July 26, 2018 Reading Time: 2 minutes

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.

Nicolás Cachanosky

Dr. Cachanosky is Associate Professor of Economics and Director of the Center for Free Enterprise at The University of Texas at El Paso Woody L. Hunt College of Business. He is also Fellow of the UCEMA Friedman-Hayek Center for the Study of a Free Society. He served as President of the Association of Private Enterprise Education (APEE, 2021-2022) and in the Board of Directors at the Mont Pelerin Society (MPS, 2018-2022).

He earned a Licentiate in Economics from the Pontificia Universidad Católica Argentina, a M.A. in Economics and Political Sciences from the Escuela Superior de Economía y Administración de Empresas (ESEADE), and his Ph.D. in Economics from Suffolk University, Boston, MA.

Dr. Cachanosky is author of Reflexiones Sobre la Economía Argentina (Instituto Acton Argentina, 2017), Monetary Equilibrium and Nominal Income Targeting (Routledge, 2019), and co-author of Austrian Capital Theory: A Modern Survey of the Essentials (Cambridge University Press, 2019), Capital and Finance: Theory and History (Routledge, 2020), and Dolarización: Una Solución para la Argentina (Editorial Claridad, 2022).

Dr. Cachanosky’s research has been published in outlets such as Journal of Economic Behavior & Organization, Public Choice, Journal of Institutional Economics, Quarterly Review of Economics and Finance, and Journal of the History of Economic Thought among other outlets.

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