Milton Friedman once debated Robert Mundell on exchange rates. Mundell advocated using monetary policy to fix the exchange rate, whereas Friedman suggested that this sort of price control was interfering with the free market, and thus a bad idea.
Friedman was probably right that fixed exchange rates are a bad idea, but his argument was flawed in two very important respects.
First, Mundell was advocating the targeting of nominal exchange rates. The real exchange rate (which is what matters) would still be set by the free market. That’s very different from things like rent controls and minimum wage laws, where the government controls the real price of a good or service.
Second, Friedman’s own preferred monetary policy involved fixing the growth rate of the money supply, which is every bit as interventionist as fixing the exchange rate. In fairness, Friedman only advocated fixing the nominal quantity of money; the real quantity would still be determined by the public.
Similarly, Keynesians favor targeting the nominal interest rate, but the real rate is still controlled by the public. Gold standard advocates favor defining the nominal price of gold, but the real price would still be determined by the public. I favor targeting NGDP, but real GDP would still be determined by the public.
Commenter Andrew recently suggested:
As long as we put the right Market Socialists in charge of centrally planning NGDP, we never have to pay any price for funding unprofitable investments out of money that hasn’t been voluntarily saved!
Perhaps Andrew is referring to Friedrich Hayek, who favored NGDP targeting. My response is that NGDP targeting is only “centrally planning NGDP” in the sense that targeting inflation is centrally planning the price level, or defining the dollar as 1/35 oz. of gold is centrally planning gold prices, or setting a limit of 22 million Bitcoin is centrally planning Bitcoin, or Tesla executives planning on producing 320,000 cars in Q4 is centrally planning Tesla output.
Whoever is in charge of X gets to decide how X is run. Whoever is in change of money gets to decide how money is run.
When people use the term “central planning” as a pejorative, they usually have in mind something completely different. They are thinking of a Soviet planning bureau telling all sort of other enterprises what sort of prices and output are appropriate. How many shoes should be produced by enterprise X, how much steel should be sold to tractor company Y by steel mill Z. Etc., etc.
In contrast, setting a monetary policy is merely setting a policy for the very thing that the institution is in charge of producing. Imagine visiting a monetary authority and asking them how they determine how much money they print, and hearing the response, “We don’t have any policy at all, we just produce money at random”. You’d probably view that as being pretty weird. Whatever policy a monetary authority has is a monetary policy, whether it involves setting an interest rate, a quantity of money, an exchange rate, a price of gold, or targeting the price of a NGDP futures contract. And that’s equally true of publicly and privately produced money.
Don’t waste time opposing “monetary policy”—there will always be monetary policy. Spend your time opposing bad monetary policies.
PS. That’s not to say that we shouldn’t worry at all about central planning. George Selgin recently pointed out that the nominee to head the Office of Comptroller of the Currency seems to favor replacing private bank accounts with government produced bank accounts. I don’t know if that’s exactly central planning, but it’s certainly more of an infringement on the free market than NGDP targeting.
READER COMMENTS
Andrew_FL
Nov 1 2021 at 3:32pm
If you are not against Central Banking, you are for Central Planning, with regard to money. Not complicated.
Scott Sumner
Nov 1 2021 at 5:07pm
The term “central” has completely different meanings in those two phrases, utterly unrelated. How about the Central Time Zone? How about the Central Intelligence Agency? Do they engage in central planning? Don’t obsess about the term “central”. Central banks shouldn’t even be called central banks, it’s not an accurate description.
Andrew_FL
Nov 1 2021 at 5:38pm
You’re literally being one of those people who thinks without a Central Intelligence Agency, we’d have no Intelligence
Brian
Nov 1 2021 at 9:53pm
Nobody is preventing you from spending your stash of Disney Dollars. https://en.wikipedia.org/wiki/Disney_Dollars
Andrew_FL
Nov 1 2021 at 10:22pm
We are not having a discussion about what one is allowed to do, Brian, but what the government ought or ought not to do. Your ridicule is off point.
Mark Z
Nov 1 2021 at 3:38pm
“My response is that NGDP targeting is only “centrally planning NGDP” in the sense that targeting inflation is centrally planning the price level, or defining the dollar as 1/35 oz. of gold is centrally planning gold prices, or setting a limit of 22 million Bitcoin is centrally planning Bitcoin, or Tesla executives planning on producing 320,000 cars in Q4 is centrally planning Tesla output.”
I was with you until you got to Bitcoin and Tesla. Your full analogy here I think actually hurts your argument, as it’s too reminiscent of the old socialist argument that big corporations do central planning to, so the same criticisms classical liberals apply to the state apply to free markets as well; the next couple paragraphs could be reapplied in other contexts: you shouldn’t oppose nationalizing industry X; you should try to get the agency that runs that industry to do a better job of it. But there’s a difference between private institutions engaging in planning in a competitive market – Tesla and Bitcoin – and a government sanctioned monopoly, like currency.
The first half of your analogy is more convincing: inasmuch as we have a government monopoly on currency, no monetary policy is intrinsically more interventionist than the other. Keeping prices fixed or keeping the money supply fixed is no more laissez faire than keeping inflation rate or NGDP fixed. Selgin and White I think have even argued that monetary policy that stabilizes NGDP best approximates how a free market would handle currency. Though I believe you disagree about that, so would it be fair to say that you think currency is exceptional in that its production shouldn’t be handled by the market?
Scott Sumner
Nov 1 2021 at 5:11pm
“I was with you until you got to Bitcoin and Tesla. Your full analogy here I think actually hurts your argument, as it’s too reminiscent of the old socialist argument that big corporations do central planning to”
Sorry, but saying my good argument is “reminiscent” of a completely different bad argument is sloppy reasoning. That’s not my argument, as should be obvious from the rest of my post.
On your other point, I don’t mind private firms issuing currency, but I do believe that the medium of account is a natural monopoly. You can argue about what that medium should be, but a system with lots of different media of account would be very confusing.
robc
Nov 1 2021 at 8:00pm
Why? Confusing isnt a good enough reason.
Scott Sumner
Nov 2 2021 at 12:53pm
“Network effects” is the technical term.
Mark Z
Nov 2 2021 at 12:03am
It’s not obvious at all. You explicitly analogize a president-appointed board of directors deciding how much money to produce to a business deciding how much of a good to produce in a competitive market. You say that the issue with a politburo is that it plans for all kind of industries, whereas, “In contrast, setting a monetary policy is merely setting a policy for the very thing that the institution is in charge of producing.”
Alright, so why not have specific institutions in charge of producing shoes and cars – a Federal Shoe Institution and a Federal Auto Institution – the chairmen and boards of directors of which would be appointed by the president? And why not debate, as political issues, how many shoes should be produced? And economists can advocate for shoe hawks or shoe doves on the board? Most of the same arguments against central planning would still apply. In markets, no one is ‘put in charge of’ producing cars or shoes as a central bank is put in charge of producing currency by the federal government.
Arguing that money is a natural monopoly and will tend to end up being produced by a single institution sanctioned by the state, rather than one operating in a competitive market and owned by shareholders, is pretty much the opposite of money being just like other goods. The rest of your post, on there being no such thing as no monetary policy, while true, is orthogonal to whether currency is centrally planned in the pejorative sense of the word.
Scott Sumner
Nov 2 2021 at 12:52pm
“Alright, so why not have specific institutions in charge of producing shoes and cars – a Federal Shoe Institution and a Federal Auto Institution – the chairmen and boards of directors of which would be appointed by the president?”
Because that would be inefficient.
“And why not debate, as political issues, how many shoes should be produced?”
Because shoes are produce by private firms and money is produced by the government. Government policies are political issues.
And I never said money is just like other goods, so I don’t see what point you are trying to make in your final paragraph.
In any case you are not advancing the claim that monetary policy is “central planning.” It isn’t.
Mark Z
Nov 2 2021 at 4:51pm
But if we did that with shoes, etc., you wouldn’t call that central planning? Is the crux of your argument that an industry can’t be centrally planned, only a whole economy can? I’m quite certain the term is often used to refer to individual industries being directed by a single central authority (as money is). More importantly, the problems with a central authority directing all economic activity apply to a central authority directing specific industries as well. Semantic debates are pointless, define the term any way you please, you agree that a central, state-sanctioned authority directing an entire industry is inefficient (generally for the same reasons why a central authority directing an entire economy is inefficient), but favor – or at least are tolerant of – having a central authority do this for money, because money is different: it’s a natural monopoly.
You should be trying to convince Andrew either that money is exceptional and should or can be effectively run by a central authority, and/or that, as long as it is run by a central authority, NGDP targeting is the least distortionary monetary policy. Arguing it’s not central planning by whatever definition is completely beside the point; whatever you want to call our current monetary arrangement, no one who favors free markets would want that arrangement for to almost any good or service.
Michael Rulle
Nov 4 2021 at 10:02am
It appears some readers are confusing Nominal with Real. The true central planners of Soviet land really did try to dictate the “number of shoes” to be produced. Nominal targeting does no such thing. Nor does it even state that number of dollars that should be “produced” ——it does try —-as I understand it—-to create an equilibrium between the supply and demand for dollars as one of the mechanisms for targeting NGDP. The Fed also targets inflation (not number of shoes) which I always thought was an attempt to eliminate uncertainty. Also—-the Fed is supposed to target employment (I admit that does not feel necessary as a central bank function)——although I assume that means it does believe employment is in part a function of money equilibrium. I often think the Fed does not want to limit employment ——within its inflation target objective—-different than central planning the amount who should be employed.
Christophe Biocca
Nov 1 2021 at 3:51pm
Isn’t that a relatively normal example of central planning (just not done by a state)? If you’d said that it doesn’t count as centrally planning car output then I’d agree with you, but that’s because the car market has many competing providers and some degree of free entry into the industry, which is what keeps the “how many/what kinds of cars will be produced this year” roughly in line with consumer demand.
Scott Sumner
Nov 1 2021 at 5:14pm
You asked:
“Isn’t that a relatively normal example of central planning (just not done by a state)? ”
Not at all. With central planning the Department of Commerce would decide how many cars Tesla produces. All the economic decisions in the economy are centralized in one place. In contrast, in our economy decisions are decentralized. Each firm gets to choose its output level.
The term ‘central planning’ has a very specific meaning; it doesn’t just mean what you want it to mean.
Andrew_FL
Nov 1 2021 at 3:54pm
“Hayek favored NGDP targeting” is a misleading calumny, but irrelevant
On the other hand “Milton Friedman called for abolishing the Fed” is something I can directly quote. You can say he didn’t think it would happen in practice and therefore didn’t advocate it very strongly.
You on the other hand, are pro-Central Bank. You support the Fed. You not only don’t want to abolish it, you want to improve it and entrench it as a permanent institution. Why? The answer is obvious.
Scott Sumner
Nov 1 2021 at 5:17pm
““Hayek favored NGDP targeting” is a misleading calumny”
Really? I don’t see any explanation on your part as to why it’s misleading. Did Hayek not advocate NGDP targeting? I think we both know that the answer is yes.
I have no problem with abolishing the Fed as long as it’s replaced by an equally effective monetary authority. In other words, I don’t favor barter.
Andrew_FL
Nov 1 2021 at 5:43pm
“As long as the government still runs money, I’d be happy to get the government out of money”
-Frédéric Bastiat
Andrew_FL
Nov 1 2021 at 6:04pm
You will not be able find Hayek saying, anywhere, “the Central Bank ought to, and can, enforce a constant, greater than zero growth rate of the sum of money expenditures on domestically produced final goods and services”
Not that it would matter one iota to me or any other opponent of money socialism if you could. Hayek is not God.
This is a direct Friedman quote, on the other hand:
Scott Sumner
Nov 2 2021 at 12:54pm
So you admit that Hayek favored NGDP targeting?
Andrew_FL
Nov 2 2021 at 1:25pm
No. What a strange way to reply instead of providing a quote backing up your assertion.
rsm
Nov 2 2021 at 2:09am
《Imagine visiting a monetary authority and asking them how they determine how much money they print, and hearing the response, “We don’t have any policy at all, we just produce money at random”. You’d probably view that as being pretty weird. 》
Isn’t it weird that the profit motive is not their answer, and this means arbitrarily administered prices are introduced deep within the financial plumbing, making all prices arbitrary?
Scott Sumner
Nov 2 2021 at 12:55pm
Profit maximization is rarely if ever the socially optimal policy for monopolies.
rsm
Nov 2 2021 at 2:48pm
How accurate do you think GDP statistics are?
How accurate are prices? How much inflation is just noise?
《we might define an efficient market as one in which price is within a factor of 2 of value, i.e., the price is more than half of value and less than twice value.11 The factor of 2 is arbitrary, of course. Intuitively, though, it seems reasonable to me, in the light of sources of uncertainty about value and the strength of the forces tending to cause price to return to value. By this definition, I think almost all markets are efficient almost all of the time. “Almost all” means at least 90%.》- Fischer Black, “Noise”
Michael Sandifer
Nov 2 2021 at 8:33am
Is this anything more than an argument over semantics? When I read someone say they don’t want monetary policy centrally planned, I assume they mean they don’t want government setting monetary policy. They’d like to see 100% free banking, with private currency issuance is what I imagine.
True, some mistakenly label a statutory fiat gold standard as something other than what it is. It is no more or less free market than NGDP level targeting. In that case, it makes sense to me to point to the lack of proper distinction.
Scott Sumner
Nov 2 2021 at 12:57pm
When I start seeing people calling a gold standard “central planning”, I’ll agree with you. Until then, I’ll just assume that people are confused.
Andrew_FL
Nov 2 2021 at 1:32pm
I am not confused. Oddly enough the guy who thinks human action can be reduced to equations is right for once. I want private mints or private issuers, whatever people will choose as base money without the government involved in either. I want a banking system without regulation which will automatically adjust the supply of money substitutes to demand to hold real cash balances. It would be calamitous if you got your way, because it guarantees banking and money will never be privatized and deregulated. Either NGDP targeting “works” and people will argue that there is no rationale for deregulating banking or privatizing money, or more likely it doesn’t, and the results lead to even more regulation of banking and even more nationalizing of money.
We cannot have both a free market and government run money.
rsm
Nov 2 2021 at 2:37pm
If your free market violates the Lockean Proviso, i.e. if “enough, and as good” land is not left in common for me to self-provision on without needing any private money, haven’t you lost all claims to moral superiority? Without leaving enough land for opting out on, are you left with “might makes right” as your only justification for “free” markets that actually coerce my participation?
Andrew_FL
Nov 2 2021 at 3:10pm
I have no idea why you’re bringing land into this argument, but Locke’s proviso does not make sense anyway.
rsm
Nov 3 2021 at 7:34pm
So, free markets are really coercive?
Spencer Bradley Hall
Nov 2 2021 at 12:39pm
The impetus for targeting N-gDp was driven by an extremely flawed monetary policy – interest rate manipulation. The monetary authorities shouldn’t target N-gDp. Economists should target R-gDp. You don’t work the demand side, but the supply side.
The BOJ couldn’t do it. (PDF) Optimal Premiums for the Deposit Insurance System: An empirical work on the deposit insurance system of Japan (researchgate.net)
In the U.S., the FDIC reduced transaction deposit insurance from unlimited to $250,000. This caused the “Taper Tantrum”, which I predicted in Dec. 2012 with my “market zinger” forecast. This dramatically raised the real rate of interest for saver-holders.
Link: “Fact Check: Was 2013’s ‘Taper Tantrum’ Actually So Tumultuous?”
Fact Check: Was 2013’s ‘Taper Tantrum’ Actually So Tumultuous? | MarketMinder | Fisher Investments
Spencer Bradley Hall
Nov 2 2021 at 1:11pm
Monetary policy should be renamed interest rate policy. The yield curve is actually inverted. The remuneration rate on interbank demand deposits @.15 % (outside money), IBDDs, is higher than all money market rates. The money market is differentiated by its position on the yield curve (i.e., short-term borrowing & lending with original maturities from one year or less). In turn, money market paper funds, in the borrow short to lend longer, the capital market (earning assets greater than 1 year).
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
It is the “Interest Rate Fallacy” – “low rates lead people to borrow more and expand credit…”
“After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”
–Milton Friedman, “Reviving Japan,” 1998
James
Nov 2 2021 at 2:15pm
Scott,
When people talk about central planning of agriculture in the Cuba and central planning of the money supply in the US, they are using that term to refer to planning by government run monopolies. I wonder if you made this mistake before and were corrected on it in some comments section.
Instead of critiquing a position that no one holds, why not spell out your reasons to favor ngdp targeting by a state run monopoly over the alternative of repealing legal tender laws and denationalizing money?
Spencer Bradley Hall
Nov 3 2021 at 9:21am
Targeting N-gDp is as good as Weimar inflation. Lending by the Reserve and commercial banks is inflationary, whereas lending by the non-banks is non-inflationary.
Congress, the state legislators, and our monetary authorities, in the interest of the commercial banks, the financial intermediaries (non-banks), and above all in the interest of the community, should pursue every possible means for promoting the orderly and continuous flow of monetary savings into real investment. That means driving the banks out of the savings business.
John Brennan
Nov 6 2021 at 3:48pm
Are you familiar with Hayek’s debate with Charles Merriam (it aired nationally on NBC Radio in April of 1945)? They specifically discussed what constituted Central Planning and National Planning (Merriam was a titular head of various New Deal planning efforts under FDR, and is a “founder” of modern political science, public administration, and planning). Hayek was making a tour supporting the publication of The Road to Serfdom in the United States and Merriam was clearly miffed that he was receiving grass roots support for his essential ideas against the rise of statism in the western world. I remembered it (I analyzed the debate in my doctoral dissertation) re-read it, and can see how it would inform the current discussion on Hayek here. The transcript of the debate was printed in Kresge and Wenar’s Hayek on Hayek, a supplement to The Collected Works of F.A. Hayek, a University of Chicago Press series.
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