s what’s defined as the “productive” economy. What you’re spending on these wants/needs is what GDP strives to measure. Each nation collects the data on your spending (via reports the businesses you buy from are required (by law) to submit) & compile that data into functional accounts totaling to NGDP. Yes,there are estimates that have to be made, like the rent imputed to owned homes that you cited, but those estimates are minor relative to the mass of real data collected (both in spending & income, eg, business’ payroll reporting). And to ensure that GDP (& its sub-accounts) are providing a reasonably objective measure of this activity, the compilations are done using double-entry accounting so that any discrepancies that occur between the aggregate spending and income accounts can be tracked (via the Statistical Discrepancy account)
Yes, that’s not all of the economy. But the rest of the economy (that I called the FIRE economy above & what Mr. Eicholz called the Crony-capitalism economy in his post to Part 3) is, by definition, the “non-productive” economy. It can’t be measured (despite economists’ attempts to do – what productive meanings can be gleaned from an accumulation of fiat coupons?). And even if it could, I’ll argue that it has little value to most of us. Whereas the productive economy consists of real people servicing the wants/need of real people in a manner where both parties win, this non-productive economy is largely win-lose game-playing (& these days seldom losing as government can be counted on to bail out any significant losses.)
Tracy W
Apr 20 2020 at 6:30pm
Sorry Ed, but you’re wrong on many levels.
GDP is a measure of domestic product. You’re thinking of something like national disposable income, or NDI (you’re not being very clear, but the System of National Accounts 2008 manual is (SNA200)).
The SNA08 uses quadruple book-keeping, not double-book keeping.
There’s no such thing in the SNA08 as a statistical discrepancy account.
Not every nation collects this data – lots of poor ones, particularly small Pacific islands, don’t. It’s expensive. The GDP figures you see for some nations, particularly small Pacific Islands are rough estimates done by consultants who fly in from the UN or the IMF.
The idea that cleaning your own house or cooking your own food is “non-productive” because it’s not part of GDP is daft. If Mr. Eicholz thinks that house cleaning is non-productive then so much the worse for Mr Eicholz.
As I said in another response to you, the UN has a guide called Understanding National Accounts, which is freely available online, if you want to learn about what GDP actually is, and what other measures are available.
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