But let’s focus on the choice of a 2% target. After the high inflation of the late 1970s and early 1980s, when it reached over 20% in the UK, central banks were left scrambling to find some new theoretical model to deal with rising prices. The first central bank to propose an inflation target of 2% was in New Zealand. But where did they get it from? Apparently, from thin air.
Recently, I came across this one story that suggested the choice of 2% was the result of an off the cuff remark by then New Zealand finance minister, during a TV interview, who told reporters he would be happy with an inflation between 0% and 1%. This led the governor of the central bank at the time, Don Brash, to factor in an inflation bias of roughly 1% to arrive at the magical number of 2%. Michael Reddell, a colleague of Brash’s at the time at the Reserve Bank, admitted: “It wasn’t ruthlessly scientific.” Brash himself admitted as much: “It was almost a chance remark. The figure was plucked out of the air to influence the public’s expectations.”
“It wasn’t ruthlessly scientific.”
nothing about economics is scientific. economics is modern day astrology, it uses math but it all comes down to belief.
Economics filtered through politics and media can get silly but actual economists doing actual economics create rigorous models (like any science) and most don’t even necessarily make predictions about the future. A cross-discipline academic project on the effects of past coastal erosion might, for instance, have an ecologist, historian, and economist all write separate papers. That’s more common than pontificating on TV.
Econ is also prone to being misrepresented by politicians because there’s almost always trade-offs in the real world. Like imagine a proposed tax on gas/petrol to fund public transportation. An economist would just predict who will benefit or be harmed but you probably already know exactly what the different political parties and media outlets in your country will focus on.
economics can use the scientific method but is not nor will ever be a science.
That’s why we make a distinction between:
- formal sciences (math, logic, statistics, etc.)
- natural sciences (physics, chemistry, geology, etc.), and;
- social sciences (econ, anthropology, archaeology, etc.)
People in formal and social sciences don’t put “scientist” on their business card because the popular understanding of the term is a natural scientist in a lab coat doing controlled experiments. You don’t get a nice clean lab to do controlled experiments on societies, economies, or ancient ruins. When you study those things, your degree still usually says “Bachelor of Science” and not “Bachelor of Arts” because the terms “sciences” and “arts” are more expansive than the way we use them in every day conversation.
a social science uses the scientific method, but experiments can’t really be replicated because of the moral and ethical implications of experimenting and deriving conclusions when studying humans and their interactions.
economy is the most egregious because theories are applied in real societies with, sometimes, disastrous results. economists are taken way to seriously for their scientific output. psychology comes a close second because of exactly the same problem. not because those “scientists” come up with theories or hypotheses but because they apply, and test, faulty and incomplete conclusions to the real world.
ps: i didn’t know about the formal sciences definition, but they do make sense.
edit: just to add my biggest pet peeve with economics is that economists derive conclusions from incomplete data and different schools of economy use different metrics for the same concept. one case is that a few years ago uk changed how they measured gdp so that the numbers looked better and nobody called them out, and that happened because everybody has different metrics for assessing gdp. its all made up and the numbers don’t matter.
Every time I hear economist, I directly first think about Friedman and the whole thing goes to shit…
Yeah, I’m sorry but this is stupid. I think you’re on to something here in that technocracy has led to a situation where corporate stooges are put into positions of power as “experts” who just make policy that benefits capital. On the other hand economics is a legitimate science with rigorous case studies to back up at least some of its theories. The real problem is there are a lot of junk theories out there that have been implemented through the political weaponization of faux-expertise. Chicago Boys’ economics is a good example of the problem.
its not a science. that is my point. all that comes from economists must be taken with a massive grain of salt. even if it confirms my biases.
Stable currency should be the goal. Anything else is ultimately a kind of theft.
Agreed.
I read a quote some time ago that made a whole lot of sense to me …
If you want to change what Economics does, you have to change what economists are taught.
Theft from… creditors?
The creditors do fine, unless inflation outpaces interest. It mostly hurts those on fixed incomes (non-investors).
That’s an argument to peg social security to inflation, not to get rid of inflation.
Is there a good reason not to adopt both positions?
Yes, absolutely. The number of reasons why inflation is good for the general economy is… rather vast.
Only because our economic system is underpinned by consumption and “always more”. A more sustainable form of capitalism needs to be imagined, imo
It’s not just a question of growth. It’s also a question of wealth inequality and the accumulation of liquid capital, of the velocity of money, avoiding liquidity traps, etc etc etc etc.
It needs to be low, but positive and keept stable. If it’s to high it will be self sustaining and increasing, if it’s negative everything stalls. 2% seems to fit the bill.
There could be an argument that 4% would have been just as good, and had the rest of the world united on 4% it would*. However, it would not have changed anything in last year’s combat of inflation. The target would have been defended just as fiercely causing just as much collateral. Only the numbers would have been slightly different.
*Ignoring for a bit those countries that has had to fight to keep inflation up.
This is the best summary I could come up with:
After the high inflation of the late 1970s and early 1980s, when it reached over 20% in the UK, central banks were left scrambling to find some new theoretical model to deal with rising prices.
Recently, I came across this one story that suggested the choice of 2% was the result of an off the cuff remark by then New Zealand finance minister, during a TV interview, who told reporters he would be happy with an inflation between 0% and 1%.
This led the governor of the central bank at the time, Don Brash, to factor in an inflation bias of roughly 1% to arrive at the magical number of 2%.
A similar version of the events was proposed, in June 2023, by the Council on Foreign Relations, which concluded that “surprisingly [a 2% target] came not from any academic study”, and that it came about “somewhat accidentally”.
In 2018, Friedman wrote, in a book honouring Vítor Constâncio, the former vice-president of the European Central Bank: “There is the arbitrariness surrounding the current 2 percent target.
We give central banks too much power over our lives and livelihoods, when fiscal policy, which concerns government spending and taxes, is where the battle should be fought.
The original article contains 871 words, the summary contains 204 words. Saved 77%. I’m a bot and I’m open source!
