Tuesday, December 27, 2011

A Rejoinder to John Carney on MMT and Austrian Economics

CNBC's John Carney has responded to my earlier comments on his favorable view of Modern Monetary Theory.

In his response, Carney writes:
The MMTers believe that the modern monetary system—sovereign fiat money, unlinked to any commodity and unpegged to any other currency—that exists in the United States, Canada, Japan, the UK and Australia allows governments to operate without revenue constraints. They can never run out of money because they create the money they spend.
Here is problem one with Carney's view of MMT. MMTers do not hold that all fiat money is the same. Although they object to Federal Reserve notes, they see no problem with a fiat currency being issued they call "US notes".

Here is MMTer  Bill Still, who is seeking to become the Libertarian Party presidential nominee:
A sovereign nation does not have to borrow, in fact, being debt-free is the very definition of sovereignty. Pay off the existing bonds -- which is our National Debt -- as they come due, but pay them off with debt free U.S. Notes (or their electronic equivalents) instead of Federal Reserve Notes, which are all borrowed into existence.
Here is MMTer Cullen Roche on fiat money:
Money is always created by the state and must therefore be regulated by the state; however, ultimately the private sector must accept this legal tender as the currency unit. Therefore, the private and public sectors should best be thought of as being in partnership with one another and not opposing forces.
Thus, when Carney tries to give the impression that MMTers and Austrians have a lot in common, he is just wrong. Austrians reject the idea that a fiat money of any sort is necessary in a highly industrialized economy (and any other type economy). A gold coin standard could function much better in the eyes of Austrians. A government couldn't inflate a gold standard at will, further the Austrians see no need to ever inflate a currency, unlike MMTers.

Here's Roche again:
The economy is a complex dynamical system with irrational participants. It cannot be expected to regulate itself or behave rationally at all times. Therefore, some level of government intervention and involvement is not only beneficial, but necessary
An Austrian simply doesn't see the world this way, where "irrational participants" occur on such a scale that they must be counteracted by government. An Austrian would first ask, if there are so many "irrational participants" who is to say they aren't in government also? Remember, before the real estate crisis, it was Fed chairman Bernnake who said there was no problem with the real estate market.

Secondly, Austrians would argue that the "cluster of errors"s made because of fiat currency creation are what cause the boom-bust cycle and that without fiat money creation no such "cluster of errors" would occur. Thus, the Austrian position here is diametrically opposed to the MMT view that there are times when monetary inflation is called for.

Carney writes:
The MMTers think the financial system tends toward crisis. Wenzel writes that the financial system doesn’t tend toward crisis. But a moment later he admits that the actual financial system we have does tend toward crisis. All Austrians believe this, as far as I can tell.

What has happened here is that Wenzel is now the one confusing the world as it is with the world as he wishes it would be. Perhaps under some version of the Austrian-optimum financial system—no central bank, gold coin as money, free banking or no fractional reserve banking—we wouldn’t tend toward crisis. But that is not the system we have.

The MMTers aren’t engaged with arguing about the Austrian-optimum financial system. They are engaged in describing the actual financial system we have—which tends toward crisis.

They even agree that the tendency toward crisis is largely caused by the same thing, credit expansions leading to irresponsible lending.
If I say that automobiles don't tend to drive off cliffs, but if I am looking at a baby that is behind the driving wheel of a car that is about to go off a cliff and I say, "Hey, that car is about to go off a cliff." It doesn't in anyway mean that I am saying all cars will go off cliffs.

In the same way, the financial system, like a car, does not have a tendency to drive off a cliff. If the Fed prints money it may go off a cliff, just as a car may go off a cliff when driven by a baby. My solution for the cars being driven by babies is to stop the babies from driving cars, for the economy, it is to stop the Fed from driving the economy. To say that I should just deal with the reality of a baby driving a car and hop in the back seat, makes no sense. Anymore than it makes sense, when arguing monetary policy, to say hey just deal with the Fed's inflationary boom-bust ways.

Carney then writes:
The MMTers say that “capitalist economies are not self-regulating.” Again, Wenzel dissents. But if we read “capitalist economies” as “modern economies with central banking and interventionist governments” then the point of disagreement vanishes.
John, puhleeze. Of course, if you define capitalism to mean, well, the exact opposite of capitalism "the point of disagreement vanishes."

Carney writes:
Wenzel’s challenge to the idea of functional finance is untenable—and not particularly Austrian. He argues that the subjectivity of value means it is impossible for us to tell whether something is “good for the economy.” Humbug.
I should first note that I specifically state that I am referencing how "fiscal policy should be measured" Indeed, I further write:
Thus, it is extremely dangerous to go around talking about what is "good for the economy", especially when you are talking fiscal policy.
Far from this being "not particularly Austrian", it is at the heart of the Austrian view that subjective value can not be measured in the pubic sector ( as opposed to the private sector where exchange tales place voluntarily between two individuals). Indeed, the Austrian economist Murray Rothbard, even suggested that ALL government spending is a negative that should be subtracted from GDP:.
..most of the resources consumed by the maw of government have not even been seen, much less used, by the consumers, who were at least allowed to ride in their buggies. In the private sector, a firm's productivity is gauged by how much the consumers voluntarily spend on its product. But in the public sector, the government's "productivity" is measured—mirabile dictum—by how much it spends! Early in their construction of national product statistics, the statisticians were confronted with the fact that the government, unique among individuals and firms, could not have its activities gauged by the voluntary payments of the public—because there were little or none of such payments. Assuming, without any proof, that government must be as productive as anything else, they then settled upon its expenditures as a gauge of its productivity. In this way, not only are government expenditures just as useful as private, but all the government need to do in order to increase its "productivity" is to add a large chunk to its bureaucracy. Hire more bureaucrats, and see the productivity of the public sector rise! Here, indeed, is an easy and happy form of social magic for our bemused citizens.

The truth is exactly the reverse of the common assumptions. Far from adding cozily to the private sector, the public sector can only feed off the private sector; it necessarily lives parasitically upon the private economy. But this means that the productive resources of society—far from satisfying the wants of consumers—are now directed, by compulsion, away from these wants and needs. The consumers are deliberately thwarted, and the resources of the economy diverted from them to those activities desired by the parasitic bureaucracy and politicians. In many cases, the private consumers obtain nothing at all, except perhaps propaganda beamed to them at their own expense. In other cases, the consumers receive something far down on their list of priorities—like the buggies of our example. In either case, it becomes evident that the "public sector" is actually antiproductive: that it subtracts from, rather than adds to, the private sector of the economy. For the public sector lives by continuous attack on the very criterion that is used to gauge productivity: the voluntary purchases of consumers.

We may gauge the fiscal impact of government on the private sector by subtracting government expenditures from the national product. For government payments to its own bureaucracy are hardly additions to production; and government absorption of economic resources takes them out of the productive sphere. This gauge, of course, is only fiscal; it does not begin to measure the anti-productive impact of various government regulations, which cripple production and exchange in other ways than absorbing resources. It also does not dispose of numerous other fallacies of the national product statistics.
Carney may, or may not, agree with this view, but he must agree that it is distinctly Austrian and not in line with MMT thinking.

Carney concludes by stating:
At the level of theory, Austrians and MMTers have a lot in common. Tactically, an alliance makes sense.
I just don't see where the Austrians and MMTers have much in common at all. And, a tactical alliance with a group that is in favor of creating a new fiat money, to replace the current fiat money, seems to be of little value to Austrians. More than anything, there is great educational value in pointing out the important differences between MMTers and Austrians.


  1. Apparently Carney has never visited the comments section of Murphy's blog. LOL There's been an Austrian vs MMT debate burning there for at least the past year.

  2. The Carney article is better than I expected but.....

    1. Like all non-Austrians throughout the galaxy, Carney just does not comprehend the fundamental concept of economic calculation. Subjective value is expressed through economic calculation and free market prices as the result of voluntary exchange. Calling this “nihilism” demonstrates complete a non-comprehension on the part of Carney of this core concept.

    2. The fiat money system tends towards crisis because it impairs economic calculation. The MMT proposal of direct funny money spending would impair economic calculation far worse than it already is.

    3. I’ll repeat #1. Neither Carney nor the MMTers comprehend economic calculation. Thus, they are clueless regarding the source of our problem.

    4. The MMTers are oblivious to “public choice” concerns which are really just a subpart of the broader Rothbardian analysis. They suffer from a terminal case of believing in “The Mary Poppins Theory of Government”. Their naiveté about the nature of government is so severe as to be downright creepy.

    5. It is essential that the government spending be constrained, a main purpose of gold and silver as constitutional money. Again, MMTers are oblivious to this necessity as the result of their hopeless naiveté. Further, the fact that our society has been oblivious to these concerns for 100 years (as opposed to say 5 years) does not alter the truth about gold and silver.

    6. I see no common ground between Austrians and MMTers other than MMTers seem to oppose crony capitalism. But crony capitalism exists only as the result of policies MMTers support due to their hopeless naiveté about the nature of government.

  3. Federal Reserve notes, U.S. notes and the underlying MMT concept:

    Seems to me to be a distinction without a difference....and it took a hell of alot of words to say it.

  4. If you ask me, this is a similar line of thinking that created some common ground between Ron Paul and Ralph Nader. This is also consistent with the line of thought as proposed by Cass Sunstein and Richard Thaler in regard to Libertarian Paternalism. We addressed this back in January of 2011.


    This is an issue that will dig away at the foundation of libertarianism because it is a distinction between free will and architected choice. Defending ideals against someone who has more information (even if it is about the value of your opted-in organ donations) than you do is an uphill battle. What Isaiah Berlin achieved through dividing liberty in half, Mervyn King plans to apply to the currency system itself. The "End the Fed" movement will likely result in an acceleration of the progressive structured solution rather than in a restoration of the city on the hill.

    Dave Harrison

  5. Why stop with only funding current and future Treasury bond and bill redemptions with "U.S. notes"? Why not eliminate all taxes and fund all government obligations, salaries, or operations with these new notes?

    Why can't I fund my debts and operations with John Doe notes? What is so special about the government?

  6. This is great stuff! The battle of ideas from two top minds. Keep it up! It's the only way we'll be able to combat the collectivists.

  7. Every alternative to a metal backed currency comes down to the fundamentally flawed concept that you can game the law of scarcity by gaming the system. Why is this so hard for them to see?

  8. MMT is the same folly done over the previous eleven decades as wonderfully described in James Grant's Money of the Mind. The descriptive words used to justify it may have changed with the times, but the lose credit rationale has remained the same.

  9. Joe Fetz is right about
    Bob Murphy and the MMTers.

    Taylor Conant of EPJ has smacked them down too.

    Further, Bob Murphy has exposed MMT guru L. Randall Wray’s anti-historical history lesson:

    Our modern Hooverians would like to return to the "good old days" of President Hoover, when the government was smaller and both unwilling and unable to offset the swings of private investment spending. Back then, when investment collapsed unemployment did not go to 9 or 10 percent, it went all the way to 25 percent. Hooverian economics would turn back the clock to ring in another Great Depression with the same old pre-Keynesian ideas that failed us in the 1930s.

  10. @bob roddis

    The fiat money system tends toward crisis because it is dependent upon the soldier's bayonet in order to impute value into the subjective minds of market actors.

    Also, let us not forget to correct the greenbackers when they use the word "notes" to label their toilet paper. They are irredeemable repudiated non-notes.

  11. "Their naiveté about the nature of government is so severe as to be downright creepy." - Bob Roddis

    "Naive" is a word I often think of when I read some MMT stuff - especially the "job guarantee" (have these people ever had interactions with government in the real world?)

  12. @anonymous By drawing attention to your "law of scarcity" you are drawing attention to the flaw in your argument rather than a strong foundation. Whether you are talking about the second law of thermodynamics or how scarce the gold is sitting in Fort Knox, your argument is not supported by real scarcity, but rather by a statistical probability that easily breaks down under scrutiny.

    Whether you introduce gold-filled asteroids, geothermal heating and cooling or even freshwater derivatives you're bringing abundance into the equation rather than scarcity. If life on earth could be distilled down to a net sum game, you would win your argument via checkmate.

    If your argument were valid FOFOA would be leasing his gold out to the ECB rather than asking for Christmas donations on his website. Will your premise be used to build the velocity roller coasted needed to shake most of the gold from our pockets? I believe it will. However, accounting for scarce gold inside Fort Knox while accounting for abundant gold still in the ground (i.e. Vector Gold(tm)) or plunging towards Basel from outerspace is the equivalent of accounting for how yesterday's rainwater is going to be transported to tomorrow's mountaintop.

    There may be no accounting for good taste just like there's no accounting for the abundance found in Creation. You can choose to tax the carbon or tax the Tobin, the outcome will be the same. The last shall be first and we all know where that puts the first in the scarcity of the queue.



    Dave Harrison

  13. I'll repeat my comment to the earlier posting: MMT - Magical Monetary Thinking.