Paul Volcker Never Was Precisely Because Monetarism Never Was, Nor Is

Prices are what organize the market economy, which means prices are a crucial form of communication that governments should never, ever meddle with. Too bad Milton Friedman’s monetarism continues to shrink the discussion of what’s 3^rd grade (money), but at the same time thank goodness the only closed economy is the world economy such that the Fed can’t remotely do what Friedman’s disciples imagine it can.

Take a recent piece by Mercatus scholar Patrick Horan, in which he confidently asserted that “the Fed should respond only to demand shocks, unexpected events affecting the demand for goods and services. Monetary policy is well-suited for stabilizing these sorts of disruptions.” While the conceit of economists never disappoints, a piece calling for central planning from historically free market Mercatus does. Which is a digression.

The main point is that while market intervention is never wise simply because central planning always fails vis-à-vis market forces that are information pregnant by their very name, intervention is most problematic when so-called “demand shocks” move the alleged price level. If we ignore that there’s no such thing as “demand shocks” since demand always and everywhere mirrors supply, and that market-good specific price rises borne of specific demand increases signal falling prices elsewhere (that is, unless economics is no longer about tradeoffs…), it’s very necessary that prices reflect reality as opposed to the information suffocating effects of intervention.

So, while it’s disappointing to witness the championing of intervention by central bankers in pursuit of fake prices, the good news is that the only “closed economy” is yet again the world economy. And since that’s true, Fed attempts to price control the cost of credit, the quantity of so-called “money supply,” or both, are immaterial. Markets are powerful, they always speak, and they’ll overrun central bankers including those at the Fed. That Horan yearns for the Fed to centrally plan an absurd creation of statist economists (GDP), prices, income, and employment more broadly is yet another disturbing lurch by an erstwhile free-market crowd that brevity disallows discussion of for now.

At the same time, the brevity that disallows discussion of the myriad central planning conceits of monetarism is simple when discussing Paul Volcker. To this day, conservatives who should know better claim that by fiddling with the so-called “Fed funds rate,” Volcker arrested inflation. Books could be written about what insults reason, they have been, but for now it will simply be said that we borrow what money can be exchanged for, which means rising or falling credit is neither inflationary nor deflationary as much one is an effect of rising production and the other an effect of falling production.

From there, implicit in the Volcker myth is that the Fed is the one governmental entity on the planet that can control prices. No, markets once again always speak. And while Volcker was allegedly tightening credit, innovative financiers like Michael Milken were financing Schumpeterian-style corporations like MCI at rates south of the Fed funds rate. And this was MCI. AT&T (MCI’s target) could finance at much lower rates.

Which brings us to the globalized nature of credit. Exactly because credit is an effect of production, it’s globally produced. Put another way, even if Volcker had been capable of tightening credit via the Fed, global sources of credit could have worked around Volcker’s price controls.

Which is just a reminder that money in circulation and credit are an effect of production, not what central planners desire. Monetarists no doubt think they can plan all manner of economic activity, but money and credit are too exacting for their conceit precisely because markets are. Once again, Paul Volcker never was simply because monetarism never was nor can it be.