Greenspan’s Uncertainty Principle: Premise Accepted, Conclusion Rejected (P. Kasriel, Northern Trust):
On August 29, 2003, Fed Chairman Greenspan made a presentation entitled “Monetary Policy under Uncertainty” to a symposium sponsored by the Federal Reserve Bank of Kansas City. Greenspan stated that the problem for the Fed “is not the complexity of ... [its] models but the far greater complexity of a world economy whose underlying linkages appear to be in a continual state of flux.” In this statement, Greenspan acknowledged the major tenet of Austrian-school economics. That is, the actions of humans cannot be predicted with any accuracy. (This does not necessarily assume irrational behavior on the part of humans. Although there can be rational reasons for people to change their desired tradeoffs between current and future consumption, this does not imply that these changes can be predicted.) Based on this premise, Greenspan concluded that Fed monetary policy would be more successful in maximizing the economic utility of Americans if the FOMC operated with discretion rather than according to some rule. This aspiring Austrian-school economist would respectfully disagree. Because of the “complexity of a world economy whose underlying linkages appear to be in a continual state of flux,” a discretionary monetary policy guarantees inferior economic outcomes compared to a rules-based monetary policy.
