Modern Monetary Theory and the Death of Savings
Contrary to MMT, the increase in spending financed by issuing new currency doesn’t lead to increased productivity, but to less of it.
Written by: Econ Bro
Advocates of Modern Monetary Theory (MMT) tout it as a potential tool for economic growth. Just like the Keynesians before them, they believe that government spending can be used to boost productivity.
In this article, I show how MMT – contrary to the claims made by its adherents – is a potential cause of declining productivity.
Economic recessions
Economic recessions are normally defined as a period of decline in economic activity, marked by falling production, reduced business investment, rising unemployment, and lower consumer spending. It is often defined as two consecutive quarters of negative economic growth, as measured by a country's gross domestic product (GDP).
In summary, a recession is just falling productivity, which means the country is not producing as many goods and services as it used to. To understand why productivity falls, it is important to understand what makes it grow
What drives productivity
According to the Keynesian school – and MMT tows a similar line – demand (spending) drives productivity. They believe that as people spend, it signals producers to produce more.
On the other hand the Austrian School of Economic thought teaches that private savings are what drive productivity. Austrians teach that private savings free up money and the resources that would’ve otherwise been consumed for investors to invest in capital goods that boost output.
I favour the Austrian theory because the belief that spending drives productivity leads to such follies like MMT. The idea that spending drives productivity leads MMTheorists to believe that the state can issue currency to boost productivity, but in reality the same can actually lead to a decline in productivity. As has been argued ad nauseum, increasing the supply of money doesn’t increase the supply of actual commodities, it only redistributes the existing commodities from the general population to those with access to the new money. Even if this new money is spent on the production of new goods and services, the commodities required to make these new goods and service can only be taken out of the existing stock, so this is just a case of redistributing productive factors to those who own the new money first.
This same evil cannot be said of the Austrian theory which identifies private savings as the driver of productivity. When people save, they defer consumption. This means that the commodities they would’ve otherwise consumed (i.e. money, labour, land, capital goods, etc), are now available for producers to use in the production of more goods and services.
With Keynesian and MMT policies, consumers don’t save, or save less (more on this momentarily), they free up neither money nor goods and services but are drawing on the same commodity stock as producers. This artificial demand created by MMT money printing policies, combined with actual demand by producers and consumers for the same limited commodity stock bids up the prices of goods and services. This is what drives price inflation (i.e. too much money chasing few goods, leading to a general increase in prices).
MMT is an assault on savings
Seeing as savings are in fact the driver of true productivity, it’s not hard to see how MMT discourages savings and in so doing, causes productivity to fall. When general prices are on the rise, consumer goods become more expensive.
If Phumlani earns R5,000 a month, the following is a hypothetical table of Phumlani’s budget:
When prices inevitably rise – due to policies like those prescribed by MMT, Phumlani’s budget might look as follows:
Table one shows that after Phumlani spends on his needs; he still has R1,000 left to save. In table two however – after the rise in prices cause by MMT-like policies, he now has nothing left to save, because his consumption expenditure has used up all the money he would’ve saved.
What’s even worse, because of the price inflation, whatever savings he had from the period before the inflation are now worth considerably less. If Phumlani had saved R10,000 in the ten months before the inflation, the savings would have been able to pay his rent for ten months, but after the MMT-driven inflation, the same R10,000 would only pay his rent for seven months. So, not only does he have less to save, but his previous savings are also worth considerably less. Sadly, Nigerians are all too familiar with Phumlani’s experience, because our last president moved the central bank to issue $50 billion worth (at the time) of local currency and not only made savings worthless but also made them quickly evaporate.
According to Austrian theory, if there are no savings, there can be no productivity. In Nigeria today, businesses are failing, and new ones aren’t rising to replace them, all because of policies like the ones MMTheorists want to push on South Africa.
Contrary to MMT, the increase in spending financed by issuing new currency doesn’t lead to increased productivity, but to less of it.
MMT will destroy savings in South Africa and cause the banks to have less to give out in loans to those who desire to invest and cause productivity to rise. South Africa must not only insist on the independence of the SARB but must reject MMT and all other inflationist policies altogether.
Econ Bro (@EconBreau and @EconBreau2 on Twitter/X) is a Nigerian Austrolibertarian economist and an apprentice at the Mises Institute. Under the organisation name “The Freedom Institute” he teaches individual liberty, personal responsibility, private property rights, free markets, and sound money to mostly young people across Nigeria. Econ Bro is an Associate of the Free Market Foundation.