This was meant to be a casual comment on Economist Chuanwei (David) Zou’s recent article “Cryptocurrency – From the View of Modern Monetary Theory“, but it exceeded Linkedin’s maximum character limit for a comment (a strange limitation to say the least), hence a separate article.
Modern Monetary Theory (MMT) is an interesting tool for analyzing blockchain economies. David’s arguments that money is not only inherently but also historically related to credit and debt (versus the pure “commodity” money theory) are quite solid.
However, as I’m mostly on the side of the Austrian school of economics, my views of MMT are very different.
I believe that MMT might be right (although still doubtful) in, and only in, a hypothetical society which is:
(1) sufficiently large (in a thermodynamic sense);
(2) sufficiently independent (in a sense that not only can it sustain an independent economy, monetary policy and fiscal policy, but is also not subject to substantial influence from other competing economies); and
(3) sufficiently moral (in the sense that corruption arises from central planning does not overweight its growth energy).
In the real world today, no nation/economy satisfies all these conditions, not even the first two, and certainly not the third one.
Blockchain economies satisfy even less of those conditions.
From a theoretical point of view, thinking about blockchain economies in terms of MMT is stimulating, I must admit. But the truth is that at the present stage, these so-called “economies” are mostly free riders (actually “parasitic”, if I may use this word) to the real-world economy. Even BTC, the largest blockchain economy, is almost purely that, let alone the others. It does not mean the condition will not improve, but it is the present state of affairs.
At this point, the crypto world has built a strong crowd of speculators but still does not have an economist with a fundamental theory of the crypto economy.
However, whether or not the crypto world has a sound economic theory, it will stand or fall on fundamental economic principles. Economics is considered a branch of science not because it has sophisticated models but because it deals with reality, which obeys certain laws.
I believe the most fundamental element/force of an economy is productivity, which is the creation of value through knowledge growth, entrepreneurship, and innovation.
Now, no economist ignores productivity. In fact, every economist (even Keynesians) acknowledges its ultimate importance. But the problem is that MMT treats productivity as an emerging phenomenon, while I believe it is fundamental (in the sense of being a fundamental force in physics).
Therefore, whatever theory of money a government or society adopts, the real dispute is not on the commonly accepted features of money such as unit of account, medium of exchange, store of value, or even means of systematic distribution, but on a more fundamental but more overlooked function of money:
As a proper incentivizing system to maximize value creation.
MMT is wrong not because it is illogical in an academic sense but because it deprives the system of a real pricing mechanism, inhibits systemic recursive learning (which is requisite to knowledge growth), creates false and forced cooperation (instead of naturally incentivized cooperation), and does not provide a proper incentive to value creation.
What is interesting is that, as typified by BTC, the blockchain economy has leapfrogged into the unification of monetary and fiscal policy (on this point, David’s analysis is spot on). Tragically, that’s where the real world (including the US) is getting into as well, as symbolized by the fact that for the first time in history, a former FED head is serving as the treasury head.
So in that sense, instead of MMT shedding light on the blockchain economy, it may be more instructive to say the following: the blockchain economies as small-scale experiments, most of which are likely to fail, may shed light on MMT to show why it does not work.
By the way, I previously wrote on related topics:
Why BSV is a value creating system, while BTC a value absorbing system