The Super-alertness of Central Bankers

The most common and widely accepted argument in favor of central banks is that they are necessary to put a check on the inherent instability of financial markets. Most economists agree that markets self-regulate pretty well, except when it comes to money and banking. Note that the argument does not stop at the need for financial regulation, but goes all the way to supporting a government monopoly on the issuance of money.

The argument that the market in money and banking is inherently unstable is contestable both theoretically and empirically. But, leaving this issue aside, the idea that a central bank is needed does not mean it can achieve its desired objectives. A number of reasons can be given for why it is unlikely that central bankers will perform their job efficiently. Here I want to focus on what I call the super-alertness of central bankers. 

Alertness is the term Israel Kirzner uses in his work on entrepreneurship. The role of the entrepreneur in the market process consists in discovering market disequilibria to which the other economic agents are blind. Market information, such as prices, captures real conditions in the world and economic agents’ expectations of future conditions. Successful entrepreneurs have the alertness to discover what others are not observing. A significant implication of Kirzner’s analysis is that entrepreneurs are the driving force of the market, meaning they are the ones that reallocate resources while moving the market closer to equilibrium. Note that entrepreneurs need market information as an input for their alertness. Entrepreneurial alertness occurs within the market. 

Central bankers are in a different situation. Central bankers use market information to decide monetary policy. But such market information is the result of central bankers’ policies in the first place. Central bankers do not take market information as given, because they have a significant effect on the variables that generate it. There is a further distinction to be made. Central banks are not just monopoly producers inside the market; they are above the market. 

Central bankers need not merely be alert to market disequilibria, like entrepreneurs. Rather, they must be super alert. They must foretell, without the proper information, how the whole market will react to new conditions. That requires a special type of alertness—an alertness that is as special as it is unrealistic.

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Nicolás Cachanosky

Nicolás Cachanosky is an Assistant Professor of Economics at Metropolitan State University of Denver. With research interests in monetary economics and macroeconomics, much of his recent work has focused on incorporating aspects of financial duration into traditional business cycle models. He has published articles in scholarly journals, including the Quarterly Review of Economics and Finance, Review of Financial Economics, and Journal of Institutional Economics. He is co-editor of the journal Libertas: Segunda Época. His popular works have appeared in La Nación (Argentina), Infobae (Argentina), and Altavoz (Peru).

Cachanosky earned his M.S. and Ph.D. in Economics at Suffolk University, his M.A. in Economics and Political Sciences at Escuela Superior de Economía y Administración de Empresas, and his Licentiate in Economics at Pontificia Universidad Católica Argentina.