Econ Bro | Associate | Free Market Foundation | mail me |
Modern Monetary Theory (MMT) has found a receptive audience in South Africa, and it is not hard to see why. Eskom’s balance sheet lies in ruins, municipal debt continues to pile up in Johannesburg and Tshwane, and the South African Social Security Agency (SASSA) grants remain stretched thin.
Against this backdrop, the idea that a sovereign government “can’t run out of money” sounds like an answer to almost every fiscal problem. However, the MMT position rests on a fundamental confusion that Ludwig von Mises spent his career warning against: confusing money with wealth.
This distinction matters because creating more money does not automatically create the resources an economy needs to prosper. Indeed, confusing money with wealth risks obscuring the real constraints facing South Africa.
Printing Rands doesn’t build a power station
MMT’s central claim is that a government that issues its own currency faces no financial constraint, only a resource constraint. This distinction is important, but it does not solve the underlying problem.
Consider Eskom. The utility’s crisis does not stem from a shortage of Rands. National Treasury has repeatedly bailed it out, yet the electricity crisis persists. What Eskom lacks is functioning generating equipment, skilled maintenance crews, reliable coal supply chains, adequate infrastructure and years of investment.
No amount of money creation can produce any of those things. Yes, the state can print rands, but it cannot print turbines, skilled engineers or additional hours of productive labour. Money serves as a medium of exchange and a claim on real goods and services. However, it is not the goods and services themselves.
If government creates additional money while the supply of turbines, engineers and other inputs remains constrained, it creates more purchasing power. That purchasing power then competes for the same scarce resources. It does not make those resources less scarce.
That is the basic Misesian objection to MMT. South Africa’s real constraints include skills flight, ageing infrastructure and weak fixed investment. These constraints do not disappear simply because the South African Reserve Bank (SARB) expands the money supply. Confusing money with wealth does not make these structural limitations any less real.
Inflation is the constraint
MMT supporters respond that they never claimed otherwise. Instead, they argue that inflation, rather than solvency, represents the real constraint. Government can spend while labour and productive capacity remain idle. It can then raise taxes or reduce spending once the economy approaches its limits.
The problem is that policymakers cannot know precisely where those limits lie. No one can. South Africa’s experience with fuel and food prices illustrates this problem. Petrol prices respond to international crude prices, exchange-rate movements and domestic cost pressures. Meanwhile, food prices respond to weather, supply disruptions, transport costs and global markets. Businesses, workers and consumers make millions of decisions simultaneously.
By the time inflation data tells Pretoria that spending has gone too far, government has already spent the money. Contracts have been signed, and resources have been committed. Some of those resources may also have been diverted from uses that consumers would have valued more highly.
It is not really a numbers problem. It is a knowledge problem. Consider everything that influences supply and demand: what people want right now, what is running short and what has just changed. This information remains scattered across millions of people, and it never stands still.
There is simply no one in charge who could ever collect all this information. This matters because prices communicate information precisely through those decentralised decisions. Confusing money with wealth also distracts from this fundamental knowledge problem.
Who gets the money first?
There is another problem, and Mises understood it through Richard Cantillon: newly created money does not enter the economy evenly.
Suppose government funds a major infrastructure programme with newly created money. Construction companies, contractors, equipment suppliers and others connected to the programme receive that money first. Consequently, they can spend it before prices have fully adjusted.
Someone receiving a fixed SASSA grant does not enjoy that advantage. By the time the additional money has worked its way through the economy, food, transport and other necessities may already cost more.
The point is not that every instance of money printing leads to identical inflation. Nor does every recipient of new money necessarily gain at everyone else’s expense. Rather, the way new money enters the economy matters. Prices and incomes do not adjust simultaneously. Therefore, those closest to the source of new purchasing power can spend before other people feel the full effects of rising prices.
MMT does not eliminate this unjust redistribution. By making deficit-financed spending a routine policy instrument, it institutionalises it. This further illustrates why confusing money with wealth can lead policymakers to overlook the unequal consequences of monetary expansion.
MMT economists would push back here. They do not claim that printing money conjures physical resources from nothing. Instead, they argue that government spending can sometimes put idle workers and unused capacity to work. This can happen without immediately triggering unacceptable inflation.
Even if this is true, it overlooks an important cost: avoiding inflation is not the same as avoiding loss. Money that holds its value, or gains purchasing power as productivity grows, would have made everyone better off. Therefore, new money quietly eats into those gains and robs us of higher living standards.
In conclusion
MMT economists would also argue that the uneven effects of new purchasing power occur under ordinary deficit spending and private credit expansion. In other words, these effects do not arise exclusively from MMT-style financing.
Fair enough. However, saying that “everyone else does it” does not make it right. Nor does it make the problems we have already identified disappear. Monetary sovereignty does not abolish any of them.
You can create more Rands. You cannot create more wealth by decree. Ultimately, confusing money with wealth risks mistaking monetary expansion for economic progress. South Africa needs productive capacity, investment, skills and functioning infrastructure. Printing more money cannot substitute for any of these.