"Money and the Rule of Law" Book Panel

Constrained discretion is held up as the reigning paradigm for central banks. But no matter how smart or well-intentioned central bankers are, discretionary policy contains information and incentive problems that make macroeconomic stability systematically unlikely. On this episode of the Hayek Program Podcast, we'll hear a book panel discussion on "Money and the Rule of Law," written by Peter Boettke, Alexander Salter, and Daniel Smith. Salter presents the book's main argument for general, predictable rules to provide a sturdier foundation for economic growth and prosperity. He is joined on the panel by David Beckworth, Lawrence White, and Daniel Smith. The panel is moderated by Peter Boettke.

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Peter J. Boettke
Lawrence H. White
Calendar Date: 
Sep 22, 2021
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Political entrepreneurship, emergent dynamics, and constitutional politics

January, 2018

Constitutional political economy mostly distinguishes between rules and actions, with rules selected prior to actions within those rules. While we accept the coherence of this distinction, we pursue it within an open rather than closed scheme of analysis. Doing this entails recognition that societies rarely exhibit universal agreement about constitutional provisions. Recognizing the incomplete character of constitutional agreement points to the existence of margins of contestation. Along those margins, political entrepreneurship will be active in promoting support for alternative constitutional interpretations. Within open systems of creative and entrepreneurial action, constitutional reinterpretation is continually injected into society. Acquiescence in the presence of power does not imply agreement about its use. Rather, acquiescence means the constitutional contestation becomes an element of ordinary politics and not an activity that is prior to ordinary politics. It also means that emergent dynamics supplements comparative statics as a method of analysis.

Money and the Rule of Law

May, 2021

Contemporary monetary institutions are flawed at a foundational level. The reigning paradigm in monetary policy holds up constrained discretion as the preferred operating framework for central banks. But no matter how smart or well-intentioned are central bankers, discretionary policy contains information and incentive problems that make macroeconomic stability systematically unlikely. Furthermore, central bank discretion implicitly violates the basic jurisprudential norms of liberal democracy. Drawing on a wide body of scholarship, this volume presents a novel argument in favor of embedding monetary institutions into a rule of law framework. The authors argue for general, predictable rules to provide a sturdier foundation for economic growth and prosperity. A rule of law approach to monetary policy would remedy the flaws that resulted in misguided monetary responses to the 2007-8 financial crisis and the COVID-19 pandemic. Understanding the case for true monetary rules is the first step toward creating more stable monetary institutions.

Reviews:

'A profound and highly original assessment of monetary policy and its inseparable connection to the rule of law, a key principal of economic freedom. This is a great read, carefully researched with telling quotes from top policy makers. It dissects tough monetary problems into easy-to-understand pieces – objectives, instruments, targets, and models. It candidly describes political pressures on the Fed with hard evidence from past to present. It creatively uses the great ideas of Hayek, Friedman, and Buchanan to confront the weaker scholarship of today. Most ominously, it warns that Fed is once again expanding its reach and thereby threatening the rule of law.'

John Taylor, Mary and Robert Raymond Professor of Economics at Stanford University

 

'Like Hayek, Friedman, and Buchanan before them, Boettke, Salter, and Smith argue convincingly for fundamental changes in institutional design that, by enforcing rules over discretion in monetary policymaking, will help restore economic prosperity and the smooth functioning of our liberal democratic system. Anyone with a serious interest in using economics to improve the lives of all Americans should read this book.'

—Peter Ireland, Professor of Economics at Boston College

 

'This book takes a fascinating deep dive - a dive off of a springboard founded by economists as diverse as Adam Smith, Milton Friedman, John Maynard Keynes, F.A. Hayek, and John Taylor - into the thesis that money creation and responsible monetary institutions are as fundamentally important for our prosperity as any institution. It couldn't have arrived at a better time, when many believe money can be printed without consequence and when monetary institutions are increasingly coming under enormous political, cultural, and social pressure to perform the impossible. Their well-argued conclusion that the fragility of good monetary systems should fundamentally be embedded within the rule of law makes this book important for all readers hoping to preserve good governance, promote shared prosperity, and limit expropriation by those who would exploit democratic institutions.'

Lee Ohanian, Professor of Economics at University of California, Los Angeles

 

'This book is required reading for anyone concerned about monetary policymakers’ management of the COVID 19 economic crisis and, especially, their lack of attention to the long-term impacts of their historically dramatic monetary policy changes.'

William F. Ford, President of the Federal Reserve Bank of Atlanta from 1980–83

 

'From the adoption of the US Constitution to the founding of the Federal Reserve System, policymakers concluded that a currency anchored by a gold standard was essential to maintain monetary discipline. However, during our central banks’ century of existence, it evolved into an undisciplined discretionary system of fiat money creation. In Money and the Rule of Law, the authors provide a very much needed road map for returning to a disciplined monetary system for the remainder of the 21st century.'

Jerry Jordan, President of the Federal Reserve Bank of Cleveland from 1992 to 2003

 

'Many economists rightly advocate the rule of law, and allocation by markets rather than by expert central planners, as the key to economic development. Too few apply these principles to monetary institutions. Boettke, Smith, and Salter offer an insightful alternative. They diagnose the serious problems with the management of our money by central bankers who exercise discretion unconstrained by the rule of law. And they point the way toward much better arrangements. Highly recommended.'

Lawrence H. White, Professor of Economics at George Mason University

 

'Boettke, Salter, and Smith have produced a well-researched, well-written, highly-readable gem. By weaving the technical, philosophical, institutional, historical, and empirical aspects of money tightly together with the thread of economic principles, they are able to present money in a new light - the light of the rule of law. With that, the authors masterfully show why virtually every idea in vogue today has been tried before and why each has failed time and time again.'

Steven Hanke, Professor of Economics at John Hopkins

Rawlsian originalism

February, 2019

How should judges reason in a well-ordered constitutional democracy? According to John Rawls’s famous remarks in Political Liberalism, they ought to do so in accordance with the idea of public reason, to the point that they act as an (if not the) institutional exemplar of public reason. There are many attractive features of this view, but it is still too vague. For the idea of public reason is permissive – it rules certain modes of reasoning and discourse out, but the modes of reasoning and discourse it deems permissible are pluralistic. The current paper tries to remedy this indeterminacy by further fleshing out how judges ought to reason in something like a Rawlsian well-ordered constitutional democratic society. Our conclusion may come as a surprise: judges in such a society should be Originalists.

Constitutional catallaxy

April, 2019

Most liberal constitutional theorising, as exemplified by Buchanan (1975) and Rawls (1971), operates with a two-level scheme of analysis. The first level entails agreement on the rules through which a polity is constituted; the second level entails self-interested action inside that framework of rules. Within this framework a polity is constituted through agreement on the rules that frame political action. In this paper, we explore how this scheme of analysis might be relaxed by recognising that acquiescence is not agreement. Hence, people can acquiesce in some framework of governance without truly accepting it. In this alternative framework, agreement on rules is always incomplete, for two sets of reasons. One is the limited and divided quality of knowledge (Hayek, 1937; 1945). The other is the persistent presence of antagonism within society, as conveyed by Carl Schmitt's (1932) distinction between friends and enemies, and with that distinction present as well in William Riker's (1962) theory of political coalitions.

Political Entrepreneurship, Emergent Dynamics, and Constitutional Politics

January, 2018

Constitutional political economy mostly distinguishes between rules and actions, with rules selected prior to actions within those rules. While we accept the coherence of this distinction, we pursue it within an open rather than closed scheme of analysis. Doing this entails recognition that societies rarely exhibit universal agreement about constitutional provisions. Recognizing the incomplete character of constitutional agreement points to the existence of margins of contestation. Along those margins, political entrepreneurship will be active in promoting support for alternative constitutional interpretations. Within open systems of creative and entrepreneurial action, constitutional reinterpretation is continually injected into society. Acquiescence in the presence of power does not imply agreement about its use. Rather, acquiescence means the constitutional contestation becomes an element of ordinary politics and not an activity that is prior to ordinary politics. It also means that emergent dynamics supplements comparative statics as a method of analysis.

Constitutional Catallaxy

May, 2017

Most liberal constitutional theorizing, as exemplified by Buchanan (1975) and Rawls (1971), treats societies as closed systems of human interaction. This treatment is carried forward by emphasizing the similarity between choosing constitutional rules and choosing the rules for playing a parlor game such as poker. The menu of possible rules and the desires and values of the players are taken as data, and the players agree on the rules by which they will play. We don’t deny the heuristic value of this two-stage scheme of analysis; however, we also think that exploring constitutional thought from within a framework of open system also offers useful analytical insight, as we set forth here. In our alternative framework, agreement on rules is always incomplete, for two sets of reasons. One is the limited and divided quality of knowledge (Hayek 1937, 1945). The other is the persistent present of antagonism within society, as conveyed by Carl Schmitt’s (1932) distinction between friends and enemies, and with that distinction present as well in William Riker’s (1962) theory of political coalitions.

Political Entrepreneurship, Emergence, and the Theory of Constitutional Control

March, 2017

Since ancient times, scholars have recognized the paradox of political power: power is necessary to enforce principles of just conduct, but power also renders favoritism and arbitrary action likely. Quis Custodiet Ipsos Custodes? Almost universally, this question has been pursued within a closed-system scheme of analysis. In contrast, we address this question within an open-system scheme of analysis, and explore some of the analytical differences that arise. In short, no resolution of the paradox is possible, for neither political entrepreneurship nor the crooked timber of humanity will allow it. Within open systems of creative and entrepreneurial action, freshness is continually injected into society, including new forms and uses of power. The challenge that the paradox of power presents for political economy is not to subdue it, which is impossible, but is to learn to live with it in a generally productive manner.

Reducing Banks' Incentives for Risk-Taking Via Extended Shareholder Liability

February, 2017

It has long been understood that deposit guarantees and too-big-to-fail (TBTF) policies create a moral-hazard problem—they incentivize banks to take on too much risk by shielding depositors and shareholders from losses in excess of equity (“left-tail” outcomes)—in American banking.1Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991 to mitigate the moral-hazard problem by restricting forbearance and implicit subsidies for undercapitalized banks. But the mandates of the act (particularly early intervention to reorganize undercapitalized banks) were ignored when they might have made a difference just before and during the recent financial crisis. Common recommendations for mitigating moral hazard would have the FDIC adopt the techniques that private insurance companies use (deductibles, coinsurance, lower effective limits on coverage), but these have not been adopted, in part because (as seen in the British case of Northern Rock) they can give ordinary depositors reasons to rapidly withdraw money from suspect banks (the dreaded “run on banks”).

This chapter considers a different method for mitigating moral hazard: extended liability for bank shareholders. This reform does not put additional legal restrictions on bank activities, but reduces banks’ incentives for taking excessive risks by at least partially neutralizing current safety-net subsidies to risk-taking. It shifts the risk of left-tail events from deposit-guarantee agencies to equity-holders as a means for reducing the moral hazard that promotes inefficient risk-taking. Given that the root of the current incentive distortion lies in deposit and TBTF guarantees, a more straightforward approach would be simply to remove the guarantees, shifting risk from guarantee agencies to depositors and giving them more incentive to monitor and reward safe banking.

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