Modern monetary theory: An Austrian interpretation of recrudescent Keynesianism

This paper argues that Modern Monetary Theory (MMT) is best understood as old school Keynesianism of the 1930s and 1940s run amok. Old school Keynesians and other similar thinkers argued that macroeconomic markets were inherently unstable and would be perpetually subjected to severe business cycles. Moreover, they argued that monetary policy was generally ineffective because of the liquidity and investment trap, and that fiscal policy was the appropriate countercyclical policy tool, especially during recessions. Austrian economists were some of the most prominent thinkers of the era to criticize the Keynesian system. In particular, they argued that Keynesians failed to understand the temporal structure of production, the coordinative role of the interest rate, and the lack of economic calculation in government spending. In essence, Austrians argued that Keynesian policy would distort macroeconomic markets and delay economic recovery.

MMT takes the basic tenets of old school Keynesianism to their logical extreme. In essence, MMT champions the supremacy of fiscal policy over both monetary policy and private spending, and asserts that it can achieve virtually any objective desired, regardless of whether the economy is in a business cycle. They argue that monetary policy is ancillary to fiscal policy and even subordinate to it, because the government simply can print money to finance budget deficits and increase taxes to reduce inflation. As a result, modern Austrian economics can criticize MMT on similar grounds for failing to understand capital-based macroeconomics and the importance of profit and loss accounting. Furthermore, Austrian economics argues that MMT polices not only delay economic recovery in a recession, but results in general economic stagnation as well.