In some discussions I´ve held with followers of the Austrian school of economics, I have been told that the flaws I point in Mises Monetary Theory are not relevant or that I just nit-pick Mises wording in order to “score points” in favor of Mengerian Carlos Bondone Monetary Theory, but that no real world implications arise from my critiques.
First, my interest of course is not scoring any points but to understand and explain the reality. All theories explain reality in some way or another, but the simpler and more general the theory, it is superior. Newton explained the reality, and Einstein did not prove him wrong, he developed a more general theory, therefore superior.
This is specially relevant in the context of demonstrating the flaws of Keynesian and Monetarists. It is very difficult, if not impossible, to rebut them by accepting as valid their flawed theoretical principles about money. It is like trying to rebut geocentric theories by first accepting that all celestial objects orbit around the earth. Once you accept that, you have already lost no matter what other arguments you develop later.
The critical flawed principles that Mises accepts as valid are the following:
- Fiduciary Media and Fiat Currency are present economic goods.
- It is possible to create any amount of credit (circulating credit)
According to Mises, the holder of fiduciary media or fiat currency grants no credit to the issuer (see paragraph 5, Chapter 15, Part Three of Theory of Money and Credit). The implication of this claim is that the issuer can issue debt while not acknowledging the holder as a creditor and avoiding paying any interest. The issuers of this kind of credit currencies are usually governments, central banks, or privileged commercial banks and they don’t need to force holders into creditors, the Academia does that dirty job for them, so they inadvertenly impose their violence and coercion legitimated by the prevailing scientific theories (which its root principles Mises validates).
With the concept of “circulating credit”, Mises enables the theoretical possibility of creating any amount of credit. This does not explain the reality because it is simply not possible and it is also inconsistent with his own definition of credit “Exchanging present goods for future goods” with which I fully agree, where the creation of future goods (credit) is limited by the available present goods in the economy. This is a consequence of accepting the first flawed principle of classifiying credit as a present good when used as currency.
This is why Mises monetary theory is quantitativism, because no matter the economic nature or quality of the currency (money or credit) he makes no taxonomical distinction. It would be like setting the theoretical principle that both fresh water and sea water are potable, and then writing extensively why we should not drink sea water. This is very confusing and it is, in my opinion, one ot the main reasons why Austrian monetary theory has been disregarded within the academia.
The monetary theory of Carlos Bondone goes back to Menger qualitatitivism, clearly separating money and credit. There is no point in quantifying anything before having accurately qualified it first. In this respect it is not only crucial to differentiate money and credit but also to differentiate between regular credit where it is specified the quality, quantity and due date of the good to be received, from irregular credit where one or more of those requisites are not specified. It is the latter form of credit the one that is extremely dangerous. Fiat currencies are clear cases of irregular credit.
Here is a summary of the main differences between Mises and Bondone monetary theories:
To wrap up, Bondone’s monetary theory rejects the theoretical principle that credit is a present good when used as currency, so it is in the right position to challenge the prevailing Monetarist and Keynesian theories.
For more details about irregular credit, see the following post: