By Paul-Martin Foss
If you thought the Soviet Union’s collapse meant the end of central planning, you were wrong. Central planning is alive and well. In fact, it’s even stronger now than it was during the Soviet Union’s heyday. What’s even more disturbing is that many who would strongly oppose Soviet-style central planning and who consider themselves to be defenders of free markets fail to recognize their acceptance of central planning and see no contradiction between their acceptance of central planning and their alleged support of the market economy.
Consider this Wall Street Journal interview with AT&T CEO Randall Stephenson from last month’s World Economic Forum in Davos, Switzerland. Mr. Stephenson states his opinion that two percent annual economic growth is unacceptable. This is the type of statement you hear from CEOs, politicians, and other leaders all the time. You’ll hear calls for four percent annual GDP growth, five percent, maybe even six percent. How exactly do you quantify economic growth? Most would point to gross domestic product (GDP), but that is a problematic measure. Aside from the difficulty in calculating it, GDP also includes government spending as one of the components of productivity. All else being equal, more government spending equals higher GDP, which gives politicians an excuse to spend more money lest GDP should drop.
All of this ignores the fact that there is no ideal rate of growth. The rate of growth is what it is, sometimes it is greater, sometimes it is lesser, but (in an unhampered market) it really is whatever the market can bear. Attempting to pick a firm number and achieve that rate is an exercise in futility. But the obsession with economic data and calculating a precise figure for economic growth has led economists, politicians, and business leaders to believe that there is some ideal rate of growth that can be calculated, quantified, and targeted. And how do these leaders expect the economy to reach their ideal growth rate anyway? Why, just ask the central bank to help out through monetary policy. Create more money, drive prices upward, GDP rises, voila!
The downside, of course, is that economic growth that is stimulated by artificial inflation of the money supply is ultimately unsustainable. An economic boom is created, GDP growth rises, and resources are malinvested. As those malinvestements begin to come to light and businesses begin falter, the recessionary phase of the business cycle begins and GDP begins to fall. And what do the creators of the boom and bust propose to counteract the recession? Why, more money printing of course! And thus the cycle continues over and over again until what Ludwig von Mises called the “crackup boom” results.
What is monetary policy anyway other than centralized economic planning? The central bank sets a certain target interest rate and buys and sells assets to achieve that target, creating money out of thin air to do so. This is nothing more than price-fixing. It may not be as total a price-fixing scheme as occurred behind the Iron Curtain, but it is price-fixing nonetheless, with all the subsequent negative effects that result. Only this time the prices being manipulated are interest rates, the prices of money and credit, perhaps the most crucial prices to a developed economy. These prices coordinate savings and investment throughout the economy, so that if they are manipulated the entire structure of the economy is distorted.
But so many people fail to understand that monetary policy is price-fixing. Many fervent advocates of the market economy, who may decry minimum wages, rent control, trade barriers, or other economic interventionism and price-fixing, have a huge blind spot when it comes to monetary policy. That’s despite the fact that the Federal Reserve’s dual mandate in federal law decrees that the Fed is to assure full employment and stable prices. Do they honestly expect the Fed to be able to try to achieve those goals without manipulating prices?
Politicians don’t understand monetary economics and neither do most businessmen. (Neither, for that matter, do most economists, but that’s a story for another day.) They don’t want to delve too deeply into the details, but the Federal Reserve hasn’t completely destroyed the economy yet so they can’t be doing too badly, right? In a way, these politicians and businessmen treat monetary policy as though it’s magic. Just let the central bankers meet in their secret rooms and do what they want with the economy and everything will turn out just hunky-dory. And when it doesn’t? Well, the politicians will have moved on to higher office, the CEOs will have retired, and everybody who’s stuck suffering during the recession wonders why this keeps happening. It will continue to happen until the mindset that an economy can be centrally controlled is no longer taken seriously in politics, business, or academia. As long as the myth that a handful of mandarins can guide the economy and produce economic growth, this destructive cycle of booms and recessions will continue to repeat itself.
This article was originally published at The Carl Menger Center.