Writing for the Council on Foreign Relations, Alan S. Blinder worries that Congressman Ron Paul’s Federal Reserve Transparency Act will result in a politicization of monetary policy.  After all, Blinder states, “some functions of government properly belong in the realm of technocracy (for example, drug approvals), and others belong in the realm of politics (for example, same-sex marriage).”

By offering these examples, Blinder, a technocrat himself, engages in the Fallacy of False Alternatives—these functions belong either in the political realm or the technocratic realm and nowhere else.  There is, however, another alternative—perhaps these functions do not properly belong in the government’s purview at all, but in the market realm.

The market is quite capable of providing safe products.  No businessman wants to see his consumers die from the use of his products; that destroys repeat business.  Additionally, safety certification agencies such as Underwriters Laboratories are market innovations.  On the other hand, government agencies such as the FDA often do more harm than good, are motivated by political incentives rather than market signals, and are subject to “regulatory capture” in which the agency acts in the favor of the dominate firms in the regulated industry and not in the public interest.

As far as interpersonal relationships such as marriage are concerned, why is this a political issue at all?  After all, in a free society people should be able to associate with anyone that they wish in any capacity they wish so long as that interaction is voluntary and consensual.  Likewise, people should not be forced to associate with anyone they do not wish to associate with.  In other words, if a gay person wishes to associate with another gay person and combine their assets into a partnership, they should be free to do so, but churches should not be forced to recognize such relationships as marriage.  When marriage becomes a political issue, a one-size-fits-all policy is foisted on everyone, whether they agree with the policy or not.

When it comes to monetary policy, Blinder believes that the Fed has run a “very capable—which is not to say perfect” policy. 

Ostensibly, the fed has two objectives—to pursue stable prices and maximum employment.  (The Fed’s tacit objective is to protect the banking system, especially the large politically connected banks.)

First, let us discuss the term “maximum employment.”  The outcome of a properly functioning economy is maximum productivity, not maximum employment.  Jobs are the result of a productive economy, not the other way around.  For example, if people were paid to dig holes, many more folks would have jobs digging holes than if a backhoe was used.  However, the backhoe can do the job faster and cheaper than human labor can, thus freeing up the labor to do other tasks for which it is better suited.  Hence, productivity is increased and resources are allocated to their best possible use.

“Maximum employment” is a straw man designed to empower the central planners by convincing the masses that it is the planners who create jobs.  Of course, when jobs are destroyed, the planners claim that market conditions are at fault.  Just as the Fed portrays itself as an inflation fighter and not the source of inflation, the planners position themselves as noble champions fighting tooth and nail against mysterious, destructive market forces so that the little guy can put food on the table.  Like social safety nets—social security, unemployment—people are taught to think that government has the magical ability to create something out of nothing.  It is true that the government can provide one with employment, but it does so at a cost—misallocation of resources, i.e. the labor would be better allocated somewhere else, and the destruction of wealth through taxation—that destroys jobs elsewhere. 

As far as the Fed’s second objective—stable prices—is concerned, Blinder is plain wrong.  Since the Fed’s creation in 1913, America has experience massive price inflation.  A product which would have cost $1 in 1913 now costs $21.  This despite massive increases in productivity through technological advances.  If prices were “stable”, most products would cost much less today because it is so much cheaper to produce and distribute them.  In contrast, with the exception of wars (which governments often fund primarily by printing money), price inflation was flat or negative throughout the 19th century and into the early 20th century.  In 1933, FDR terminated the gold standard, which had compelled monetary disciple on the Fed and fiscal disciple on the federal government.  Since then, prices have continually rose.

The Fed attempts to maintain stable prices by manipulating the money supply which distorts the price of money itself, resulting in distortions in the market and malinvestment—the inefficient allocation of resources.

Blinder claims that, while it has suffered some serious failures, the Fed has basically been successful:

It averted financial calamity in the United States as economies faltered throughout Asia in 1997-98; it steered the country through the post-2000 stock market crash with minimal damage; and, most recently, it took extraordinary measures to avert what its chair, Ben Bernanke, said might have become the Great Depression 2.0.

In reality, the Fed has not averted anything; it has pushed back the day of reckoning by inflating its way out of these crises.  The chronic bubbles from which our economy suffers are the result of the Fed loosening monetary policy to stimulate the economy.  Instead of allowing the bubble to deflate and the bad investments to liquidate, the Fed steps on the monetary accelerator and blows a bubble somewhere else in the economy. 

However, the market always wins in the end.  When the day of reckoning finally comes, it will not be your average run-of-the-mill recession—it will be the liquidation of the accumulated malinvestment of decades of the Fed’s interventions.

I agree with Blinder that the monetary policy should not be politicized.  Once again, however, he is promoting a fallacy—the Fed is a political organization.  In his new book End the Fed, Congressman Ron Paul calls the Fed the most political organization in the entire government.  Central bankers are not omniscience dispassionate automatons; they are simply people subject to the same impulses as the rest of us.  Alan Greenspan and Ben Bernanke both campaigned for the post of Fed chairman.  Staff memos to Chairman Arthur Burns revealed strategies to court the favor of President Jimmy Carter.  Like any other agency, the Fed is subject to intense political pressure from the executive branch, Congress, and the public.

However, the root problem of central planning could not be solved even if the planner were not human but was the most powerful supercomputer imaginable.  Market conditions are constantly changing.  All central planners, no matter how wise, face the problem of gathering the necessary data—an impossible feat in all but the most primitive economies—and making adjustments instantaneously—another impossibility.

The market, on the other hand, has a built-in mechanism to deal with these variables—the price mechanism.  Prices fluctuate according to consumer desires.  If prices rise, entrepreneurs will try to bring more of the desired product to market, lowering the price.  If the price drops, entrepreneurs will produce less of that product and will move to other products which will bring them a higher profit.  Thus, the market is self-regulating, making necessary adjustments based on the price mechanism.

Central planning has never worked anywhere.  No matter how brilliant or competent the planners, they can never overcome the problems described above. 

In addition, the market is the ultimate form of democracy.  Unlike the top-down one-size-fits-all policies imposed by elitist central planners, the market is capable of catering to nearly everyone's needs and desires.  If there is a profit to be made, an entrepreneur will service the need.  Just look at all the niche markets to which entrepreneurs currently cater.  Scroll through any major city’s yellow pages and you will find an incredible variety of businesses all targeted at individuals with specific, disparate tastes.  Does anyone really think that the government could provide such a variety of products?

The Constitution provides an answer to the politicization of monetary policy.  Although monetary policy is placed under the control of Congress, this power is extremely limited.  Congress is not empowered to create money.  Money, according to the Constitution, is gold and silver.  Congress is authorized only to put these precious metals in coin form and to police against fraud and counterfeiting (a practice of which the Fed itself is guilty).  Congress is not empowered to create a legal tender or prohibit private agencies to issue money.  Hence, the Constitution encourages sound money by allowing competing currencies.

As important as it is, central control of money is only part of a bigger question.  That question is: who should control your life, you or some far away stranger?  The elitism of today is a relic of the Progressive Era when it was believed that experts could competently run society.  As the failures of the Fed illustrate, this idea is an illusion.  Unfortunately, many of us still take comfort in believing that someone is “in charge”.  Those who do so reject the reality that the economy and society are the result not of a central plan but of spontaneous order.

All of us look at our neighbors and wonder if some of them are capable of making sound decisions.  Should it come as any surprise that central planners may look at each of us in this same way—incompetent and foolish?  The beauty of the market is that it encourages good decisions—those that are beneficial to society as a whole—and discourages destructive behavior. 

While the current economic turmoil is being blamed on the free market, the truth is that the free market has been subverted.  As has been the case throughout history, the chaos is the result of central planning.  Blinder's article offers a glimpse of the elitist perspective.  Instead of admitting their failures, however, the planners demand more power and more control.  To do otherwise would be admitting their own irrelevance. 

How much more damage, how many more failures are we willing to endure before we reject the fallacy of central planning and control by elites?