The Federal Reserve System: A Case Study

1 INTRODUCTION

The notion that control over policymaking should be entrusted primarily with bureaucrats have indeed become a shibboleth of contemporary public policy. However, this position requires a closer examination and needs to be properly scrutinized under time-tested political and economic principles. In this context, I will attempt to demonstrate the inherent difficulty that characterizes the main problems facing bureaucrats in the area of bureaucratic management. First, I will explain the chief distinction between the methods of bureaucracy and private enterprise. Second, I will consider the case of the Federal Reserve System to demonstrate the dangers associated with granting bureaucrats greater independence from political oversight.

In other words, market prices allow cost-benefit analysis to be objectively carried out, what Mises termed as economic calculation. Neither the shareholder nor the hired manager can appeal against the verdict of the income statement. This renders profit as the most objective and efficient guide for decision-making under the private enterprise system. But none of this can be applied to the bureaucrat in government. Mises (1944) argued that:

“A bureaucrat differs from a non-bureaucrat precisely because he is working in a field in which it is impossible to appraise the result of a man’s effort in terms of money. The nation spends money for the upkeep of the bureaus, for the payment of salaries and wages, and for the purchase of all the equipment and materials needed. But what it gets for the expenditure, the service rendered, cannot be appraised in terms of money, however important and valuable this ‘output’ may be” (p.

Princeton economist Lawrence Ball conducted an interesting study in 2012 where he traced the evolution of (then) Chairman Bernanke’s psychology between 2008 and 2012. Ball noted that since 2008, the Bernanke Fed has eschewed the policies that Bernanke once supported, attributing the shift in Bernanke’s thinking to groupthink and the chairman’s own personality, which he described as shy, withdrawn and unassertive (as cited in Klein, 2010). That the personality of a group of powerful and unelected technocrats can have such a considerable impact on the direction of policy illustrates the danger of despotic arbitrariness under the bureaucratic management, and presents a powerful argument against granting greater discretion to bureaucrats over policies that affect the multitude of people in