Röpke on Inflation Targeting

Alan Greenspan has come out recently, again denying any central bank responsibility for the last crisis. David Stockman has responded in typical fashion.

This is a controversial topic: Martin Armstrong, whom I greatly admire for his historical insights, has attacked Stockman harshly, agreeing with Greenspan. Armstrong’s conclusion is data driven, i.e. he has no theory, which comes with the usual epistemological problems that Mises pointed out in his masterpiece “Theory and History“. As an Austrian, I clearly side with David Stockman’s analysis.

As discussed in this post, I am currently reading Wilhelm Röpke’s book “Crisis and Cycles”. I always find it interesting to read pre WWII economics books. Economists at that time seemed to care about  real world problems, they were less of specialists (“Fachidioten”) and trained in classical economics and philosophy rather than math-modelling. In the book, Röpke intensively discusses the role a central bank’s mandate plays in creating bubbles.

Röpke stresses that the Fed’s pre-crisis (i.e. pre 1929) objective of “price-level stabilization” was ill-suited in regulating the volume of credit. Similar to today, where the same thing is called “inflation targeting”, central banks thought there is no problem as long as consumer prices show no market rise – in other words: we have been here before.

Röpke’s two main objections, familiar to every Austrian:

  1. Indices used measuring the price-level are arbitrarily constructed and have serious data issues – they cannot be precise in any scientific sense
  2. Prices in a dynamic economy are not stable. A stable economic system is not one where everything stands still but a system in which there is a continually moving economic equilibrium – stable prices are not even desirable

He even goes so far as to proclaim (p.150): “Better no credit control at all than one based on this treacherous and dangerous criterion” and advocates replacing the idea of “stable money” with the objective of “neutral money” defined as “money which exerts no influence on the structure of production and prices,” basically a constant money supply.

We seem to have learned nothing from the past – so much for progress in the social sciences! Worse, one can argue that has gotten worse as the current objective is not only maintaining a stable price level growth but also to boost employment by boosting the volume of credit. I wonder whether stock market participants in the “roaring twenties” also were talking about the equivalent of the “central bank put”. So far, I have found no indication – but I will keep looking.

P.S. The excellent spontaneous finance blog also has a new post on this topic.



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