In my previous post I discussed some of the potential weaknesses of the various theoretical approaches to analyzing market conditions under the current crisis. I concluded by drawing attention to the particular approach of MMT theorists to interpret economic data to suit their particular policy aims, and the temptations those interpretations will pose to intellectuals and politicians alike. Here we will explore the particular strengths and weaknesses of that approach.

Those who value the traditions of individual liberty and self-government need to recognize that in one very peculiar way, MMT may in fact prove correct in its macro predictions. 

Focused as the school is on certain types of tangible accounting measures (e.g. notes issued, taxes levied, and prices aggregated), MMT may very well prove to be strategically better placed to offer a just-so interpretation of the overt data. This is because of the particular and largely nominal ways in which costs may express themselves in this particular crisis; that is to say, the pattern that such costs will take over the middle to long term might very well look different from any previous economic crisis. 

Market theorists need to be ready to apply their most basic insights into the nature of costs and benefits that flow from their more thoroughly subjectivist ideas of value. Here is where the unseen and unintended aspects at the core of economic phenomena come into play in the most rigorous evaluation of costs. But market theorists will have to be ready to apply these understandings without jumping to the conclusions suggested by older theoretical models.

MMT theorists often speak of driving nominal rates of interest down to zero because “it is much cleaner that way.” From this way of looking at the economy, aggregate price levels are gauges and open market operations and tax rates are so many spigots with on and off valves. Such an orientation places considerable store in the visible and the tangible. 

In the same recent Business Insider essay cited in part 1, the author focused on the eminently visible such as the “manufacturing base,” foreign competition, and he advocated muscular high-profile fiscal and monetary policies.  All this because a nation ought “to spend on whatever it places a priority on….” 

Unlike the socialist theorists of a hundred years ago or the Keynesians just five decades ago, however, MMT theorists figure that they have far more in the way of institutional means to structure both the expression and perception of those policies: “Our government holds a monopoly to ‘issue’ the currency,” we are assured, “it does not merely ‘use’ it like the rest of us.”

Such a view reflects a deep seated faith in the efficacy of power: “we don’t wait to issue debt or collect taxes to spend money—Congress authorizes spending and the treasury calls upon the Federal reserve to provide funding, which the latter does at a key stroke.” All that is necessary from this view of the world is the political will to remove any excess currency that drives up prices. 

Thus, MMT theorists will argue, government creates its own demand to meet its own supply. This is why Weimar is of no concern. It was hardly in control of its own destiny, but a truly sovereign nation is, they will contend. 

Sovereign power to tax is MMT’s mantra. And economic activity, by their estimation, is not to be found in the private sector alone. Indeed the private economy, by their lights, is not even the most important sector where monetary policy is concerned. It is government action itself. 

Hence only the most visible effects count for MMT theorists: “government deficit means that money is being put into the economy, while taxes and government surplus mean that money is being removed.” By going in debt to ourselves, MMT theorists frequently boast, we can both temper inflation as well as restructure the distribution of property and wealth! 

Their aim is nothing less than “an epochal paradigm shift.” But I would also contend that the advantage is more apparent than real, and here is where the subjectivist paradigm of Austrian economics has renewed and vital relevance to the debate. 

That will be the focus of the next and concluding post.


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).