Why Omniscience is a Prerequisite for Successful Central Banking
Statements such as ‘The Federal Reserve should have done such and such’ or ‘The Bank of Japan shouldn’t have done this and that’ are often uttered by market analysts and commentators. Although these analysts and commentators are often well-intentioned and healthily skeptical, their statements contain a fallacious premise (in my mind): that central banks could have succeeded.
Here, I attack the notion that central bankers are capable of satisfactorily producing money. I’ll argue as follows:
- Money is a good like any other.
- Attempts to centrally plan any good must fail (in the absence of an omniscient central planner).
- Attempts to centrally plan money must also fail (in the absence of an omniscient central banker).
Taking Money off its Pedestal:
Money – it is said – is ‘special’. This ‘specialness’ is deemed to imply that it must be produced by government and/or government-backed institutions. As is evidenced by the harsh punishments inflicted upon Bernard von NotHaus (the former ‘liberty dollar’ producer), anything else is just unthinkable.
However, money is ‘just’ a “good”. Admittedly, it is particularly and uniquely valued for its widespread marketability, but so are McDonald’s hamburgers valued for their unique and particular McDonald’s-ness. The key point is that money belongs to the class of “goods”; that is, it is valued (and hence “good” for us). In each transaction in an economy, the money and the good exchanged stand equally against one another: the person who buys – say – apples is as much ‘selling money’ as he/she is ‘buying apples’. Likewise, the person who sells apples is as much ‘buying money’ as he/she is ‘selling apples’. Moreover, to emphasize that money is a good, we should note that money must originate from a commodity (quoting Hans Hermann Hoppe in How is Fiat Money Possible?-or, The Devolution of Money and Credit):
Money must emerge as a commodity money because something can be demanded as a medium of exchange only if it has pre-existing bater demand (indeed, it must have been a highly marketable bater commodity), …
With this understood, it should be clear that the ‘problem’ of scarcity applies to money in the same way that it applies to any other good. What proportion of our scarce resources should be put into the production of money?
The Allocation of Scarce Resources without a Functioning Market:
The epic problem of the central planner is that he cannot know how much to produce. He cannot rationally answer the following questions; what quantity of a given good is the ‘right’ quantity? What quantity is productive and not wasteful? What level of production yields something better than what was used to make it? A character from Henry Hazlitt’s Time Will Run Back went through these dilemmas:
If I’m shooting at a target, and my shot falls approximately a foot below the bull’s eye, I try to raise my next shot by a foot; if my shots are going too far to the left, I aim more to the right. If a chef broils a steak and finds it overdone, he leaves the next steak over the fire a shorter time. And so on. But what standard have you got for error in the problem we are trying to solve? How do you know that the production of some particular item is costing more than it is worth? How do you know whether or not you are adopting the most economical method of making that item or any other item?
When applied to money, these questions start to sound rather familiar; what level of money supply growth is the ‘right’ one (if any)? What interest rate is the ‘right’ one? What interest rate is productive and not harmful? What level of money production yields something better than what it took to make that money? How can we know?
The fact is that anyone claiming to have the ‘right’ answers to the questions without market information must claim to have perfect knowledge about the preferences of all economic actors involved. But any man – to be sure – can only perceive what he can perceive. In this way, his knowledge of things (inlcuding other economic actors) is both subject to the things that he is perceiving and his apparatus of perception. This mortal limitation implies that no man can have such knowledge about even one other economic actor (let alone all economic actors). Hence, the only entity that can claim to centrally plan any good (including money) must have some kind of knowledge of things that transcends human perception – central planners would have to be omniscient to be successful.
Money is a good that is valued for its superlative marketability. Just as with any other good, a market is required for rational production. Any attempts to centrally plan money must fail as central bankers do not have the means by which to determine how much should be produced.
Recommended: Charting the Federal Reserve's Assets - 1915 to 2012