Neoclassical economics vs MMT on the status of savings

Jim Byrne

The following link – https://www.linkedin.com/feed [1 ] – which appeared on 1 Apr 2026 – is an extracted summary of a larger article by Jim Byrne which appeared in https://mmt101.substack.com/p/mmt-basics-from-adam-smith-to-mmt [2]

The neoclassical view [1]
Frugality has always been thought of as a virtue, an idea with its roots in religion and social norms.

But ‘saving for a rainy day’ took on a new status with the rise of the classical school of economics in the late 18th and early 19th centuries.

Economists like Adam Smith, JeanBaptiste Say and David Ricardo built theories in which a sensible citizen was a frugal citizen: saving was not just a virtue, it was seen as underpinning economic growth.

In short their story was: that savings -including profits and capital accumulation — are good; they lead to investment. and that investment leads to development.

These ideas were later formalised by the late 19th/early 20th century neoclassical economist Alfred Marshall, who turned them into a more formal mechanism.

His version of the ‘savings are good’ idea went as follows: when people save more, interest rates fall; lower interest rates encourage more borrowing and investment; and greater investment leads to greater productive capacity in the economy.

Why did Marshall think that more savings meant lower interest rates? Simple demand and supply: if more funds are available the cost of borrowing those funds goes down.

If funds were scarce it would be the opposite: the same number of borrowers chasing a smaller pool of funds pushes up the price of those funds.

Marshall laid the foundations for what later became known as the loanable funds theory. That is, saving is assumed to provide the pool of funds from which investment is financed, with the interest rate adjusting to bring the two into balance.

Find out how Keynes and then MMT scholars disagreed with this view: https://mmt101.substack.com/p/mmt-basics-from-adam-smith-to-mmt.

The MMT view – extracted from [2]

Higher levels of savings do not lead to lower interest rates and higher investment.

MMT Basics: From Adam Smith to MMT: Why Spending Creates Savings, Not the Other Way Around. MMT101.SUBSTACK.COM. MMTioi.ORG – Learn Modern Monetary Theory (MMT)

MMT challenges the idea, set out in classical and neoclassical economics, that higher levels of saving lead to lower interest rates and, therefore, to higher levels of investment. In short, MMT shows us that interest rates are not determined by the supply of savings in a market for loanable funds. They are a policy variable set by the central bank. And investment is not constrained by prior saving. Businesses invest when they expect to make a profit, not because there is a larger pool of savings available. Conclusion: private sector savings don’t drive economic development, spending does.

In this article, we have taken a journey from the classical view of savings as essential for investment and growth, through Keynes turning that idea on its head, and finally to the MMT view derived from the observation of what happens in practice as revealed by balance-sheet accounting.

Yes, private sector savings are important but they don’t drive investment and development. It is spending that creates income and it is that income which allows savings to happen.

Savings are the result, not the cause, of a healthy economy.