In Capitalism and Freedom, Milton Friedman wrote that "Any system that gives so much power and so much discretion to a few men that mistakes -- whether excusable or not -- can have such far reaching effects is a bad system." He was, of course, talking about the Federal Reserve System in the US, and in particular the policy errors that produced the Great Depression of the 1930s. Friedman then developments his argument for rules rather than discretion in macroeconomic policy.
But despite the intellectual victory of Friedman -- starting with his 1968 AEA Presidental Address on The Role of Monetary Policy -- I would argue that this mainly led only to a change in rhetoric surrounding public policy. The institutions and the choices made inside those institutions reflected that power and discretion remained vested in the hands of few decision makers such that their errors -- whether excusable or not -- continued to have such far reaching effects. In other words, the problem is with the system.
Drawing on Adam Smith, I have been stressing since the financial crisis began the juggling trick that governments -- ancient as well as modern -- engage in as they attempt to hide the consequences of their mistakes in policy choices. See here for example.
If even master jugglers fail sometimes, and their failure is catastrophic for the entire system, perhaps we shouldn't allow them to persist in their juggling tricks.
In my latest 'The Economic Way of Thinking' column for FEE, I use the example of the juggling trick to explore the difference between "good economics" and "bad economics". This, of course, fits with my simple perspective on economics and public policy which is:
BAD IDEAS ==>BAD POLICIES ===> BAD OUTCOMES
We have to address dire economic conditions by identifying the culprit in bad policy choices, and then we need to expose the bad ideas that gave rise to those policy choices. Of course, we then must also discover incentive compatible policies that will fix the problem, and incentive compatible strategies for implementing the fixing solution.
Ultimately, we have to remember that instituitonal problems require institutional solutions.
And, a good start would be to STOP THE JUGGLING TRICKS.