Feature: Modern monetary theory – a recipe for wealth inequality- Richard Cantillon vs MMT

by Econ Bro

Modern Monetary Theory (MMT) is an economic framework that proposes that countries that control their own currency can issue new currency to meet the needs deemed necessary by the government. MMTheorists argue that governments should issue currency to create jobs for the unemployed, to narrow the gap in wealth inequality. Although not in these terms, South African MMT advocate Buddy Wells has argued for the same.

In this article, I will explain how the proposals of Mr Wells and other MMTheorists – counter to their noble intentions – can widen the gap in wealth inequality.

Defining true wealth
A mistake often made by many who believe in MMT is one of thinking of wealth in monetary terms. Wealth – true wealth – isn’t money, but the things we for which we exchange money. True wealth is houses, cars, food, internet services, computers, etc. A man stranded alone on an island – though he possess a billion dollars in cash – is no more wealthy than the beggar without a dime to his name in the city.

Money is mostly earned by producing goods and services (i.e. real wealth), and is ultimately traded by those who own it for more goods and services they themselves cannot produce.

Cantillon effects
In his 1730 essay titled “Essai sur la Nature du Commerce en Général (Essay on the Nature of Trade in General)”, Irish born Frenchman Richard Cantillon made what I consider to be one of the most important contributions to monetary economics. Prior to Cantillon, mercantilists – like Thomas Mun or Jean Bodin – recognized that an influx of money could lead to higher prices.

Bodin is often credited with an early observation of this phenomenon during the Price Revolution in Europe, attributing rising prices to the abundance of precious metals from Spanish colonies. However, these thinkers didn’t articulate a precise, proportional relationship between money supply and prices. Their views were more descriptive than analytical, lacking the systematic framework associated with modern economics.

Cantillon argued that an increase in the money supply doesn’t affect everyone equally, that those who first receive the new money gain purchasing power before prices rise. As this money spreads through the economy, prices increase, and those further down the chain such as wage earners lose because their incomes lag behind inflation. This came to be known as the “Cantillon Effect”.

Cantillon effects and inequality
Murray Rothbard and other Austrian economists, commenting on Cantillon’s brilliance pointed out that Cantillon Effects also explain wealth inequality.

As stated earlier, wealth is the actual goods and services for which people exchange money. This being the case, when new money is printed, those such as government officials, contractors, bankers, etc. with access to the new money purchase commodities at prices, leaving behind a smaller stock of commodities (real wealth) for the rest of the population to bid over.

Here’s how it plays out:

1. New money enters the system: Imagine the SARB prints 10 billion Rands to stimulate the economy. This money doesn’t just magically appear in everyone’s bank account at once. It’s introduced at specific points – like through banks, government spending, or loans.  
2. First receivers benefit most: The people or institutions who get this money first (e.g., banks, government contractors, or big businesses) can spend it before prices rise. For example, a bank gets cheap loans and lends to a real estate developer. The developer buys land and materials at current (lower) prices, locking in profits.  
3. Prices start to rise: As this new money circulates, demand increases for goods and services (e.g., land, labor, concrete). Sellers notice and raise prices. So, the cost-of-living creeps up, but the first receivers already got their cut at the old, lower prices.  
4. Later receivers lose out: By the time this money trickles down to wage earners, prices have already risen. Their purchasing power shrinks because they’re buying at the new, higher prices.  
5. Wealth gap grows: The early recipients – often wealthier, connected players like financial institutions or large firms – gain an advantage. They invest or buy assets (like stocks or property). Meanwhile, people on fixed incomes, savers, or those at the end of the chain (like everyday consumers) see their money buy less.

Real-world example
Think of 2020-2021, when central banks pumped trillions into economies post-COVID. Big corporations and Wall Street got loans and bailouts early. They invested in stocks or real estate, which soared in value. Meanwhile, by the time stimulus checks hit regular people, rents were up, groceries cost more, and inflation was eating into savings. The rich got richer faster because they were closer to the new money source.

MMT will cause more inequality
The entire MMT proposal has to do with issuing of new currency. If Richard Cantillon and the Austrian economists are right (and I have no doubt that they are), MMT will undoubtedly help transfer real wealth from the general population to the hand of the few individuals privileged to have access to the new money first. These people tend to be the rich, and not the middle or lower classes.

MMTheorists always present themselves as champions of the poor and downtrodden, but regardless of their intentions, what they propose would cause more inequality and create more poverty than we already have now.

This is one more reason why South Africa – and all other countries – must shun those who propose MMT and other inflationist policies.