This paper applies Kirzner’s theory of entrepreneurial alertness to central banking. As opposed to entrepreneurs operating within the market, central banks can operate outside the market by defining its structure and regulations. We label as “super-alertness” the particular type of Kirznerian alertness that central banks are required to have to successfully achieve stable monetary equilibrium.
This is a preview of subscription content, log in to check access.
Buy single article
Instant access to the full article PDF.
Price includes VAT for USA
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
This is the net price. Taxes to be calculated in checkout.
Cachanosky (2017) offers a financial interpretation of Kirznerian alertness.
This point is not as trivial as it seems, since historical episodes that lack a central bank but are subject to a number of regulations are sometimes described as free banking. The imbalances produced by ineffective regulations are then assumed to be proof of the inherent instability of an unregulated money and banking market. See, for instance, Selgin’s (1988, Chapter 1) discussion on the pre-Federal Reserve era in the United States and Cachanosky (2012) for the case of Argentina in the late nineteenth century.
Even today, some commercial banks in Scotland, Ireland, and Hong-Kong, issue convertible banknotes. See Hogan (2012).
A key reference in support of banking’s inherent instability is Diamond and Dybvig’s (1983) model of bank runs. We cannot offer a detailed analysis here of the challenges rised to their model. It has been pointed out, for instance, that their model of banking crisis does not have money and banks do not issue loans among other shortcomings that make it quesitonable as a “proof” of inhernet financial instability. For a more detailed discussion see Cachanosky (2018, Chapter 1), Dowd (1992a), (1996, Chapters 1, 3), and White (1999, Chapter 6).
In the equation of exchange, MV = PY, M represents money supply, V the velocity of circulation, P the GDP deflator, and Y real GDP (then PY = NGDP).
It should be noted that how the right level of noninal income is achieved is also important. It is not the same when the nominal income is a bottom-up proces that originates in economic agents, than when it is an bottom-up process dictated by a central authority such as a central bank (Salter 2013).
This is not to say that goods do not have an impact on the market. The invention of the car, the computer, mobile phones, etcetera, had a large impact on how the market works. Still, they are closing previously undiscovered disequilibria.
By fixing the interest rate, the central bank commits to expand (contract) money supply as needed to keep the interest rate unchanged.
Also see Fuster et al. (2010).
Anderson, B. M. (1949). Economics And The Public Welfare (1980 ed.). Indianapolis: Liberty Fund.
Bernanke, Ben S. (2013). The Federal Reserve and the Financial Crisis: Lectures by Ben S. Bernanke. Princeton: Princeton University Press
Bernanke, B. S. (2015). The courage to act: A memoir of a crisis and its aftermath. New York and London: W. W. Norton & Company.
Bernanke, B. S., & Woodford, M. (1997). Inflation forecast and monetary policy. Journal of Money, Credit and Banking, 29(4 (November, Part 2)), 653–684.
Cachanosky, N. (2010). The endogenous stability of free banking: Crisis as an exogenous phenomenon. New Perspectives on Political Economy, 6(1), 31–48.
Cachanosky, N. (2012). The law of National Guaranteed Banks in Argentina, 1887-1890: Free-banking failure or regulatory failure? The Independent Review, 16(4), 569–590.
Cachanosky, N. (2014). Hayek’s rule, NGDP targeting, and the productivity norm: Theory and application. Journal of Stock & Forex Trading, 03(02). https://doi.org/10.4172/2168-9458.1000121
Cachanosky, N. (2017). Austrian economics, market process, and the EVA® framework. Journal of Business Valuation and Economic Loss Analysis, 12(s1). https://doi.org/10.1515/jbvela-2016-0014
Cachanosky, N. (2018). Monetary equilibrium and nominal income targeting. London and New York: Routledge.
Cachanosky, N., & Salter, A. W. (2017). The view from Vienna: An analysis of the renewed interest in the Mises-Hayek theory of the business cycle. The Review of Austrian Economics, 30(2), 169–192. https://doi.org/10.1007/s11138-016-0340-5
Diamond, D. W., & Dybvig, P. H. (1983). Bank runs, deposit insurance, and liquidity. The Journal of Political Economy, 91(3), 401–419.
Dowd, K. (1992a). Models of banking instability: A partial review of the literature. Journal of Economic Surveys, 6(2), 107–132.
Dowd, K. (1992b). The experience of free banking. London and New York: Routledge.
Dowd, K. (2015). Free banking. In P. J. Boettke & C. J. Coyne (Eds.), The Oxford handbook of austrian economics (pp. 213–246). Oxford: Oxford University Press.
Dutkowsky, D. H., & VanHoose, D. D. (2017). Interest on reserves, regime shifts, and bank behavior. Journal of Economics and Business, 91, 1–15. https://doi.org/10.1016/j.jeconbus.2017.03.003
Friedman, M. (1947). Lerner on the economics of control. The Journal of Political Economy, 55(5), 405–416.
Fuster, A., Laibson, D., & Mendel, B. (2010). Natural expectations and macroeconomic fluctuations. Journal of Economic Perspectives, 24(4), 67–84.
Garrison, R. W. (1986). From Lachmann to Lucas: On institutions, expectations, and equilibrating tendencies. In I. M. Kirzner (Ed.), Subjectivism, intelligibility and economic understanding (pp. 87–101). New York and London: New York University Press and Macmillan Co..
Hayek, F. A. (1948). Individualism and economic order (1958th ed.). Chicago: The University of Chicago Press.
Hayek, F. A. (1976). Denationalisation of money (2007th ed.). London: The Institute of Economic Affairs.
Hayek, F. A. (1978). New studies in philosophy, politics, economics and the history of ideas. Chicago: The University of Chicago Press.
Hendrickson, J. R. (2017). Interest on reserves, settlement, and the effectiveness of monetary policy. Journal of Macroeconomics, 54, 208–216. https://doi.org/10.1016/j.jmacro.2017.05.010
Hoffmann, A. (2014). Zero-interest rate policy and unintended consequences in emerging markets. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2055690
Hoffmann, A., & Cachanosky, N. (2018). Unintended consequences of ECB policies in Europe. In A. Kroon, Godart van-der & P. Vonlanthen (Eds.), Banking and monetary policy from the perspective of Austrian economics (pp. 103–126). Cham: Springer International Publishing. https://doi.org/10.1007/978-3-319-75817-6_6
Hogan, T. L. (2012). Competition in currency. Policy Analysis, 698, 1–53.
Hogan, T. L. (2018). Bank lending and interest on excess reserves. Houston.
Hogan, T. L., Le, L., & Salter, A. W. (2015). Ben Bernanke and Bagehot’s Rule. Journal of Money, Credit and Banking, 47(2–3), 333–348.
Hummel, J. R. (2011). Ben Bernanke versus Milton Friedman. The Federal Reserve’s emergence as the U.S. Economy’s central planner. The Independent Review, 15(4), 485–518.
Kirzner, I. M. (1973). Competition and entrepreneurship. Chicago: The University of Chicago Press.
Kirzner, I. M. (1997). Entrepreneurial discovery and the competitive market process: An Austrian approach. Journal of Economic Literature, 35(1), 60–85.
Koppl, R. G. (2002). Big players and the economic theory of expectations. New York: Palgrave Macmillan.
Lucas, R. E. (1976). Econometric policy evaluation: A critique. In K. Brunner & A. H. Meltzer (Eds.), The Phillips curve and labor markets (Carnegie-Rochester conference series on public policy). New York: American Elsevier.
Luther, W. J. (2013). Friedman versus Hayek on private outside monies: New evidence for the debate. Economic Affairs, 33(1), 127–135. https://doi.org/10.1111/ecaf.12001
McCallum, B. T. (2011). Nominal NGDP targeting. Shadow Open Market Committee.
Nordhaus, W. D. (1975). The Political Business Cycle. Review of Economic Studies. 42 (April) 169–90.
Rothbard, M. N. (1960). The politics of political economists: Comment. Quarterly Journal of Economics, 74(4), 659–665.
Salter, A. W. (2013). Not all NGDP is created equal: A critique of market monetarism. Journal of Private Enterprise, XXIX(1), 41–52.
Salter, A. W., & Smith, D. J. (2017). What you don’t know can hurt you: Knowledge problems in monetary policy. Contemporary Economic Policy, 35(3), 505–517. https://doi.org/10.1111/coep.12219
Salter, A. W., & Tarko, V. (2018). Governing the banking system: An assessment of resilience based on Elinor Ostrom’s design principles. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3235752
Salter, A. W., & Young, A. T. (2018). A theory of self-enforcing monetary constitutions with reference to the Suffolk system, 182551858. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3173294
Sechrest, L. J. (1993). Free banking. Theory, history, and a laissez-faire model (2008th ed.). Auburn: The Ludwig von Mises Institute.
Selgin, G. A. (1988). The theory of free banking. Lanham: CATO Institute and Rowman & Littlefield.
Selgin, G. A. (1996). Bank deregulation and monetary order (2002nd ed.). New York: Routledge.
Selgin, G. A. (1997). Less than zero. London: The Institute of Economic Affairs.
Selgin, G. A. (2018). Floored!: How a misguided fed experiment deepened and prolonged the great recession. Washington D.C: Cato Institute.
Selgin, G. A., & White, L. H. (1994). Monetary reform and the redemption of National Bank Notes, 1863-1913. The Business History Review, 68(2), 205–243.
Selgin, G. A., Lastrapes, W. D., & White, L. H. (2012). Has the fed been a failure? Journal of Macroeconomics, 34(3), 569–596. https://doi.org/10.1016/j.jmacro.2012.02.003
Selgin, G. A., Beckworth, D., & Bahadir, B. (2015). The productivity gap: Monetary policy, the subprime boom, and the post-2001 productivity surge. Journal of Policy Modeling, 37(2), 189–207. https://doi.org/10.1016/j.jpolmod.2015.02.005
Sumner, S. (1989). Uing futures instrument prices to target nominal income. Bulletin of Economic Research, 41(2), 157–162. https://doi.org/10.1111/j.1467-8586.1989.tb00287.x
Sumner, S. (2012). The case for nominal GDP targeting. Arlington, Virginia: Mercatus Research.
Sumner, S. (2013). A Market-driven nominal GDP targeting regime Arlington, Virginia: Mercatus Research.
von Mises, L. (1949). Human action (1996th ed.). Irvington-on-Hudson: The Foundation for Economic Education.
Walsh, C. E. (2009). Inflation targeting: What have we learned? International Finance, 12(2), 195–233. https://doi.org/10.1111/j.1468-2362.2009.01236.x
White, L. H. (1984). Free banking in Britain. Theory, experience and debate, 1800–1845 (1995th ed.). London: The Institute of Economic Affairs.
White, L. H. (1989). Competition and currency. New York and London: New York University Press.
White, L. H. (1999). The Theory of Monetary Institutions. Chapter 9. Oxford: Basil Blackwell.
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
About this article
Cite this article
Cachanosky, N., Salter, A.W. The super-alertness of central banks. Rev Austrian Econ 33, 187–200 (2020). https://doi.org/10.1007/s11138-019-00436-1
- Free banking
- Central banking
- Monetary equilibrium