Central Banking and Knowledge Problems

|Peter Boettke|

Anthony Evans has an excellent piece on why central bank policy leads to frustration even under the best of circumstances. In the process he discusses the work of Henderson and Hummel, as well as Sumner, and takes their argument at face value, but shows that even granting that, these arguments miss the fundamental point that:

Whether we “blame” central bankers or not is really a secondary consideration to our attempts to understand what happened and why. By assigning blame we suggest that the Fed should have done better. It encourages us to think “if only it did X everything would be ok”. But the problem isn’t that individuals focused on the wrong targets, and the solution isn’t to work out how they can improve. The lesson should be that the nature of central banking – the attempt to centrally plan the monetary system – imposes an epistemic burden on policymakers that they cannot possibly ever fulfil. The Fed wasn’t to blame for the crisis, because any argument for what it “should” have done is insincere. We should absolve it from culpability, and remove the shackles of expectation that we place upon it. It did the best it could be expected to do. And that wasn’t enough.

Emphasis added is mine so that readers can actually see that for the sake of argument one can assume the best of intentions and still demonstrate that is not enough to accomplish the task required. This is how Mises and Hayek argued against socialism, and it is, I would argue, the correct approach — treat ends as given, and assess the effectiveness of chosen means to given ends. That is the sense of value-free, or positive, economic analysis in the praxeological perspective.

I have addressed this methodological point in a few articles, e.g., “From Approximate Value-Neutrality to Real Value Relevance,” and “Is Economics a Moral Science?”. Also see my paper with Pete Leeson on “Was Mises Right?” — we argue yes (emphasis added again for those who have a hard time reading). Praxeology does indeed put parameters on people’s utopias, but it does so not by impugning their character of intellectual opponents or exposing some malicious intent of the policy makers.

Clearly there are bad faith dealers in ideas and special interest politics at work all the time in history, but praxeology takes as its primary mode of argument that it is dealing with good faith dealers in ideas and publicly interested policy makers. The path to hell is paved with good intentions, as Hayek demonstrated in The Road to Serfdom, which gets its core argument from Mises’s Socialism. The public choice elements of the story come in, in this argumentative structure, after the more strictly speaking economic elements.(see Boettke and Leeson 2003) A complete political economy picture must be painted with both, but the sequencing of the argumentative structure matters significantly I believe. But no doubt, as we strive to build robust institutions of governance, we cannot ignore either our hubristic knavery, or our opportunistic knavery, and to do so, would be — as Anthony put it — to expect too much from these institutional designs and thus court continuous frustration with policy failure.