Richard Murphy: The Debate on the Proper Role of the Bank of England, Continued

Yves here. One reason for featuring this post was that the discussion of the role of the Bank of England also has implications for the role of the Fed and other central banks. Murphy’s post takes on the claim of central bank independence. That is code for “the management of a country’s finances must be in the hands of those who will keep governments from spending too much.” The pretext is governments if not constrained by sober conservative bankers adults, will go and spend to buy votes and will create oodles of inflation, leading to a collapse in investment and all sorts of other horrors.

We could go on at length about how what investors need is not zero inflation (which is too close to deflation for comfort) but not horribly high and not too volatile rates of inflation, since that can be priced into financial assets.

But as Mikhail Kalecki described at length in his seminal essay on the political obstacles to achieving full employment, businessmen don’t want full employment because it would give labor too much power (they could easily quit if a boss was lousy) and too small a status premium over their workers. Government therefore needs to step in to achieve full employment, but businessmen don’t like that either, since a vigorous and effective state again diminishes their role. Kalecki then worked from those premises how government would nevertheless be enlisted to fight downturns:

This may be done by lowering the rate of interest, by the reduction of income tax, or by subsidizing private investment directly in this or another form. That such a scheme should be attractive to business is not surprising. The entrepreneur remains the medium through which the intervention is conducted. If he does not feel confidence in the political situation, he will not be bribed into investment. And the intervention does not involve the government either in ‘playing with’ (public) investment or ‘wasting money’ on subsidizing consumption.

It may be shown, however, that the stimulation of private investment does not provide an adequate method for preventing mass unemployment. There are two alternatives to be considered here. (i) The rate of interest or income tax (or both) is reduced sharply in the slump and increased in the boom. In this case, both the period and the amplitude of the business cycle will be reduced, but employment not only in the slump but even in the boom may be far from full, i.e. the average unemployment may be considerable, although its fluctuations will be less marked. (ii) The rate of interest or income tax is reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously.

Mind you, Kalecki foresaw where we wound up after the crisis in 1944.

Needless to say, central banks have played an important role in making an economy intended to be at less than full employment seem necessary and desirable. In the interest of letting you get to Murphy’s thoughts sooner rather than later, I won’t spell out the considerable supporting evidence, since we’ve covered this issue at great length on this site.

However, in his points about “charade” and “role of the elites,” what I believe Murphy is tip-toeing around is the fact that the independence pretense for central banks is a ruse for keeping them from being democratically accountable. Given their poor performance, both in helping to create the crisis by encouraging financialization (which we also now know leads to lower economic growth) and then by responding to it by favoring banks over the real economy, there should have been widespread demands for a change in their role, or alternatively, much greater transparency (admittedly, Audit the Fed was a step in that direction). But central banks have managed to do such a good job of preserving their secrecy and aura of mystery that they’ve gotten away without being called to account.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

I wrote my blog on the objectives of economic policy and the role of the Bank of England within it yesterday for a reason. It contributed to a debate I was having with others.

An economist replied in that debate, saying:

I really do not understand this rejection of the almost universal received wisdom of mainstream economics over the last 40 years.  We do have evidence of an extremely successful policy regime when interest rates are not at their lower bound.

In other words, the claim is that opinion does not matter on this issue: we should continue with Bank of England independence because the policy worked, and still will if we do not have interest rates at the lower bound (or near enough 0% in plain English).

I made a four-part response, arguing in summary that:

a) We do not have Bank independence now. What we have instead  is a charade of independence, because the Bank of England Act 1998 makes clear that the Chancellor can take back control whenever they wish;

b)  Granting control of economic policy within a democracy  to an elite is a dangerous thing to do;

c) There is  substantial empirical evidence that the system does not work: 2008 was proof of that, and the comments of Alan Greenspan and Adair Turner  both provide evidence that the assumptions underpinning the arrangement were found to be at fault at that time;

d)  It is now likely that we are living in an era of near-perpetual low-interest rates, and events in the USA do not, for example, prove otherwise: when their 50 year bond rate is lower than the 30 year rate there is some indication that markets are reacting to current circumstances, and that movements are politically, and not economically driven.

I was curious to receive a response suggesting:

1) If it is a charade don’t worry about;

2) We grant  power to elites throughout society: for example, we expect  doctors to set drug policy for the NHS and so an elite should set interest rates as they are better able to do so than politicians who do not have the technical skill to do so;

3) The evidence of the post-2008 era cannot be used to dismiss the evidence of the pre-2008 era because in the post-2008 era monetary policy has not been possible. That does not prove that it isn’t a superior policy tool.

4) Fiscal policy is needed when at the zero bound, but we are moving out of that era now and so the argument that it is more useful now falls away.

I summarise of course. But I do think a response is appropriate.

Do Charades Matter?

I was astonished to be told that charades do not matter. The whole field of political economy  looks at the ways in which relationships of power influence the allocation of resources in society, and in the process considers the ways in which those relationships of power are created, including by artifice, subterfuge and charade to achieve results that are inconsistent with the underlying supposed principles on which actions are claimed to be based. We look at these issues because they matter. The whole of offshore is based on games of misrepresentation.

If the supposed state of Bank of England independence is as well then the consequences are significant because the real agenda has to be established. The substance of the relationships has to be considered, and not just the form. It is not acceptable for economists to consider form alone.

The Role of Elites

Experts have a very clear role in society: I hope no one would suggest otherwise. But I have a real problem with the suggestion that elites are experts. And as far as I can see being a banker, or being an economist, is not a qualification for having expertise in making the political judgement on the stimulus or otherwise needed to direct an economy, which is always a political choice.

The suggestion that bankers and economists do have such expertise is not just misguided but is closed minded to the possibility that alternative opinion exists to the mainstream economic wisdom of the last 40 years. Such mainstream opinion, which did create the situation that led to the 2008 crash, is a contestable wisdom in that it is based upon assumptions, and so prejudices, that not all might accept and as a result the exercise of judgement within the boundaries it sets is not about the expression of expertise in some impartial fashion but is instead about the operation of power within a particular framework that is pre-disposed to favour certain interests, including those of bankers and mainstream economists, over others. This is not then the exercise of expertise: it is the expression of elite power, which is something very different indeed.

Empirical Evidence

I am entirely willing to accept empirical evidence, within the boundaries within which the research took place. Extrapolation beyond those boundaries is always dangerous.

It is my contention that the pre-2008 economy has gone for good: there will be no return to the old ‘normal’. Most informed opinion seems to think we will face perpetual low-interest rates. That is because it is apparent that the experience of QE has changed the role of central banking and interest rate setting forever, but that use of QE only happens (and this is true despite the new Hammond/Carney agreement, which if anything reinforces my suggestion) within the boundaries of acceptable political consent. And in that case it cannot be argued that what held true in one circumstance pre QE now holds true in another post QE.

When the only two instruments of monetary control were fiscal policy and the interest rate empirical results indicated one thing. Now we have three instruments: fiscal policy, monetary policy and QE, with the latter being capable of use to support either fiscal or monetary policy: it is quite specifically not a pure instrument of monetary policy. To restore the old regime when QE has, to coin a phrase ‘changed everything’; makes no sense at all. The empirical evidence is that monetisation via QE is here to stay. But in that case the use of that power to support broadly based economic policy is essential and central banks quite specifically do not have the expertise to do that.

The Zero Bound

I would argue that even if things are changing in the USA, and the evidence of that is ambiguous (The Krugman v Baker debate on full employment is some indication of that, as is that fact that long-term US markets are ignoring short-term interest rate policy as if they see this as a temporary political aberration, which I suggest that it is) they are not changing in the UK, which is my concern. Nor, come to that, are they changing much in Europe. The zero bound is here to stay.

Why on earth build an economic policy on a scenario that has been inoperative for a decade and is likely to be so for time to come in that case? What is the point of putting dogma ahead of the requirement for arrangements that have a chance of working? I have no objection to there being arrangements where the Bank can advise on (but not control) future interest rate changes. Such a policy would make sense. But to pretend that monetary policy has any significant likely role for some time to come makes no sense at all: the UK economy simply cannot afford that it might, excepting a response to a crashing out from the EU, when any decision would have to be politically led in any event and is bound to replicate the futility of Black Wednesday, come what may.

I will be sharing my opinions with my correspondent.

Print Friendly, PDF & Email


  1. paul

    Why on earth build an economic policy on a scenario that has been inoperative for a decade and is likely to be so for time to come

    Because it suits the current,storied beneficiaries.
    That most hated of ideas, relativism, is what drives them.
    Dead bodies,pollution, its it is just their currency to isolate them above all.

    If anyone catches the current criminals betraying an ounce of their worthless weight in the interests of those they represent,take a photo, you are unlikely to see it again.

    If professor murphy is reading these comments, I have for years tried to bang on about the primacy of political will over economic surrealistics, and I used your blog comment area, among others, to do that.

    I was asked to leave over the corbyn/smith distraction but still hold in you in high regard as a very good egg.

  2. paul

    Dead bodies,pollution, it’s just their currency to isolate them above all they can see.

    That’s what I meant to say.

    I’ve always wondered why there was so much emphasis on relative poverty than relative wealth

  3. Colonel Smithers

    Thank you, Yves.

    I wrote my masters dissertation on central bank independence in 1994 – 5, including spending time in Germany in the autumn of 1994, around the time of the federal elections.

    Central bank independence is often backed by reference to Weimar Germany’s hyperinflation. What is rarely mentioned is the strategy to inflate / hyperinflate away Germany’s (WWI) reparations, a strategy that (hard) Brexitannia may have to emulate. With regard to Germany, what is also rarely mentioned is that Bundesbank independence was a way of weakening the centre and empowering countervailing forces, e.g. the laender and their representation on the Bundesbank, after Nazi / central rule.

    At the time of writing, I could find no evidence that central bank independence was the reason why or main driver for economic growth, low inflation etc. There are many reasons, including cultural and (economic) structural.

    In light of the crisis and empowering of central banks, I would like to revisit and may be work the masters into a doctorate.

    1. Yves Smith Post author

      Yes, this is extremely important and timely. If you have further insights as you revisit/rethink your work, we’d love to hear them.

    2. UserFriendly

      What is rarely mentioned is the strategy to inflate / hyperinflate away Germany’s (WWI) reparations, a strategy that (hard) Brexitannia may have to emulate.

      Weren’t both of these debts held in a foreign currency and thus impossible to inflate away? All the inflation does is change the exchange rate.

  4. paul

    Regional development! what an idea!

    Don’t let this get outside the south east.

    I’m coming round to the idea that a hard border(due to depopulation, our supposed lack of initiative and no motorways) might be tenable.
    All we’ve got in our way is…tbc

  5. templar555510

    The Bank of England is still thought of as hallowed ground by politicians from all parties in the UK and thus the ‘ charade ‘ that Richard Murphy describes is exactly that and by extension it is not difficult to get the people to believe that if the BofE is running things all must be right with the world. The very name ‘ Bank of England ‘ sounds solid. And THAT is the problem . It’s stuffed full of dinosaurs . But Carney leaves next year and who might replace him is anybody’s guess given Brexit, Trump etc and where we will be in a year’s time . Sentiment and window dressing play a big part in these decisions. The Chancellor Hammond and the Governor Carney have just agreed a bailout deal ( although not announced as such ) to save the banks should it all go belly up in March next year, but that is only further proof of the democratic deficit that Yves alludes to in her introduction.

    1. Colonel Smithers

      Thank you, Templar.

      Around the turn of the century, the Liberal Democrats proposed renaming the Bank of England the UK Reserve Bank and having regional representation – as the Bundesbank has, although some smaller laender share their seats.

  6. John k

    Good discussion.
    Independence means freedom to do dumb things that can’t be justified in the light of day, such as insisting on maintaining a reserve of unemployed workers to hold down wages.
    Public sector should lean against the business cycle in many ways to reduce fluctuations and systemic risks:
    The amount one can borrow against shares, if any, should be reduced as those shares p/e rises.
    Companies should once again be prohibited from buying their own shares.
    The calculation of unemployment should be returned to how it was under Reagan. Those that stop looking are assumed to be unemployed. Somebody working four hours/week and wants full unemployment is 90% unemployed. Then, with a more accurate stat, one can begin to spend regionally, say via block grants to regions, on infra until each region reaches full employment… I.e., when regional inflation might rise.
    There will of course be another, or many, major crises as weak, and weakening, stabilizers are insufficient to counter the business cycle in this increasingly neolib era. This means that a pres may occasionally have the opportunity, as fdr and Obama did (the former used it) to modify the system. Imagine temporarily taking over collapsing wall st and other banks, and then retaining a golden share when resold to the public whereby the gov retains the power to prohibit campaign contributions.

  7. Chauncey Gardiner

    Due to my own limited background I had some difficulty processing this post; but my takeaways are:

    1.) Regarding central bankers and the so called elite across a range of policies, we are constantly reminded of Walter Scott’s, “Oh, what a tangled web we weave when first we practice to deceive.” Behind the propaganda, obfuscation and spin, policies are based on “elite” power relationships that favor certain interests, not expertise. The scope and complexity of the problems are beyond the elite’s expertise, as they lack both the capacity and desire to formulate broadly beneficial policy. That is the Achilles heal of our current system as contrasted with that of a truly representative democracy.

    Restricting access to policy influence by throwing up academic, ideological, political and economic barriers is a surefire recipe for economic, political and social failure.

    2.) Quantitative Easing (QE) should be considered as a separate and distinct policy tool in addition to conventional monetary and fiscal policy. It is here to stay for the foreseeable future, but central bankers do not have the expertise nor the desire to apply QE to support broadly based economic and social initiatives.

    So, what to do?…

  8. djrichard

    I’m reminded of this article by Ben Hunt

    I want to suggest a third ending to the story, one that is terribly unsatisfying from a human behavioral perspective, but one that I believe is far more likely from a historical perspective – the Entropic Ending, the long slog of a gray winding-down, neither fire nor ice, neither Happy nor Shocking, where the transformation of emergency monetary policy into permanent government program creates a low growth, low inflation political equilibrium that can last for decades. Stocks will go up and stocks will go down, but not by much either way. Perpetually disappointing growth translates into persistently dashed expectations of corporate earnings growth, but the programmatic Fed backstop of financial asset prices essentially outlaws a significant price decline. There are neither secular bull markets nor secular bear markets in an Entropic Ending, just an ossification of an increasingly mediocre status quo.

    1. djrichard

      More on this theme from Ben

      Through the magic of Narrative construction, capital markets are being transformed into political utilities.

      After World War I, French Prime Minister Georges Clemenceau famously said that war was too important to be left to the generals, meaning that politicians would now take charge. Today, the pervasive belief in every capital in the world is that markets are too important to be left to the investors. These things don’t change back. Sorry.

      … if you’re raising the floor on what you might suffer in the way of asset price deflation, you are also lowering the ceiling on what you might enjoy in the way of asset price inflation. That’s what investing in a utility means – you’re probably not going to lose money, but you’re not going to make a lot of money, either. So to all of those public pension funds who are wringing their hands at this fiscal year’s meager returns, well below what they need to stay afloat without raising contributions, I say get used to it. … Their market-as-utility solution isn’t likely to go bust in a paroxysm of global chaos, any more than it’s likely to spark a glorious age of reinvigorated global growth. Neither the doomsday scenario nor the happy ending is likely here, I think. Instead, it’s what I’ve called the Entropic Ending, a long gray slog where a recession is as unthinkable as a 4% growth rate. It’s a very stable political equilibrium. Sorry.

      1. Chauncey Gardiner

        He could be right, of course. But it’s a big world,, and Emerging Markets credit might be the canary that tells of another Minsky moment. There are others.

  9. RBHoughton

    Richard Werner’s writings note the Asian tigers’ economic miracle was largely due in every case to a policy of a few percentage points of annual inflation. In those countries, the government wanted to grow the economy to improve living standards of the people – it is only in Europe where the central bank is totally independent of political control, that it demands no inflation for its bank customers and screw the people, viz Greece, Portugal, Italy, Ireland.

    The proper role of the BoE is as a museum so future generations might be shown the evil that men do for money. Its true the Governor is ultimately under the Chancellor’s thumb but that’s just as bad as the ECB which is under no-one’s thumb and does precisely the same. There is a coterie of people like the Chancellor who have no faith in democracy, assessing it as mob rule, and call the shots obo the owners of the country.

    I like the ability to make a few bob but we let it get out of hand. If we are continuing that, then we need an ameliorating policy to restore the balance. Tom Paine provided one by observing that a man’s rights end with death. Our attempt to reach beyond the grave with Wills and Codicils is wrong. We no longer have the right or the enforcement ability. If a fellow is still rich when he croaks, he should give it to government and allow the political whizz kids to repeal income tax.

  10. Susan the other

    Thanks for the ongoing posts by Richard Murphy. His common sense is so stunning and he writes so beautifully without any nonsense. I love this guy almost as much as I love Ann Pettifor. I was encouraged to read that RM considers the “old normal” gone for good. And good riddance. It was an idea whose time has passed. Boiling it down to 3 variables of monetary policy, fiscal policy, and QE was very salient. And his simple statement about offshoring being pure misrepresentation was wonderful. So to think back once again on FDR’s difficulty with the big capitalists who refused to fire up their factories because the depression prevented their profits was like a stand-off that has lasted for almost a century. The corporations chose to offshore for profits and have had a good, if shameless, run for their money. Now they too can see that they are dependent on society. And so is central banking.

Comments are closed.