Towards a Libertarian/Austrian Modern Money Theory

By L. Randall Wray

For reasons that I cannot fathom, the most vehement critics of Modern Money Theory (MMT) are the wingnut libertarians and Austrians (and, please, I use the term wingnut with some affection for our fellow fringe travellers). Any time there is an MMT post on this blog, or over at New Deal, Naked Capitalism, or the Huff, the comments are dominated by conspiracy theorists, haters of government, goldbugs, and victims of alien probings who are certain that MMT-ers are united in their effort to ramp up government until it consumes the entire economy. So let us try to mend fences.

First, on one level, MMT is a description of the way a sovereign currency works. Love it or hate it, our sovereign government spends by crediting bank accounts. Over the past 20 years, MMT has investigated, analyzed, and documented the sordid operational details. We can lecture for hours on the balance sheet manipulations involving the Treasury, the Fed, the primary security dealers, the special depositories, and the regular private banks every time the Treasury buys a notepad from OfficeMax. We did the work, so you do not have to do it. And believe me, you do not want to do it. You can skip directly to the conclusion: “Yes, government spends by crediting bank accounts, taxes by debiting them, and sells bonds to provide an interest-earning substitute to low-earning reserves. Q.E.D.”

A few libertarians and Austrians now get this, although instead of thanking us for a job well done, they immediately attack us for explaining how things work. Now, why would they do that? Because they fear that if we tell policymakers and the general public how things work, democratic processes will inevitably blow up the government’s budget as everyone demands that wine flow freely through the nation’s drinking fountains whilst workers retire from government jobs at age 28 on generous pensions provided at the public trough. And off we go to Zimbabwe land, with hyperinflation that destroys the currency and sucks the precious body fluids from our economy.

Ok, understood. We fear inflation, too. That has always been our message, too. Indeed, “price stability” has always been one of the two key missions of UMKC’s Center for Full Employment and Price Stability ( Maybe you do not like our proposed methods of battling inflation. Fine. Show us yours. I realize that many libertarians and Austrians believe that the only foolproof method for avoiding inflation is to go back to gold. Again, fine. But don’t criticize our labor “buffer stock” scheme for its political infeasibility! Going back to the gold standard is less likely than alien abduction. (Oh, sorry, no offence intended.) Anyway, we (also) do not want black helicopters flying around dropping bags of cash; and we (also) oppose government “pump-priming” demand stimulus—the libertarians and Austrians and even Milton Friedman are correct in their argument that this would generate inflation.

So it is true that there is a second level to MMT: we use our understanding of the way money works to bring rational analysis to government policy-making. Since involuntary default is, literally, impossible for a sovereign government, we quickly move beyond fears about government deficits and debt ratios and all the other nonsense that currently grips Washington. Can we “afford” full employment? Yes. Can we “afford” Social Security? Yes. Can we “afford” to put wine in all the drinking fountains? Yes. The problem IS NOT, CANNOT BE about affordability. It is about resources. Unemployment is easy: by definition, someone who is unemployed is available to hire. So government can put them to work. Social Security is a little more difficult: can we move enough resources to the aged (plus their dependents, and people with disabilities) so that they can enjoy a comfortable, American-style, life? On all reasonable projections of demographics and US ability to produce, the answer is yes. The projections could turn out to be wrong. But if they do, affordability still will not be the problem—it will be a resource problem. Finally, wine in drinking fountains? There probably is not enough fine wine, but we could probably fill all the drinking fountains with cheap French wine. Again, it is a resource problem and if we convert the American prairies to wine production we could probably even resolve that one.

Perhaps the most important policy pushed by most MMT-ers is the Job Guarantee/Employer of Last Resort proposal. This provides a federal-government funded job to anyone who wants to work, at a uniform, basic compensation (wages plus benefits). Our libertarian/Austrian fellow travelers seem to hate this program, again for unfathomable reasons. I suspect that they have misinterpreted this to be some kind of Big Government/Big Brother program based on a weird combination of force plus welfare. The claim is simultaneously that it “forces” everyone to work, and that it also pays everyone for not working. Actually, it is a purely voluntary program, only for those who want to work. Those who will not work cannot participate. Libertarians and Austrians ought to love it. It is not Big Brother. It is not even Big Government. The jobs do not have to be provided by government at all. No one has to take a job. It is consistent with, I think, the most cherished norms of freedom-loving libertarians and Austrians.

So to sum up:

1. MMT is consistent with any size of government. It can be a small libertarian government if you like. But it issues a sovereign floating currency. It supports the currency by imposing a tax payable in that currency.

2. Job Guarantee/Employer of Last Resort is also consistent with any size of government. If you want a big private sector and small government sector, keep taxes and government spending low. That frees up resources to be used by the big private sector. But you will need the JG/ELR to take up the labor resources the private sector cannot fully employ.

3. JG/ELR can be as decentralized as you want. I think there are massive incentive problems if you have federal government pay wages of for-profit firms. So I would have federal government pay the wages in the program but have the jobs actually created and managed by: not-for-profits, local government, maybe state government, maybe only as a final last resort the federal government. Argentina experimented with cooperatives and they looked to me to be highly successful.

4. The problem with a monetary economy (you can call it capitalism if you like) is that from inception imposition of taxes creates unemployment (those looking for money to pay taxes). We scale this up to our modern almost fully monetized economy (you need money just to eat, watch TV, play on cell phones, etc) and we get everyone looking for money (and not just to pay taxes). It is sheer folly to then force the private sector to solve the unemployment problem created by the government’s tax. The private sector alone will never (never has) provide full employment. ELR/JG is a logical and empirical necessity to support the private sector. It is a complement not a substitute for private sector employment.

5. How can the belief that all ought to work, and contribute to society, rather than lay about and collect welfare be called socialism?

31 responses to “Towards a Libertarian/Austrian Modern Money Theory

  1. Bravo, Randall. To quote Milton Friedman, "Only a crisis, actual or perceived, produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.”

  2. Great post. I'm currently reading your book Understanding Modern Money. Thank you for your work.

  3. Very nicely laid out. You seem to have touched upon all the major points, but obviously you've taken the time to write this because you think you must be missing something. OK, you are.The right wing hates democracy. They do not trust the people. They fear them, in fact. They fear the uncertainty of a free vote.Oh, I know about all the flag waving and the rainbow of ribbon decals they put on their cars, all proclaiming that this is the best country EVER, but remember, these are also the folks who coined the expression, "Love it or leave it." … Huh? That's not how it works here. Love it or vote to change it is more to what the founders intended. And more to what the right wingers fear. (They were never much into that revolution thing anyways.)Look, if MMT does anything, it democratizes the money supply. And that is EXACTLY what the right wing doesn't want.

  4. Well done RandallA nice, concise description of what MMT and ELR/JG are about.Somehow though I fear that the Gold Bugs/Libs are just too paranoid to reach. No amount of reason seems to get through. They are just too suspicious of society. They dont trust their fellow man enough. While many are decidedly non religious, Calvinism runs through their veins in ways they are unaware of.

  5. The one thing that bugs me about the JG is the amount of overhead needed. I sometimes get the uncomfortable feeling that people who recommend this program have never run a small business. Even if you break it down to the county level, it seems to me you would still need large overhead (in sum), which somehow has to expand and contract as the need to employ the unemployed waxes and wane. How is this problem addressed, and doesn't the very existence of such an administrative function constitute 'more government' ?

  6. Anonymous on 7/28 @10:06amSeveral things:1. Overhead could, in fact, be small in many cases, such as where the govt is mostly just cutting checks for wages of JG workers hired by non-profits. Similarly, it could be simply cutting checks to individuals enrolled in approved private sector job training programs. One shouldn't limit oneself to a particular version of the JG–there are countless, creative options available for designing such a program.2. Yes, there would need to be some fluidity if it's going to be effective at stabilizing prices and the macroeconomy overall. Some, if not most, of this could be via something akin to a temporary workers agency, which again wouldn't call for huge overhead. Also, the amount of such fluidity can be a sizeable minority of the actual JG program, as we know that in typical recessions the number of unemployed may be as high as 10M (more now, of course) but this number actually only fluctuates by 10-20% over the course of the business cycle.3. Overall, even if the program required a LOT of overhead, it's still quite preferable to spend the overhead to put people to work compared to the spending currently done to sustain an economic system with significant numbers of people not working, including all of the extra expenses on crime prevention, healthcare, and so forth. If you add up the total costs of unemployment–and there is some evidence that unemployment is at least indirectly related to virtually every socio-economic problem–it's really unfathomable that an effectively designed and administered JG wouldn't be a massive net economic gain overall.

  7. Forgot to mention regarding overhead that the past experience with a number of jobs programs has been that non-wage expenditures was not high. For CETA, for instance, it was about 15%.

  8. Well done Wray! However, one thing might explain Austrian nonconformity to MMT. They cherish too much Menger's tale about money origin as a non-State institution in nature. So, how to fully accept a theory which emerges exactly from the opposite Austrians belive?Fabiano

  9. The Libertarian/Austrian/Goldbug worldview treats the government and monetary system like they're a person who can't be trusted to eat healthily on their own, so they would have his stomach stapled shut involuntarily to remove the chance of him ever getting too fat. I think a true Libertarian should actually embrace MMT, because, far more than under any gold standard, it encourages free citizens to make choices. A people that had the freedom to easily vote themselves a large statist government but CHOSE not to would seem to me to be the height of the Libertarian ideal. But then again, I think I hit the nail on the head. They don't trust the people. They don't believe in democracy if democracy inevitably leads to the populace voting themselves a government that they find personally distasteful.

  10. I am an "Austrian/Libertarian" wingnut – I see nothing wrong with MMT as I consider it a descriptive theory. Great Article.

  11. Just returned from a 2 week / 3000 mi car trip thru the midwest, visiting friends and family.I was struck by the pervasive level of fear for our country's future that has been stirred up by our leaders and media – from across the political & economic spectrum.While patiently debunking the standard myths (running out of money, US owned by China, hyperinflation, etc.), I refocussed conversation on all of the rich resources that surround us, as well as the inventiveness, resourcefulness and energy of our population.When this vast pool of opportunity is put in the balance with solving the "deficit problem" (an accounting number), fear changed perceptibly to hope and a positive outlook: let's use our people & resources to invest in the future!Let's get everyone back to work – go JG/ELR!Thank you Randall – I had your "Understanding Modern Money" in my hip pocket the whole way!

  12. 1935 Social Security Report recommendations; unemployment insurace listed second, old-age assistance mentioned third… but the first proposed benefit(which of course didn't make it into the bill)—EMPLOYMENT ASSURANCESince most people must live by work, the first objective in a program of economic security must be maximum employment. As the major contribution of the Federal Government in providing a safeguard against unemployment we suggest employment assurance– the stimulation of private employment and the provision of public employment for those able-bodied workers whom industry cannot employ at a given time.

  13. This just seems to be a mental exercise without any consideration for the effects on society. Passing all this money to banks does not decrease unemployment or decrease poverty, it does not create jobs, it is just moved around globally for few peoples benefit.Imagine if the same amount was passed out to the taxpayer, to spend as they wish, then society could be as foolish with it as they wished and it would have no effect on the country's debt as it can just print more. That however would be too democratic.

  14. The animus of Austrians against modern monetary theorists is long standing. I just happened to look at the description in Schumpeter's History of G. F. Knapp's book on money and it was nothing but mockery, with no attempt to even describe what Knapp said, but just dismissed him as absurd. Their problem is with "a sovereign floating currency" driven by taxes – this is evil incarnate – the UnGold. Divorced somehow from this belief, they might be good candidates for recruitment into the modern monetary army – at least they know the socially mainstream economics is not the intellectual mainstream. Some of them are truly mad; just a little bit worse, and they would start sending MMTers their worthless dollars.Anon, I live off my small bidness, and I recommend the JG. The "more government" overhead is minuscule in comparison to the losses everyone suffers due to involuntary unemployment.

  15. Thanks for your comments, Scott Fullwiler. I need to digest. Another Anon: I'm not convinced it's 'minuscule'. And I only posted my comment/question because of this in the original post: "Job Guarantee/Employer of Last Resort is also consistent with any size of government. " That didn't ring true to me since I thought it would require massive (government) overhead to administer any such program. And even if it's administered at the county level, summed over the whole nation you're talking about massive increase in government, and most Americans would see it that way. Standing in line at an understaffed Department of Motor Vehicles office, one can't help but wonder how it would be at an understaffed Department of Job Guarantee, where presumably the issue at hand is far more complex than submitting paperwork for a license renewal. And so not only do you need 'big government' for administration, but it needs to ebb and flow with the economy. With our unionized and inflexible government workers, I have to admit some skepticism. But like I said, I need to think about Scott's comments and do more research when I have time. I like MMT, but I'm skeptical about the JG. But as a good Agnostic, I'm willing to be convinced by evidence and good argument. And I have first hand knowledge of the pain of unemployment, for what it's worth. I have to depend on my savings, however, since I'm not eligible for unemployment. So the last option on my list – bank robbery – is quickly approaching. (I'm kidding of course… sort of..)

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  16. Thanks for comments. As I recall, New Deal jobs programs spent an amt equal to 25% of wage bill on overhead and materials. And recall a lot of these projects were massive construction projects (Boulder/Hoover dam–at the time one of the greatest human achievements of all). So that is the number I would aim for, with perhaps fedgovt providing 12.5% of wage bill for such costs, and the organizers/employers providing the rest.You can have a small govt/big private sector, with govt JG picking up the labor the private sector doesn't want. It is perfectly plausible. The problem is that it will be highly financially unstable (ie: finance capitalism that crashed in 1929)–but if that is what our libertarian/Austrian friends want, we can give that another go. LRWray

  17. All: read this if you have any remaining questions about the JG: this guy in the cabinet, allocate $60B to the program, and we'd have full employment in 2 weeks. LRWray

  18. I've been reading a lot of MMT lately. I like certain parts, but disagree with it on the basis that it calls for the same monetary system which is corrupt.I'd rather see a fully Nationalized Fed and a reduction in the private banking cartel. free notes. Why does the Government have to borrow money at interest? We know the Fed. is a private banking cartel, with their own set of interests. Putting the money power back in the hands of the government gives the people more control and say over their own governance.www.webofdebt.comI am afraid that the ordinary citizenwill not like to be told that bankscan and do create money…And they who controlthe credit of the nationdirect the policy of Governmentsand hold in the hollow of their handsthe destiny of the people"Reginald McKenna,past Chairman of the Board, Midlands Bank of England“I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money… I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with the Congress for sitting idly by and permitting such an idiotic system to continue.”Congressman Wright Patman

  19. I have a few questions regarding MMT:1. The notion that the government uses taxes to manipulate aggregate demand seems to be a "post hoc ergo prompter hoc" conclusion.2. The coercive use of taxation to create value for otherwise worthless currency will generate SOME demand for the currency but all one must do is obtain enough currency to discharge tax obligations. Other transactions can be effected using other means of exchange. The widespread use of fiat money is really just a matter of convenience but isn't really a requirement. Isn't this what happened in Zimbabwe? People paid their taxes in local fiat money and used foreign currency to conduct their business. Then the government started to demand payment of taxes in foreign currency. In Greece people are hoarding gold sovereigns because they fear an exit from the Euro. They are stating up front that they will not accept Greek fiat money.3. The Employer of Last Resort concept smells a bit like the Broken Window Fallacy.4. MMT also seems to be a justification of the status quo – almost like Leibniz's "best of all possible worlds" argument. Everything is really ok if you just look at it upside down and backwards.The Austrian school does attract extremists of a certain stripe but as far as I can tell that's a common theme no matter which blogs you follow, including MMT blogs. IMHO, the lesson of the Austrian school is that you ignore people (sentiment) at your peril. We just proved this with the first round of stimulus. People are blissfully ignorant of how the graphs say they should behave. As for the gold bugs, some are perma-bugs and others are new recruits like myself who are still trying to get the number of the truck that hit them in 2008. Gold's recent behavior is a reflection of lack of confidence in fiat money. The gold standard is attractive to the conspiracy crowd because of the perception that it limits government and bank shenanigans. Given the past behavior of private central banks (e.g., Nicholas Biddle) they do have a certain point.I look forward to your response. Convert me. 😉

  20. > ELR provides a federal-government funded job> to anyone who wants to work, at a uniform,> basic compensation.> […]> The jobs do not have to be provided by > government at all.Interesting. That would mean I can start a company with all wages permanently being funded by the government. Over time, that will bankrupt all non-'government wage funded' businesses since no-one will be able to sustain competition against free labor (somewhat like what China did to US manufacturing, using its currency to engineer almost free labor). So the whole economy will end up with nothing but government funded equal wages (again, somewhat like China). But with demand for free labor probably close to unlimited, who or what mechanism should decide -the use of price having been crowded out- how to allocate the finite supply of labor? Chances are the misallocations will be humongeous and the ensuing crisis even bigger than our current one (oncemore: somewhat like China, though the jury is still out on their experiment – some 25 years and counting, too short to tell).

  21. I think I can explain MMT to Austrians. I also think MMT people don't understand that hyperinflation is bankruptcy for governments that print money.

  22. Vincent, you forget one cardinal fact: the money supply is endogenous – why print money, so that it leads to hypeinflation? Might it have something to do with wide-spread supply shocks before? If you look at Weimar Germany, Zimbawee, Chinese hyperinflation, Latin American hyperinflations etc., they often have one thing in common: massive supply shocks occur BEFORE the hyperinflation, which increases prices generally, and thus the public demand more notes to purchase these scare resources whose prices have risen, igniting a hyperinflationary spiral. It is a resources question, not a "printing money" question. Why print money? It makes no sense to print so much money.

  23. "- why print money, so that it leads to hyperinflation?"Your question makes it sound like you think governments make a decision to have hyperinflation. 🙂 With over 100 cases I am sure there was not one of them where the government decided to have hyperinflation. It seems governments get to where the deficit is over 40% of their spending and after a few years people don't want to buy their bonds any more (enough people can see trouble coming). So they have to print lots of money just to keep all the employees and programs they are used to. Inflation starts but the government can't stop printing money (still have all these employees and programs and now inflation is making life extra hard for people). So you get a feedback loop where more printing causes less bond buying and less real taxes which means the government has to get an even higher fraction of its spending money by printing money, etc. So things explode out of control. Nobody ever wanted hyperinflation or chose hyperinflation. Events just led to it. Below is a link to a good book on Hyperinflation history:

  24. But there's no need to sell bonds.You've not mentioned the Job Guarantee either.Money creation for government spending simply balances the non-government savings preference so inventories don't fall and production/income growth is maintained. Prices are stable, no demand deficient deflation, no demand excess price inflation.If there is inflation, fiscal drag will take the edge off of this.Have you read this?

  25. Thank you for your book, "Understanding Modern Money", and for this excellent post. You're helping flush out some of the crap my profs at U Chicago poured into my brain during my MBA studies in the 1980's.

  26. Thank you Otis, for being the voice of reason. The rest of you are completely delusional.

  27. I think I can explain MMT to Austrians. I also think MMT people don't understand that hyperinflation is bankruptcy for governments that print money.and it is good

  28. The gold standard is attractive to the conspiracy crowd because of the perception that it limits government and bank shenanigans. Given the past behavior of private central banks (e.g., Nicholas Biddle) they do have a certain point.

  29. "But there's no need to sell bonds."But this is part of reality, the bonds exist. If people stop buying bonds the government will have to create new money to pay off the bonds as they come due. About half the US debt is due in the next 12 months. So even though they don't want to print too fast, if people stop buying US bonds they will print money like crazy.

  30. Government creates money by spending and destroys it by taxing. Printing money is a red herring.If people stop buying bonds they'll simply invest in other financial assets.To suggest that they'll spend all that money sending a tsunami of demand to swamp supply is ludicrous.All government debt is simply net financial assets/saving.