Academic journal article The European Journal of Comparative Economics

Central Banking without Romance

Academic journal article The European Journal of Comparative Economics

Central Banking without Romance

Article excerpt

1. Introduction

There is a broad consensus among economists that the gold standard suffers from major deficiencies. In a recent survey of prominent economists, none agreed with the proposition that a gold standard would improve price stability and employment (IGM 2012). In a series of lectures at George Washington University, former Fed Chairman Ben Bernanke (2012a; 2012b) surveyed the major theoretical and empirical problems with the gold standard. According to Bernanke (and most other economists), the gold standard prevents optimal monetary adjustment, leading to output and price instability, cannot prevent financial panics, transmits bad policies between countries, and can lead to speculation-induced collapse. (1)

These deficiencies certainly provide critiques of the gold standard that must be taken into consideration when comparing alternative monetary structures. They fall short, however, of demonstrating the superiority of central banking institutions over the gold standard. Comparative institutional analysis requires demonstrating that the relevant alternative institution, in this case the Fed, can do better than the gold standard on these same margins.

Comparative institutional analysis is a long-running theme in public choice economics. (2) Pre-public choice economics is often analogized to the tale of the Roman Emperor in which the Emperor chooses between two singing contestants (Boettke, 1998, p. 27; Boettke, Coyne, and Leeson, 2007, p. 128). After hearing the first contestant sing, the Emperor declares the second contestant the winner on the belief that the second contestant could not possibly be worse than the first singer. Rather than assume an idealized alternative would improve upon real institutions, public choice scholars recognized the need to compare alternative institutional arrangements based on how they operate in practice, factoring in both knowledge and incentive problems (Aligica and Boettke 2009; Demsetz, 1969; Friedman, 1947; Pennington, 2011).

Buchanan (1999 [1979], p. 45) argued for a positive institutional analysis of "politics without romance." Such analysis, he notes (p. 45), is necessary for a thorough understanding of governmental institutions as it "forces the analyst to compare relevant institutional alternatives." In addition, Buchanan (p. 47) stressed that economists should "compare social institutions as they might be expected actually to operate rather than to compare romantic models of how such institutions might be hoped to operate." Positive comparative analysis has since become a major pillar of public choice economics and of political and governmental institutional analysis in general. Following Buchanan and other public choice scholars, comparative analysis of institutions "without romance" has been applied to a variety of topics including statutory legal interpretation (Eskridge, 1988), free speech (Farber, 1991), zoning laws (Fraietta, 2013), and religious liberty (Horwitz, 2013).

While public choice scholars have made substantial contributions to monetary theory, the romance, so-to-speak, has largely not been removed from central banking (Buchanan, 2015, p. 51; Boettke and Smith, 2016; O'Driscoll, 2013). While the consensus view is correct that the pre-Fed gold standard was flawed in many ways, this position does not prove that central banking is a superior alternative because it fails to demonstrate that the Fed can and has improved upon the gold standard. Comparative institutional analysis requires demonstrating that the Fed can outperform the gold standard on these same margins taking into consideration the institutions in which monetary authorities operate (Salter and Luther, 2018; Salter and Smith, 2018) and demonstrated knowledge (Salter and Smith, 2017; W. White, 2013) and incentive problems (Binder and Spindel, 2017; Boettke and Smith, 2013; Conti-Brown, 2016; Smith and Boettke, 2015; White, 2005) inherent to monetary policy. …

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