Money in Illiberalism
A liberal society is governed by the principles of private property and freedom of contract, under the aegis of a nondiscriminatory rule of law. In such a society, money enables economic actors to coordinate their activities. Money allows producers and consumers to find common ground, as profit-and-loss accounting enables producers to compare various lines of production to discover which of those lines consumers value most.
Things are otherwise in a society that partially —or more worryingly, significantly— compromises on liberal principles. In such a society, money may be governed not by the rule of law, but the rule of various financial elites. Some of these elites will reside in the public sector, such as central bankers. Some will reside in the private sector, such as high-level executives of various financial houses. Ultimately, money in illiberalism is governed not according the common good, but a discriminatory manner conducive to the particular good of powerful special interests.
Money in illiberalism is subject to sudden and unexpected changes in its supply, and hence purchasing power. This is not a complaint about the changing purchasing power of money. The purchasing power of money can and does change in liberal social arrangements as well. What is objectionable is that there is no general rule, in principle knowable by the users of money, according to which the supply of money will change. For example, under modern discretionary central banking, the stance of monetary policy is decided by a committee of experts. Private financial organizations devote massive resources to anticipating and, afterwards, reflecting on central bank decisions. These organizations would have no need to do this if the stance of monetary policy were predictable and subject to general rules.
Modern discretionary central banks are Big Players. They disproportionately affect market outcomes, but because they are not subject to the same rules as ordinary market organizations, their behavior is extremely difficult to predict. Money in illiberalism is ultimately governed by some form of the will of financial Big Players, both private and public. Modern discretionary central banking is but one example, albeit the most prevalent one that actually exists.
In liberalism, money is an institution that promotes social coordination to mutual benefit. In illiberalism, money is an instrument of social control, either on the part of macroeconomic experts who view the commercial realm as a series of engineering problems to be solved, or on the part of nominally private financial elites who view users of money as a potential source for underwriting excessive financial risk taking. Neither of these uses of money is publicly justifiable on the ordinary norms of liberalism that we take for granted.
To change money from an instrument of social control to an institution of social coordination, we must insist that post-Enlightenment liberal norms of governance apply to monetary issues. Failure to do so means we will continue to suffer from the predictable results of illiberal money, namely business cycles and financial crises. It also means the liberal project of promoting peace through commerce will stall. Commerce cannot achieve its full potential under illiberal money. For the sake of the common good, money must be liberal.
Alexander William Salter
Alexander William Salter is the Georgie G. Snyder Associate Professor of Economics in the Rawls College of Business and the Comparative Economics Research Fellow with the Free Market Institute, both at Texas Tech University. He is a co-author of Money and the Rule of Law: Generality and Predictability in Monetary Institutions, published by Cambridge University Press. In addition to his numerous scholarly articles, he has published nearly 300 opinion pieces in leading national outlets such as the Wall Street Journal, National Review, Fox News Opinion, and The Hill.
Salter earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Occidental College. He was an AIER Summer Fellowship Program participant in 2011.
