In his recent post, Scott Sumner puts conservative populist economic theory through the mills, and hardly anything of all the populist arguments is left intact. I agree with everything he writes, and I am certainly not a leftist (nor is Scott). It just shows that there is a whole lot of theoretical nonsense going on on either side of the political spectrum. To summarize it crudely, leftists think that government spending can revive the economy and that regulation can heal the banking sector. People on the political right think that the central bank is inherently evil and that it is trying to bring hyperinflation to us as soon as possible.
Both are so wrong.
Central banks are, just like any centrally planned thing, a quasi-socialist construction. I concur with conservatives and libertarians that the jury is still out on whether central banking has any advantages over totally free, private banking. The historic performance of central banks until now has been rather disappointing, considering the possibilities that planning ought to open up. But then again, it is like almost any other kind of central planning. It doesn’t stand a chance against decentralized private cooperation. Chaos makes order, and order makes chaos.
Still, central banks do what society and politicians expect them to do. Show me any example of hyperinflation, or even moderately high inflation, and I’ll show you that it was the “optimal” solution from a political, democratic, or societal, point of view, which can be very different from what’s just or ethically/morally correct. My point is, central banks wouldn’t inflate if most of the people (or all powerful politicians, or business leaders) didn’t want it to. And if you want to prop up the economy, central banks are by far better than government spending.
So, if you wanna stick to the central banking system in your country, and if you wanna know what you should demand from your central bank, then listen to Scott Sumner.
Otherwise, fight for Free Banking.
Please excuse my relatively short and infrequent posts, I’m currently very busy. If you’d like to know more about the theories and efficacy of monetary policy or government spending, feel free to read my older posts.