Is Market Monetarism just market socialism?

The short answer to the question in the headline is no, but I can understand if somebody would suspect so. I will discuss this below.

If there had been an internet back in the 1920s then the leading Austrian economists Ludwig von Mises and Friedrich Hayek would have had their own blogs and so would the two leading “market socialists” Oskar Lange and Abba Lerner and in many ways the debate between the Austrians and the market socialists in the so-called Socialist Calculation Debate played out as debate do today in the blogosphere.

Recently I have given some attention to the need for Market Monetarists to stress the institutional context of monetary institutions and I think the critique by for example Daniel Smith and Peter Boettke in their recent paper “Monetary Policy and the Quest for Robust Political Economy” should be taken serious.

Smith’s and Boettke’s thesis is basically that monetary theorists – including – Market Monetarists tend to be overly focused on designing the optimal policy rules under the assumption that central bankers acts in a benevolent fashion to ensure a higher good. Smith and Boettke argue contrary to this that central bankers are unlikely to act in a benevolent fashion and we therefore instead of debating “optimal” policy rules we instead should debate how we could ultimately limit central banks discretionary powers by getting rid of them all together. Said in another way – you can not reform central banks so they should just be abolished.

I have written numerous posts arguing basically along the same lines as Boettke and Smith (See fore example here and here). I especially have argued that we certainly should not see central bankers as automatically acting in a benevolent fashion and that central bankers will act in their own self-interests as every other individual. That said, I also think that Smith and Boettke are too defeatist in their assessment and fail to acknowledge that NGDP level targeting could be seen as step toward abolishing central banks altogether.

From the Smith-Boettke perspective one might argue that Market Monetarism really is just the monetary equivalent of market socialism and I can understand why (Note Smith and Boettke are not arguing this). I have often argued that NGDP targeting is a way to emulate the outcome in a truly competitive Free Banking system (See for example here page 26) and that is certainly a common factor with the market socialists of the 1920s. What paretian market socialists like Lerner and Lange wanted was a socialist planned economy where the allocation would emulate the allocation under a Walrasian general equilibrium model.

So yes, on the surface there as some similarities between Market Monetarism and market socialism. However, note here the important difference of the use of “market” in the two names. In Market Monetarism the reference is about using the market in the conduct of monetary policy. In market socialism it is about using socialist instruments to “copy” the market. Hence, in Market Monetarism the purpose is to move towards market allocation and about monetary policy not distorting relative market prices, while the purpose of market socialism is about moving away from market allocation. Market Monetarism provides an privatisation strategy, while market socialism provides an nationalisation strategy. I am not sure that Boettke and Smith realise this. But they are not alone – I think many NGDP targeting proponents also fail to see these aspects .

George Selgin – who certainly is in favour of Free Banking – in a number of recent papers (see here and here) have discussed strategies for central bank reforms that could move us closer to Free Banking. I think that George fully demonstrates that just because you might be favouring Free Banking and wanting to get rid of central banks you don’t have to stop reforms of central banking that does not go all the way.

This debate is really similar to the critique some Austrians – particular Murray Rothbard – had of Milton Friedman’s proposal for the introduction of school vouchers. Rothbard would argue that Friedman’s ideas was just clever socialism and would preserve a socialist system rather than break it down.

However, even Rothbard acknowledged in For a New Liberty that  Friedman’s school voucher proposal was “a great improvement over the present system in permitting a wider range of parental choice and enabling the abolition of the public school system” (I stole the quote from Bryan Caplan)Shouldn’t Free Banking advocates think about NGDP level targeting in the same way?


Posts on central bank as (or not) central planning:

Maybe Scott should talk about Hayek instead of EMH
It’s time to get rid of the ”representative agent” in monetary theory
Guest blog: Central banking – between planning and rules
When central banking becomes central planning

Leave a comment


  1. Alex Salter

     /  April 11, 2012

    I don’t think central banking is necessarily central planning. Nor do I think Market Monetarism is market socialism in any way, shape, or form. Nonetheless, Market Monetarists have been conspicuously quiet on the institutional issue, beyond acknowledging it a few times in blog posts. How exactly do you propose to bind the Fed to a fixed rule (ideally an NGDP target) when they have incentives for short-run deviations? The ghosts of Kydland and Prescott haunt us still.

    • Alex, I agree. Institutions are tremendously important. However, it is not harder to bind the central bank to target a NGDP target than targeting inflation (or a Taylor rule).

  2. Bill Woolsey

     /  April 11, 2012

    There are major issuers regarding the medium of account.

    Free banking? Sure, but with what medium of account?

  3. Bill, I would leave that to Selgin and other to answer. But couldn’t we imagine a quasi-Free Banking set-up with NGDP targeting basically determining the medium of account and letting commercial banks issue money on their own? This would basically be a variation of Friedman-Selgin’s proposal to freeze the money base.

  4. Bill Woolsey

     /  April 11, 2012

    It’s the “freeze the base” or “gold” part that is questionable.

    I am all for privatized currency issue and the rest.

    Still, I think the quantity of the base (the reserves) needs to adjust to meet the demand to hold it, conditional on the expected level of nominal GDP remaining on target.

  5. Bill, freezing the base WITHOUT complete privatized money issue is of course completely insane. But yes, I could imagine a situation where the money base was adjusted to target the NGDP level while at the same time allowing privatized money issuance.

  6. Bill Woolsey

     /  April 11, 2012

    In my opinion, Scott leans towards helping his good friend Ben achieve his goals of 2% trend inflation. If you just use index futures targeting on nominal GDP you will be able to get what you want.

    My approach is more convincing people that we need an alternative monetary regime in place of putting the Fed in charge of a policy that is aimed at doing good.

    I don’t believe the Fed is trying to maximize government revenue or create booms. I think they are trying to stablize short term interest rates subject to the constraint that inflation and unemployment not get too high.

    I am not sure what special interest group is so focused on stabilizing short term interest rates.

  7. Bill, I think that is an excellent question. Why is the Fed acting as it is? I am not sure that a special interest group explanation is the best explanation. I think Niskanen had the answer – they are maximizing their own “budget”. “Budget” could mean prestige, power, “respect”, nice offices or whatever.

  8. Yes, a sovereign central bank has awesome power for good or evil.

    But sovereign nations maintain militaries, which when in error can make the mistakes of a central bank look like a picnic. But we still maintain militaries.

    The key is not to give the necessary powers of a sovereign, but to use them correctly.

    Ergo, Market Monetarism.

    Problem solved, next argument.

    • Benjamin, the fact that for example the US maintains a military is not really an argument – and you can certainly question how much good that have done in the past decade…but we better not go there.

      The fact that central banks can do either their job or do bad means that they should be limited to doing only their job and nothing else.

  9. Diego Espinosa

     /  April 12, 2012

    “I am not sure what special interest group is so focused on stabilizing short term interest rates.”

    Stabilizing short term rates at “low” levels creates incentives for maturity transformation. This is precisely what the Fed had in mind with “extended period” back in 2002 and “2014” today. It explains the growth of the shadow banking sector, which exists primarily to engage in the maturity (and liquidity) transformation of “safe” long term assets. Due to the importance of the shadow banking system, the “credit channel” relies less on asymmetric information about borrower financials and more on Fed promises to 1) keep short rates stable or predictable; and 2) provide a put for safe assets.

    One question is how free banking would affect the volume of credit provided by the shadow banking sector.

  10. Bill Woolsey

     /  April 12, 2012

    Central banks have been targeting interest rates for at least a century. Explanations in terms of shadow banking are doubtful.

    Further, the “stabilize short term interest rates at low levels” is inconsistent with “keep inflation from getting too high.” What I think can be done is reduce fluctuations in short term rates, not keep their average level higher or lower.

    Still further, commercial banks also transform maturity. As best I can tell, shadow banking does it in a way that requires less capital. I don’t see why it is inconsistent with fluctuations in short term interest rates.

  11. Diego Espinosa

     /  April 12, 2012

    The Fed has been communicating the path of short term rates for about a decade. Previous to that they told us their “bias” towards easing or tightening for the next meeting (only). Before that, they told us nothing.

    Shadow banks care about the path of short term rates and their expected volatility. These are two critical inputs into the Value At Risk models that determine optimal portfolio leverage.

  12. Lars-

    Actually, I think there is an analogy between militaries and central banks. They are properly sovereign powers, as both are necessary for the common welfare. You don’t want private-sector warlords or free bankers, who do not have obligations to the commonweal but only to maximize profits for shareholders.

    In free banking, all the banks could merely run away from their obligations, and we would not have a lender of last resort, or a way to increase the money supply. That’s called collapse. Think Lehman Bros. Bear Strearns, Washington Mutual etc etc etc.

    Ergo, we need a central bank, that can print money and will never run away.

    And, yes, sometimes there are inevitable wars, so we need a military. Hitler was a reality.

    The question becomes how to operate a military or central bank.

  13. Benjamin, not to go into a major defense of free banking, but what you certainly would not need under Free Banking is a lender of last resort. FB proponents would exactly argue that because of banks can print their own money their is no need for LOLR. Therefore, under FB an increase in money demand will alway be meet by an similar increase in the money supply and this is exactly what Free Banking and NGDP level targeting have in common – the supply of perfectly elastic.

  14. Okay, so the free banks are printing money—and is it accepted as payment for taxes? If not, it will become funny-money after any big bust. Private-sector, for-profit banks do not have the moral authority of state institutions.

    I have a strong libertarian streak in me.

    Yet, some powers are sovereign, and central banking is one of them. We have to have a state to enforce contract and property law, protect human rights and civil order, and the environment, to repel invaders. All of these powers have been abused, with horrible results. Think Russia.

    Yet many Western democracies are doing pretty good on all these fronts.

    We just need to get the central banking down, and demobilize the US military.

    • Sceptical

       /  April 15, 2012

      It is highly questionable that central banking works for the common good … “not proven” would be the best that could be said to that proposition … and after 100 years not proven is akin to “it doesn’t work”.

      It took 70 years for the vast range of resource misallocations and other evils communism spawned in Soviet Union to finally collapse that empire, do we really want to run this diastrous centrally planned banking experiment to its inevitable, ruinous end? Sovereign power over money is a bad idea from many angles, not the least individual liberty. The equations that prove this are already out there, do some research on emergent behaivour and complex systems theory for example.

      Central banking is a bad, bad idea that largely benefits privileged insiders, take a look at the scoreboard if you don’t think so, e.g. the rich-poor gaps are some of the worst in history and historically have resulted in bloodshed when around these levels.

      Anyone in favour of centralised banking can not call himself a Libertarian of any streak.

  1. Beating the Iron Law of Public Choice – a reply to Peter Boettke | The Market Monetarist

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: