Peter Boettke over at Coordination Problem a post in which he challenge Market Monetarists to think about some political economy questions.
Here is Peter:
“Now I understand that much has changed since 1962 about the state of the art in central banking and the debate over rules versus discretion. But after 2008, can we really say that anymore?
So while I might agree with the technical theory point about monetary equilibrium, the question remains as to what institutional arrangement best fits. Central banking as a system simply might not be capable of operationalizing the lessons from monetary equilibrium theory. The ability of the system to pursue optimal policy rules may beyond its reach and not merely for reasons of interest group manipulation, but due to an epistemic constraint. That is actually how I read the critical aspects of Selgin’s The Theory of Free Banking.
So when I focus on the following passage of Hayek about liberal policy in general, I wonder whether the “market monetarist” can actually pass this test:
Libeal or individualist policy must be essentially long-run policy; the present fashion to concentrate on short-run effects, and to justify this by the argument that ‘in the long run we are all dead,’ leads inevitably to the reliance on orders adjusted to the particular circumstances of the moment in the place of rules couched in terms of typical situations. (Individualism and Economic Order, p. 20)
If we add to this, the point Hayek makes in The Constitution of Liberty, that the misunderstanding of the costs of inflation by economists (due to the equilibrium preoccupation) combined with an obsessive fear of deflation in monetary policy will lead to a regime of permanent inflation, then I think the necessary contemplation about the political economy of monetary policy might question the robustness of even the most careful presentation of market monetarism.”
I think Peter raises some very important issues. Basically Peter argue that it is more important that we discuss the institutional arrangement guiding the monetary regime rather than just the day-to-day conduct of monetary policy. I am happy that Peter is raising these issues. I have often argued that Market Monetarists should never argue in favour of “stimulus” in the keynesian discretionary fashion and rather stress that we are strongly in favour of rules. We are certainly intellectually indebted to Hayek and Friedman.
Here a is few earlier posts in which I argue strongly for rules in the conduct of monetary policy:
We favour Futarchy in monetary policy – we want markets rather than policy makers to determine monetary policy. Scott Sumner has argued in favour of using NGDP futures to directly determine monetary policy. I while endorse Scott’s proposal for NGDP futures I have further argued that central banks should use predictions markets to do macroeconomic forecasting and for implementation of monetary policy. “Market” in Market Monetarism is not just a buzzword – it is an integral part of our thinking. In fact I have earlier argued that futures based NGDP level targeting could be seen as privatisation strategy and a first step toward the total privatisation of the supply of money. Not all Market Monetarists bloggers are in favour of Free Banking, but there is no doubt that a number of us are highly sympathetic to the idea of privatisation of the monetary regime.
So I think we have both been thinking about and answered Peter’s question. Peter, there is no reason to worry – we are loyal disciples of Hayek and Friedman – also when it comes to institutional questions.