08/11/2011 10:18 am ET | Updated Oct 11, 2011

Austrian Medicine for the MMT Patient

I have been an autodidact in economics and a follower of the "Austrian school" for a few years. To be clear, I am no expert and have no professional qualifications in the field. (I'm trained in physics and philosophy.) However, I have been given the occasional seminar in various countries on broadly Austrian themes -- and my own investment decisions and politics certainly reflect an Austrian view of the world.

Austrians are for free markets, and they understand the inevitably negative consequences of attempts at planning an economy. They understand the business cycle -- how interest rates coordinate the use of resources over time, and why they must be set by the market rather than some politically attached entity, such as a central bank, which can lead to bad investments, booms and busts. Austrians explain how the prices of goods, services and money that are set by a market of individuals who transact voluntarily to benefit both parties, maximize the efficiency of production of goods that people want. Therefore, Austrians do not have to resort to Keynes' "animal spirits" to explain macro-economic imbalances. Indeed, most of those who predicted our current economic crisis were Austrian thinkers.

My bookshelf attests to my own preference for Austrian thinking, which should also be evident from other articles I have written. Indeed, those few Austrians who extracted a very different message from that intended by my recent piece on Austrian economics and modern monetary theory and sought to "put me right" told me little that I didn't already know. (After reading that earlier article, one Austrian even called me a practitioner of MMT -- so obviously false that I can only think it was meant as a put-down! Moreover, I wouldn't insult MMT's pioneers by making such a claim for myself -- an interested amateur.)

So why am I interested in Modern Monetary Theory at all?

In the political realm, Austrians prefer limited government -- limited to enforcing contracts made voluntarily between free individuals. They don't want government to print and inflate money as that allows them covertly to reduce private wealth, transferring it to themselves. Moreover, for reasons Austrians can explain, government spending tends to do more damage than good in the long-run, despite best intentions. Therefore, Austrians, like Ron Paul, want a monetary system in which the government cannot simply print the money it needs -- but that imposes spending discipline and prevents covert wealth transfer to government. The gold standard is such a system.

I invited Austrians to take a look at MMT for the simple reason that, like Austrian economics, it has valuable things to say about the dynamics of monopolistic fiat money issuance by the government -- and therefore about the economic power the government has. Some of these things are simple and testable.

It is surely true that many MMTers look at what government can do in today's fiat monetary system and then theorize about how government should exercise this monopoly power over society's wealth for our own good. Austrians oppose such prescriptive claims by MMT's practitioners on principle.

I do not argue that Austrians should change their position. Rather, I am suggesting that Austrians can maintain a principled preference for true free markets and sound money, while accepting that some of MMT's descriptive elements of our current system are correct. There is no contradiction there. No need for apoplexy.

More substantially, I suggest that some of MMT's descriptive elements even support some of Austrian economics' most important claims. Austrians support sound money -- money that has real value because it represents, and can be redeemed for, a real physical thing of value, usually gold. If money is something of value in this way, then government cannot covertly devalue privately held wealth: if government wants to spend, it must raise revenue from the people honestly, through taxation.

MMT does not make anything in the preceding paragraph wrong. Rather, it helps to explain that there is an even deeper layer of economic tyranny than the government's ability to steal our wealth through inflation and devaluation, or the central bank's making us poorer by setting artificial interest rates -- about which Austrians rightly complain. I doubt any MMTers would agree, but to me, MMT, taken simply as a description of our fiat modern system, helps explain why we live under a system of economic totalitarianism.

Here's why. MMT makes the simple point that the net amount of dollars in the private sector were originally created by the government to acquire goods or services from the private sector (by crediting the private accounts of suppliers of those goods or services, such as Boeing when the government buys a warplane). Therefore -- and this is the grist to the Austrian mill -- in our system of government-issued fiat, there is only any monetary economy -- any trading at all -- because the government has, over time, spent more money into the private sector than it has taken back in taxation. In other words, in our modern monopoly fiat system, the private economy, in the simple sense of an accounting identity, is a government debt. If this government debt were fully paid off, there would be no money in circulation. (This is not "debt" in the sense of government bonds, but of money spent by government in excess of money taken in as revenue.)

In such a system, our entire economic existence depends on government spending. If I were to set myself up as king and I wanted complete and utter control over the economic life of my citizens, this is exactly the system I would establish: everyone has to accept my currency, and I can make any amount I like whenever I like to acquire whatever I like from anyone.

This system is surely the very definition of economic totalitarianism. Under it, no trade made by any two Americans is ever (unless it is barter) without the government's permission and enablement. Should the private sector wish to accumulate monetary assets, it can only do so if the currency issuer, the government, creates that money by removing (buying) goods or services from the private economy. So again, private monetary saving is, as an accounting identity, the transfer of economic production to government.

This is not at odds with Austrian concerns. Rather, it reinforces them. It makes them more urgent.

Whereas MMTers, when describing the current system, seem little concerned with its totalitarian implications (and would no doubt think I am being over-dramatic or overly philosophical), preferring to find ways to optimize the system that we have, Austrians, who are concerned with economic distortions and transfers of power, are attuned to such implicatons. Put another way, the MMT descriptive paradigm makes the Austrian prescriptive paradigm all the more compelling.

The intention of my previous article, which provoked all kinds of contradictory reactions from both Austrians and MMTers, was to ask Austrians not to reject the correct facts about our fiat monetary system at the base of MMT just because we don't like what MMTers infer from them. Rather, I ask if we might be able to use some of them in our arguments about the dangers of our fiat system.

To those of us interested in individual liberty, these are dangers that become more severe with each passing day.

In the spring of this year, leaders from the G-20 were in Nanjing for a meeting that was barely discussed in the media. The apparent topic was a new supranational monetary regime, in which a single currency is spent into existence by a single world economic institution. The men who would control this institution would have the power to expand and contract the monetary assets of the planet. Economically, no nation would be sovereign. It is a kind of MMT wet dream, and a totalitarian's, too.

The assets of everyone on the planet would be denominated in the debt-spending of that single monetary body. This is global economic dictatorship by another name, and we are almost there.

All the more reason why Austrians -- who care about the freedom of individuals to transact voluntarily and keep their own wealth -- should not react reflexively against MMT as a descriptive theory but use it, where relevant, to keep doing what they do best - which is to explain why we need to change our system of money to protect economic freedom.

Don't be upset by MMT as a description of the world: be upset that our world can be described by MMT at all.