I have asked Alex Salter to give his perspective on the ongoing debate about “Central banking is (not) central planning” in the blogosphere.
David Glasner also has a new comment on the subject.
But back to Alex…
Guest blog: Central banking – between planning and rules
I’ve been reading about the central banking vs. central planning debate on the blogosphere; the more I think about it the more interesting it becomes. Whether central banking is a form of central planning depends on what exactly the central bank does. There are two broad scenarios. In the first, the central bank is following some sort of rule or trying to hit a target. This can be a Taylor rule, inflation target, NGDP level target, or anything else. In this case the central bank is trying to provide a stable economic setting so that individuals can effectively engage in the market process. If this is what the central bank is doing, I don’t think it makes sense to call it central planning. All the central bank is trying to do is lay down the “ground rules” for economic behavior. If this is central planning, you could just as easily say any institution such as property rights or the rule of law is central planning too. This obviously isn’t a useful definition of central planning!
However, a central bank may be engaging in a type of central planning if it tries to bring about a specific allocation of resources. For example, if the central bank thinks equities prices should be higher for some reason, and they start purchasing equities, you could make an argument that this is a type of central planning. If the central bank explicitly tries to monetize the debt and acts as an enabler for the nation’s treasury department, you could also say this is a form of central planning. It’s still not 100% clear, since presumably the central bank is not using coercion or the threat of coercion to get market participants to behave in the way it wants; there’s voluntary assent on the other side of the agreement, even if that voluntary assent is a response to warped incentives.
In closing: if a central bank is trying to create a specific framework in which agents can operate, it’s not central planning, it’s rule setting. If on the other hand the central bank is trying to allocate specific resources, it may be a form of central planning. In either scenario, the usual knowledge and incentive problems still apply.