Power & Market

Greg Mankiw Loves the Federal Reserve—and the Labor Theory of Value

Prominent economist and super successful textbook author Greg Mankiw writes:

I have a confession to make: I love the Federal Reserve. And I suspect that, in their heart of hearts, most other economists love the Federal Reserve, too.

But why this gushing profession of love by Mankiw for the Fed?  Is it because the Fed provides valuable services to the U.S. economy? Mankiw's answer leaves this all-important question unaddressed:

The nation’s central bank employs about 20,000 Americans. They monitor the economy, develop analyses to help set monetary policy and regulate the banking system. None are paid the extraordinary salaries found at the nation’s private banks. But they do their jobs with solemnity and tenacity and without a whiff of scandal. And, most important, they do their jobs well.

Even the admittedly "unforced errors" that deepened the financial crisis "did not diminish [Mankiw's] love for our central bank." For people, "should not be judged by the standard of perfection. They should be judged by whether they are doing the best they can." On this score, Mankiw gives the Fed a "top grade."  And what constitutes the  Fed's success "as a public institution"?  There are "two ingredients" to its success.  First, the the Fed "aims 'to provide the nation with a safer, more flexible and more stable monetary and financial system.'”  Note the emphasis I place on the the word "aims."  Mankiw does not say something like "by and large, succeeds in attaining."   It appears that maximum effort in pursuit of advertised goals rather than actual results achieved is the first criterion by which Mankiw evaluates the Fed.  But Mankiw's theory of the Fed's value is even more clearly revealed in the second input to success he proposes:

The second ingredient to the Fed’s success are the talented people who dedicate their lives to it. Every year the Fed recruits new research assistants from top colleges and new staff economists from top Ph.D. programs in economics. Over the years, I have known many great students who have taken these jobs. For someone interested in economic policy, there is no better place to work.

Well, if your beloved public institution doesn't succeed in producing desired results . . . simply appeal to Ricardo's outmoded labor theory of value.

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