Normative Versus Positive: The Central Bank Edition

Pascal-Emmanuel Gobry notes the obvious about ‘independent’–even if they’re ideologically captured–central banks (boldface mine):

But the more subtle, and more important, point is that the choice between inflation and unemployment is a political, not a technical choice. What’s “better”? To screw debtors or creditors? To make millions unemployed or to “debase the currency”? Those are very important questions. More important, they’re questions that cannot be solved by economics. They can be informed by them, but at the end of the day what you prefer is going to come down to your own moral value system. In other words, it’s a political choice. And the way we make political choices in modern countries is through the democratic process, not through unelected, unaccountable technocrats.

During the Great Moderation, it appeared that you didn’t have to make that choice. You could have low inflation and low unemployment, you could have your free lunch, all because we put a super-competent clerisy in charge. But it turns out that in a balance sheet recession you have to make that choice. (And anyway you can argue the Great Moderation was less due to monetary policy and more due to things like IT-driven productivity improvements and the end of the Cold War.)

It’s a political choice, which means that the authorities that make that choice for the whole society need to be appointed, and held accountable, by a political, democratic process.

And for those who think this would be a disaster, Gobry places a democratically-controlled central bank in context:

If you said that national security was too important to be left to politicians and that the military and security services shouldn’t have to answer to anyone because they’re so competent, everyone would immediately see why that’s an absurd and very dangerous idea. Instead we see civilian leadership of the military as a cornerstone of democratic governance even though we know democratic leaders screw up all the time because a) we view democratic accountability as an important principle and b) it’s not at all obvious that political leaders will screw up more than military leaders.

Gobry’s right, although, in the U.S., the military and security services sometimes do set the agenda, albeit informally and unofficially. And that hasn’t worked out so well.

This entry was posted in Economics. Bookmark the permalink.

1 Response to Normative Versus Positive: The Central Bank Edition

  1. albanaeon says:

    It really is the accountability that matters, doesn’t it? Since most of us realize that nothing built by humans is going to perfect, and usually far from it, having the ability to kick the real bad ones out is our only option. Trusting “invisible hands” doesn’t really suit a democracy, particularly as with enough wealth you can be isolated from actual market consequences.

    Maybe the answer to “government is the problem!” is “Yeah, but what else you got?”

Comments are closed.