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MMT Monetary Theory vs. Austrian Monetary Theory

Deborah Harrison

One stark difference between Austrian Economics and Modern Monetary Theory has to do with their ideas about the origins of money.

The Austrian theory was developed by Ludwig Von Mises in his Theory of Money and Credit. Mises argued that money began as a solution to problems of barter. People needed a better medium of exchange than directly exchanging some goods for others. Money, for Mises, is basically whatever is used as the medium of exchange.

The MMTers do not think of money primarily as a medium of exchange. They tell the story of money as beginning with the government. The government creates a demandfor money by requiring citizens to pay its taxes in its money. This is true whether it is a government that mints gold coins or simply creates fiat money not redeemable for anything but itself.

In truth, both these theories strike me as incomplete. The Austrian theory has never adequately explained how the government got control of money. Mises and others talk about the government monopolizing coinage but this still doesn't explain why government money retains its role as the medium of exchange.

Mises writes:

All that the state can do by means of its official stamp is to single out certain pieces of metal or paper from all the other things of the same kind so that they can be subjected to a process of valuation independent of that of the rest. Thus it permits those objects possessing the special legal qualification to be used as a common medium of exchange while the other commodities of the same sort remain mere commodities. It can also take various steps with the object of encouraging the actual employment of the qualified commodities as common media of exchange. But these commodities can never become money just because the state commands it; money can be created only by the usage of those who take part in commercial transactions.

Right, I get it. So how the heck did the government convince us to use greenbacks?

The MMT explains how the government can foist whatever currency it wants on a people, including fiat money. But it doesn't go far enough in explaining why people accumulate currency far beyond their possible needs to extinguish tax obligations. The tax obligation story doesn't at all explain why money has a particular exchange value.

I would modify and combine both stories about money by saying that money is a general medium of exchange, and that the government does its best, by imposing tax obligations, to ensure it exercises monopoly control over the medium of exchange.

In short, let's bring the state into Austrian theory and market exchange into MMT.

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