MMT for Austrians

By L. Randall Wray

In the past couple of weeks we turned to the question what should government do, and last week we discussed the concept of the public purpose.

Clearly, we want the economy to do a lot of things for us, and the nongovernment sector(s) can accomplish much of that. Some of the nongovernment provisioning is nonmonetary—outside markets. For example, the unpaid work within the family. Much is provided from the “monetary production economy”—the part of the economy in which production begins with money in order to end up with more money. (Some readers will recognize the source of that—and we’ll have more to say in a few weeks.)

But while nonmonetary plus monetary production by the nongovernment sector(s) can accomplish a lot, they cannot provide everything we want.

It can even be argued that as societies become richer and more developed (some even use the term “advanced” but that can be invidious) we develop “higher-order” needs and wants.

(I do not want to go into this here, but it could be argued that in moving from, say, a tribal society to a monetary capitalist society we will need much more provisioning from the center precisely because less will and can be done by kinship organizations. To put it simply, moving to a monetary economy inevitably puts more responsibility on the issuer of the money—the sovereign government. It is in a sense a two-pronged fork: monetary economies “advance”, creating more higher order wants and needs that can only be satisfied monetarily, and by the government that issues the money.)

If you look back at our discussion last week of recognized human rights it might be apparent that we need to look beyond the production within the household and the production by for-profit firms to ensure those rights. In other words, the “public purpose” may well expand.

In addition, if we take account of environmental sustainability considerations, the scope for the public purpose likely will expand. (Those familiar with the work of Karl Polanyi will recognize the relation to the argument about the “double movement”.  Capitalist development creates environmental problems that require a public response.)

Arguably the most contentious debate between left and right is over the best way to achieve the public purpose. As I admitted last week, there are some who would go so far as to deny the concept altogether and perhaps even a greater number who would deny most of the listed human rights. But let us proceed with our discussion here taking it for granted that there is some recognized public purpose. The point of contention is over the best way to provide for it.

Conservatives tend to argue that the government’s scope should be very narrow, even given agreement on the public purpose. They believe that households and firms can provide for most economic needs and wants. Government is needed in narrowly confined areas—such as police and military. There is often reference to the benefits of “free markets” and to Adam Smith’s notion of the invisible hand. To be very brief, this is the idea that individuals pursuing their own self-interest are guided “as if” by an invisible hand to do what is actually in the interest of society as a whole. The guiding is done by the market, and more specifically by prices that act as signals. If more lawyers are needed, their salaries are bid up in the market and students react by switching to the study of law. You all get the picture. It is a very nice metaphor.

There are two problems with the story. First, it is not really Adam Smith’s view. Second, economic theory has pretty much destroyed any hope that real world markets could possibly work that way. And I am not talking about Keynesian or other critical economic theory—I’m talking about economists who desperately wanted to “prove” that the invisible hand works in the proffered manner.

Again, I’ll be brief but let’s look at these two problems before moving on to the topic of MMT for Austrians.

Adam Smith and the Invisible Hand

One of the greatest scholars of Adam Smith, Warren J. Samuels, recently published a book on the invisible hand metaphor.  (Erasing the Invisible Hand: Essays on an Elusive and Misused Concept in Economics. New York: Cambridge University Press, 2011. xxviii + 329 pp. $95 (hardcover) ISBN: 978-0-521-51725-6.) It was reviewed by Gavin Kennedy (here: EH.Net (February 2012). All EH.Net reviews are archived at Since handwaves about the invisible hand and references to Adam Smith as the father of the notion are so commonplace, I want to quote extensively from Kennedy’s review.

Quote: “Smith did not "coin" the phrase. It was prevalent in classical times from Aeschylus through to St Augustine, and later, in numerous seventeenth- and eighteenth-century theological texts, sermons, plays (Shakespeare), poems, and novels (Defoe, Walpole), and in political rhetoric (George Washington). … Adam Smith used it only twice as a metaphor in his Theory of Moral Sentiments (1759) and Wealth of Nations (1776), and once in his History of Astronomy (1795, posthumous). After Smith, there was an absence of mentions of the invisible hand metaphor among economists to 1875 and near silence thereafter until it was rediscovered and re-invented into the "founding concept" of modern economics from the 1940s… Samuels discusses Adam Smith’s supposed use of the invisible hand in his political economy. …  Samuels’ conclusions in Essay 10 are best summarized by his question: "what is left of the invisible hand" (p. 293) and by his answer: "There is no invisible hand as that term is used in economics.  Its continued use must at its base constitute an embarrassment.  Almost all uses of the term add nothing to substantive knowledge".”

Quote: “Smith used the metaphor of "an invisible hand" to "describe in a more striking and interesting manner" their particular objects: it was the absolute mutual dependence of the "unfeeling landlord" on his serfs, servants, and tenants (‘no food, no labour’), and their mutual dependence on him (‘no labour, no food’), which mutual dependence led him to share his crops with them, unintentionally benefiting humanity through the "propagation of the species" (Theory Moral Sentiments, 1759, p. 185); and it was the insecurity felt by some, but not all, merchant traders, that led them to prefer to invest in "domestick industry" (mentioned four times), rather than risk the "foreign trade of consumption" (Wealth Of Nations, 1776, p. 456), also unintentionally benefiting society by adding to domestic revenue and employment.  Smith’s use (History of Astronomy, 1795, p. 49) of the "invisible hand of Jupiter" simply states the pagan beliefs of Romans about their god, Jupiter, whom they believed (but never witnessed) cast his lightning bolts at humans.   In all three cases, it is evident that for Smith the "invisible hand" does not exist; it is an imaginary figure of speech and an imagined pagan belief.  We cannot see, but we can imagine; we may choose to believe or not to believe. The "invisible hand" "corresponds to nothing in reality," it "contributes nothing to knowledge," and is a "distraction and a diversion, (Samuels, p. 146).”

So what we actually see in Smith is use of the invisible hand to discuss the relation of the feudal lord to his peasants (obviously, this is pre-capitalism and hence pre-“market economy” as it is a relation based on visible force rather than the invisible hand of prices), in relation to his belief that there is a somewhat natural inclination to produce for domestic consumption, and finally to movement of heavenly bodies. None of these has anything to do with price signals and invisible hands leading to efficient allocations of scarce resources.

No wonder economists paid almost no attention to Smith’s notion of the invisible hand until after WWII!

Postwar Developments in General Equilibrium Theory

To be sure there had been an attempt from the 1870s to demonstrate the idea that markets would tend to generate a “general equilibrium”—even if it did not refer to Smith or the invisible hand.

Discussion of this topic can get quite difficult, but what conservative economists wanted to show it that “demand and supply” for all produced goods and services could be brought into equilibrium by flexible prices and wages. If every market is in equilibrium, where demand equals supply, we call that a general equilibrium.

I am simplifying but this is good enough for now. In any case, it turns out to be a very difficult thing to show and believe it or not requires higher mathematics. Indeed, it is so complex that proof of the existence of general equilibrium was not accomplished until the 1950s—some 80 years after the project began. And even then the results were extremely disappointing.

First, the conditions required to demonstrate existence of equilibrium (technically a vector of relative prices that eliminate excess demand in every market) require a very simple and unrealistic world. For our purposes it is relevant to note that the hypothesized world would never use money! (Students of economics also know it requires no time, no uncertainty, a Walrasian auctioneer, and so on. Essentially, you contract at birth for all transactions you will ever make over your entire life, with perfect certainty and no regrets.)

Second, it turned out that the equilibrium is neither unique nor stable. Indeed, it turns out that there are many equilibria, perhaps an infinite number, and we cannot say that any one is better than any other. And if we do not happen to be in equilibrium, market forces will not move us to one of the equilibria.

Pretty darned disappointing since the whole claim was that “free markets” would move us to equilibrium with prices signaling how best to allocate resources.

They won’t. At least we cannot demonstrate that they will. The “invisible hand” is completely impotent. Might as well have a dictator. Or a dictatorship of the proletariat. Or a coin toss. Or winner-take-all. Or any other method of trying to allocate resources. We cannot show that markets would do a better job.

Anyone who tells you that economics shows that the invisible hand “works” is a fool or a liar or confused. Plain and simple, rigorous economic theory shows no such thing.

(In 1926 Keynes wrote a great essay on “The End of Laissez Faire”; I won’t go through it in detail but what he argued is that no economist had ever accepted the notion that the free market “works”. He said that only political ideologues pushed that idea, an idea he thoroughly destroyed in his essay. However, in the last third of the essay he tried, and failed, to produce an alternative view. It took him ten years—until 1936—to create the alternative, what became The General Theory. It wasn’t until he formulated his theory of effective demand and addressed the “special properties of money” that he could counter the free market ideology.)

Now, why did I devote so much space to a discussion of the invisible hand? Because so many “free market marketeers” rely on the notion, and on the supposed authority of Adam Smith, to push their ideological agenda.

To be clear, the inability to demonstrate that an invisible hand “works” does not settle the issue. It does not in any way “prove” that “big government” is better than “small government”. It does not “prove” that the best way to ensure the public purpose is to rely on government rather than markets. And it does not demonstrate that we should adopt an expansive, progressive view of the public purpose. But it does make one highly skeptical of “invisible” handwaves about “free markets”.

Yet, it must be admitted that in truth, economics, alone, cannot answer those questions.

Let us now return to the topic at hand: can an Austrian adopt MMT?

MMT for Austrians

I am using Austrians as an example of those who prefer a narrow view of the public purpose and who believe that “free” markets can accomplish most of the public purpose. Hence, the role for the government should be quite limited. Obviously, Austrians are not the only conservatives who adopt these views. However, they provide a reasonably consistent and coherent alternative to both orthodox and heterodox approaches to economics.

(Some include Austrians within heterodoxy, and there are some affinities—on topics like time, expectations and uncertainty. While I recognize similarities on those dimensions, most of the rest of heterodoxy accepts elements of Keynesian, institutionalist and/or Marxist thought that are anathema to Austrians. Hence I put Austrians in their own camp. For the purposes of the discussion that follows, this is not really important.)

Austrian views on government are well-known. Further, Austrians are frequent commentators on MMT blogs, and many have asked whether Austrians can accept MMT.

I would assure Austrians that MMT is not just for advocates of big government. Indeed, I have always been surprised that some of the most vehement critics of MMT are some of the libertarians and Austrians.

Relatedly, often when there is an MMT blog, the comments are dominated by conspiracy theorists, haters of government, and goldbugs who are certain that MMT-ers are united in their effort to ramp up government until it consumes the entire economy. Some Austrians agree on these critiques. This section will attempt to put those fears to rest.

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 our Austrian colleagues 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.”

A few libertarians and Austrians now get this, although instead of thanking us for a job well done, some of them immediately attack MMT 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 more from government—that is for precisely the reason that Samuelson advocated that “old time religion, without which off we go to Zimbabwe land, with hyperinflation that destroys the currency.

Ok, understood.

But MMT-ers fear inflation, too. Indeed, “price stability” has always been one of the two key missions of UMKC’s Center for Full Employment and Price Stability (

(I note that my friend Edward Harrison has long pushed MMT at Credit Writedowns even as he vocally disagrees with many of us on the role of government. So there are exceptions who recognize that MMT is useful for economists of all persuasions.)

To be sure, 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 even less likely. (I’d place my bet on socialist sharing of undergarments as more likely than a return to gold.)

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.

Come to think of it, MMTers have more in common with Austerians than with “military Keynesianism” that supposes that high enough spending on the defence sector will cause full employment to “trickle down”. Most MMTers believe we’d get intolerable inflation before the jobs trickle down to Harlem.

In any case 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. (See the next blog series for a plan.)

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. If we run out, Missouri can fill the gap (for those who do not happen to live in the US Midwest, the big MO before prohibition was second only to NY in wine production.)

Again, it is a resource problem and if we convert the American and Canadian prairies to wine production we could 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).

Many of 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 desired. 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 desired. 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? How can the offer of paid work be called slavery or fascism? It merely offers paid work for those who want to work, to contribute to society. It enhances choice and freedom.

Editor’s note: Also see the November 2010 post by Edward Harrison with the same title, MMT for Austrians.

Randall Wray


L. Randall Wray is a professor of economics and research director of the Center for Full Employment and Price Stability at the University of Missouri–Kansas City. His current research focuses on providing a critique of orthodox monetary policy, and the development of an alternative approach. He also publishes extensively in the areas of full employment policy and the monetary theory of production. Wray received a B.A. from the University of the Pacific and an M.A. and a Ph.D. from Washington University, where he was a student of Hyman Minsky.