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:
NGDP targeting is not a Keynesian business cycle policy
NGDP targeting is not about ”stimulus”
Adam Posen calls for more QE – that’s fine, but…
Selgin’s Monetary Credo – Please Dr. Taylor read it!
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.
Daniel Kuehn
/ February 11, 2012Exactly what needs to be discretionary about Keynesianism? Could you clarify what that meant?
Greego
/ February 13, 2012Isn’t fiscal stimulus discretionary? If not in quantity, at least in timing and intended destination.
Anni
/ May 24, 2012Krugmanism and Market Monetarism share a single doatnmiing feature: they blame the current recession on a lack of aggregate demand relative to full-employment AD. To the extent that both camps see the same cause of the recession, both will be similar in their final solution (boost AD!) and differ mainly in their preferred methods (PK: fiscal deficits; MM: monetary stimulus).(An anecdote in this regard: when I first read Sumner, I thought his focus on NGDP was maddening and possibly even misguided. Then I learned to mentally substitute AD whenever I saw NGDP , and everything made more sense and indeed looked an awful lot more like standard macro)
Lars Christensen
/ February 11, 2012Daniel, welcome…
Well I should of course have written old fashioned keynesian. I fully acknowledge that most New Keynesians favours some kind of rules. That said, I know of no New Keynesians that would go all in and take away powers from central banks and leave the decisions to the markets – either with NGDP futures, predictions markets or more radically go all in on Free Banking.
Daniel Kuehn
/ February 11, 2012The reason a lot of people are suspicious of free banking is, of course, because of the political economy concerns.
Greego
/ February 13, 2012“The reason a lot of people are suspicious of free banking is, of course, because of the political economy concerns.”
What exactly are ‘political economy’ concerns? How would a competitive currency industry increase these concerns relative to the existing centralised one?
Lars Christensen
/ February 13, 2012Greego, I will leave that for Daniel to answer. But I would add that after having been thinking about it should be noted that the ideal Market Monetarist recommendation for the central banks is not only rules – in the rather soft version that mainstream economists think about it. Scott Sumner’s recommendation for NGDP level targeting based on NGDP futures will let the market do the implementation of monetary policy. I doubt that this is the recommendation from even rules oriented New Keynesians like Mike Woodford.
JJA
/ February 13, 2012In principle I agree that markets should determine quite a much, but… The problem is that from the grass-level the thoughts about well-behaving markets are nonsense (sorry to be annoying in purpose).
In my field of business, which is related to industrial investments, there is no such thing like a free market. Big players step on smaller ones, make deals with each others, and the end result is not something that theories would like to present. What I see from other real markets, the same holds.
From my point of view NGDP targeting would require a very strong mandate. Both for the central bank and in extreme situations to the state also. With that mandate it might be possible to be consistent and present a clear and precise picture to everybody. Without that there is no such thing as a well operating market — only the rule of the mightiest.
I respect Scott Sumner very much, but I think that the idea of NGDP futures is fine in a perfect world, but in the world of real, nasty business, it is not that good. I hope that I am wrong, but in any case…
In my daily job I would like to see a consistent aim for, lets say, 7% NGDP target. Mostly inflation, yes, but we would be quite confident that the central bank and the state would not let NGDP to fall. The real economy might fall, but with the minimum of problems for both the lenders and the borrowers.
Lars Christensen
/ February 13, 2012JJA, I think that you are too pessimistic on free markets. However, I would also stress that neither Scott nor me believe that markets are perfect. However, we both believe that the market it a great (the best) aggregator of information. A lot of research shows clearly that central banks (governments) in general are very bad at forecasting the future (and so is the rest of us who are in the business of forecasting). Furthermore, policy makers also tend to be biased in their forecasting. The markets might often be wrong, but markets are seldom biased.
Furthermore, by leave the policy implementation to the market you make policy a lot more credible. Discretion in economic policy seldom had any positive impact.
The market is not perfect, but government bureaucrats – including central banks – very rarely do a better job than markets. Just imagine the industry you work in was run by government bureaucrats. Do you think they would do a better job than you and your colleagues in the industry? And most important do you think it would better for your clients that your company was nationalised? If you answer “no” why would you then be afraid of taking away the discretionary powers from central bankers?
JJA
/ February 13, 2012I am a great football (soccer) fan. You need a referee. Without the referee everything will be a chaos.
I think that in a perfect world the central bank and the state(s) should and would act as referees. Ensuring fair play. Markets, the teams and the players and the owners, will never be able to do that without the referee(s).
I come to back my earlier issue. I think that the Market Monetarists and Keynesians boil down into what I would like to see: a clear and understandable referee that is aiming for 5% (less inflation than in 7% aim) NGDP growth. The means may be monetary policy, the fiscal policy, voodoo, dice-tossing, or whatever. The idea that the authorities will play the game for that 5% growth in any possible and imaginable way would be enough for me and my colleagues.
By the way, one of the most successful export firms in my field of business was mainly owned by the local government. Now the government owns only 48% of that company. They are one of our competitors and still bloody successful..
JJA
/ February 13, 2012Lars,
If you think that my comments are negative, then I have not achieved my aim. I think that you, Nunes, Sumner, Krugman, and DeLong and a few others write about very important things from the point of view of us practitioners. You write about the same thing: getting the economy prosper and normal people to have at least reasonable life.
To be honest, I feel that some strange academic or ideological tradition (or custom or disease or whatever) makes you Market Monetarists and Keynesians fail to see that you have the same aim.
In my world such a realization would mean serious discussions in a secret settings, Market Monetarists and sense-making Keynesians together. The aim would be market domination.
Well, drop your ideological hindrances and start serious discussion with proper people. The aim: market domination of the economic ideas.
The world would benefit.
Lars Christensen
/ February 13, 2012JJA, I certainly do not see your comment as negative.
However, I also think it is important to stress the real and important differences between us and Keynesians. You might call it ideological, but I strongly believe in the power of markets.
JJA
/ February 13, 2012Do the differences of Market Monetarists and Keynesians manifest themselves in a real way? I have the inclination that from the practitioner’s point of view both would look the same: very similar action in the monetary and fiscal policy.
In engineering we call such a situation (difficult to translate) something like: “Who cares about the design philosophy? Fuck the philosophy, lets make working products.”
I think that there must be some benefit for your academics in making such a difference in something that looks the same from the practitioners’ point of view.
Is it the number of articles in nice journals? More publications? I understand that, no problem. Measures of results are what they are, be they number of sales, profit, or journal articles.
But still you folks seem the same from my point of view.