- Stop trying to use monetary policy for your ideological whims Joakim Book, Adam Smith Institute
- The lighthouse never justified state intervention Vincent Geloso, Adam Smith Institute
- California lawmakers haven’t learned their lesson on rent control Ethan Blevins, the Hill
- Ideas were not enough Mark Koyama, Aeon
(Yes, these are all Notewriters contributing op-eds to professional outlets. Fear not! They’re still around.)
We can all come up with cringeworthy clichés for why history matters to society at large – as well as policy-makers and perhaps more infuriatingly, to hubris-prone economists:
- to understand the present, we need to know where we came from
- history doesn’t repeat itself, but it rhymes!
- “those who cannot remember the past are condemned to repeat it”
- it broadens your horizon, allows you to “zoom out“, “see the bigger picture” and draw parallels to what came before.
And we could add the opposite position, where historical analysis is altogether irrelevant for our current ills, where This Time Is completely Different and where we naively disregard all that came before us.
My pushback to these positions is taken right out of Cameron & Neal’s A Concise Economic History of The World and is one of my most cherished intellectual guidelines. The warning appears early (p. 4) and mercilessly:
those who are ignorant of the past are not qualified to generalize about it.
We can also point to some more substantive reasons for why history matters to the present:
- Discontinuities: by studying longer time period, in many different settings, we get more used to – and more comfortable with – the fact that institutions, routines, traditions and technologies that we take for granted may change. And does change. Sometimes slowly, sometimes frequently.
- Selection: in combination with emphasizing history to understand the path dependence of development, delving down into economic history ought to strengthen our appreciation for chance and randomness. The history we observed was but one outcome of many that could have happened. The point is neatly captured in an abscure article of one of last year’s Nobel Prize laureates, Paul Romer: “the world as we know it is the result of a long string of chance outcomes.” Appropriately limiting this appreciation for randomness is Matt Ridley’s rejection of the Great Man Theory: a lot of historical innovations seems to have been inevitable (When Edison invented light bulbs, he had some two dozen rivals doing so independently).
- Check On Hubris: history gives us ample examples of similar events to what we’re experiencing or contemplating in the present. As my Glasgow and Oxford professor Catherine Schenk once remarked in a conference I organized: “if this policy didn’t work in the past, what makes you think it’ll work this time?”
History isn’t only a check on policy-makers, but on ivory-tower economists as well. Browsing through Mattias Blum & Chris Colvin’s An Economist’s Guide to Economic History – published last year and has been making some waves since – I’m starting to see why this book is quickly becoming compulsory reading for economists. Describing the book, Colvin writes:
Economics is only as good as its ability to explain the economy. And the economy can only be understood by using economic theory to think about causal connections and underlying social processes. But theory that is untested is bunk. Economic history provides one way to test theory; it forms essential material to making good economic theory.
Once the question is asked, the economic historian tries to answer which theory is relevant to the question asked; essentially, the economic historian is secular with respect to theory. The purpose of economic history is thus to find which theories matter the most to a question.
[and which theory] square[s] better with the observed facts.
Using history to debunk commonly held beliefs is a wonderful check on all kinds of hubris and one of my favorite pastimes. Its purpose is not merely to treat history as a laboratory for hypothesis testing, but to illustrate that multitudes of institutional settings may render moot certain relationships that we otherwise take for granted.
Delving down into the world of money and central banks, let me add two more observations supporting my Econ History case.
One chapter in Blum & Colvin’s book, ‘Money And Central Banking’ is written by Prof. John Turner at Queen’s in Belfast (whose writings – full disclosure – has had great influence on my own thinking). Focusing on past monetary disasters and the relationship between the sovereign and the banking system is crucial for economists, Turner writes:
We therefore have a responsibility to ensure that the next generation of economists has a “lest we forget” mentality towards the carnage that can be afflicted upon an economy as a result of monetary disorder.” (p. 69)
This squares off nicely with another brief article that I stumbled across today, by banking historian and LSE Emeritus Professor Charles Goodhart. Lamentably – or perhaps it ought to have been celebratory – Goodhart notes that no monetary regime lasts forever as central banks have for centuries, almost haphazardly, developed its various functions. The history of central banking, Goodhart notes,
can be divided into periods of consensus about the roles and functions of Central Banks, interspersed with periods of uncertainty, often following a crisis, during which Central Banks (CBs) are searching for a new consensus.”
He sketches the pendulum between consensus and uncertainty…
…and suddenly the Great Monetary Experiment of today’s central banks seem much less novel!
Whatever happens to follow our current monetary regimes (and Inflation Targeting is due for an update), the student of economic history is superbly situated to make sense of it.
- Functional Illiteracy Stephen Cox, Liberty Unbound
- Hydraulic Monetarism Nick Rowe, Worthwhile Canadian Initiative
- The “New” Monopsony Argument and the Suppression of Wages Mario Rizzo, Think Markets
- The Computer-Glitch Argument for Central Bank eCash George Selgin, Alt-M
Motivated by the recent decision of Argentina’s government to ask for an stand-by loan to the I.M.F., after a run on the peso, the last The Economist’s Bello section gives an account of the history of the relationship between them and makes a remark about the Argentine currency board experience between 1991-2002 that today is almost common wisdom: “Since convertibility meant forgoing exchange-rate flexibility and an independent monetary policy, fiscal discipline was all-important for its success.”
But by the time the I.M.F. was being created, that was not an unanimous opinion. We have the example of George N. Halm who, in his book Economics of Money and Banking, stated that every Currency Board must implement a countercyclical policy on reserve requirements to be held by the commercial banks. Thus, the Currency Board could neutralize or mitigate an expansion or contraction of the base money by alternatively increasing or lowering the reserve requirements of the banks. For George Halm, a Currency Board could be almost in full command of monetary policy -and even more with respect to any other system, since it retains its political independence.
It is hard to imagine a Halm’s Currency Board that promotes a rapid economic growth which, in turn, could bring any popularity to its implementation. But it is as hard to imagine as the probability that a monetary system as such could end up in a bank run.
One of the major issues in contemporary macroeconomics concerns monetary policy since the 2008 crisis. For many, if not most, of the major central banks, the conventional channels through which the money supply changes do not work anymore. For instance, by paying interest on reserves, the Federal Reserve has moved from adjusting the money supply to influencing the banks’ money demand. Some central banks have even maintained that money supply does not affect inflation anymore.
One of the lessons that should have been learned after the 2008 crisis is that price level stability does not guarantee economic and financial stability. Rather, central bankers and policy makers understand that the lesson is there should be even more regulation.
In a recent column, William White explains how “major central banks’ vigilant pursuit of positive but low inflation has become a dangerous delusion.” The idea that price level stability is both, necessary and sufficient to achieve macroeconomic stability and growth should have been put to rest by the 2008 financial crisis. But conflicting narratives have enabled it to live on.
Since the crisis, the focus of many central bankers has turned to macroprudential policy. The objective is to manage financial risk. Regulatory efforts have increased as a result. On the monetary policy front, price level stability still reigns supreme. New tools have been developed to execute monetary policy, to be sure. But the overall objective has been more-or-less left intact.