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).