The Economic Affairs Committee of the House of Lords has produced its report on the Bank of England. Correctly, it is critical of the Bank, but it could have been much more so. As expected, the Bank is said to suffer from “groupthink” and the Treasury origins of its senior staff are highlighted as a weakness.
But there is nothing wrong with groupthink, if the members of the group believe in the right theories. In fact, groupthink would be a positive merit if there were a single right theory and everyone accepted it. The Bundesbank seems to me to have done a pretty good job between 1957 and 1999, and arguably its staff thought in much the same way. As far as I am aware, every physicist endorses the laws of gravity and every physicist is therefore subject to groupthink. I have argued consistently in (what is now) a depressingly long career that the essence of well-organized macroeconomic policy is:
- to keep the growth of money (broadly defined, please) in line with the trend rate of growth of real output, and;
- to run a balanced budget or – ideally – a budget surplus (for the entire public sector, properly defined), which over time will reduce the ratio of public debt to GDP.
Developments in the 2020s have confirmed the empirical validity of the quantity theory of money, a.k.a. “monetarism,” although let me again emphasize that it is money broadly-defined which matters to macroeconomic outcomes and I favour what might be termed “broad-money monetarism.”
The problem with central banks today is not that their research and analysis are crippled by groupthink. Rather, the problem is that their groupthink is motivated by three-equation New Keynesianism. In a particularly perverted form of this unsatisfactory doctrine, the supposed job of central bankers is to align the central bank rate with a r-starred “natural rate” (r*). In all seriousness, highly-rated academic and central bank economists pontificate about a magical r*, and pay no attention whatever to any money aggregate. As I said last month, “almost by definition” they are “incapable of assessing and calibrating the effects of changes in money growth on macroeconomic outcomes. It is as bad as that. The widespread adoption of a false theory is the underlying explanation for the severe monetary mismanagement of the 2020s.”
It is very important for non-economists to understand that macroeconomics nowadays is a total mess. Further, the mess in macroeconomics is having extremely serious consequences for policy-making in the world’s leading nations.
Source: Professor Tim Congdon, Chair, Institute of International Monetary Research (www.mv-pt.org).
