The World Is Far Too Creative and Dynamic for the Sclerotic Planning Theory That Is ‘NGDP Targeting’

In his speeches, George Gilder regularly makes a crucial point about creativity. The latter is, among other things, what economic planners can’t account for. There’s quite simply no telling what free, opposite thinking, intrepid minds will come up with. This truth is Gilder’s elegant way of revealing the folly of central planning. The latter might have a chance in a static country economy defined by a lack of change, but only then.

Thankfully the U.S. economy is not remotely static, nor are the growing parts of the global economy. Change is the constant, and the change is born of relentless creativity that no central planner could ever foresee. Central planners are constrained by the known, while entrepreneurs are obsessed with taking us to the unknown; as in what keeps them working tirelessly is the excitement about rushing an all-new future into the present.

This is something to keep in mind as “NGDP targeting” grows in popularity among economists who normally caucus with the free-market crowd. NGDP is a monetary policy target that purports to aid central banks in their efforts to manage national economic activity.

The very definition of NGDP should give readers pause. Economic activity can’t be managed simply because in a nominally free economy tomorrow, one year from now and ten years from now never look like today.

If readers doubt it, consider what the most prominent U.S. corporations were when the 21st century began: GE was the world’s most valuable company, Tyco was said to be the next GE, AOL and Yahoo were far and away the most prominent internet companies, and Enron was run by the best and smartest managers. Notable about the year 2000 is that Apple was stumbling out of near bankruptcy, Google was a largely unknown private company competing with countless others for relevance in search, Amazon was a books, CDs and DVDs punchline seemingly incapable of making a profit, Microsoft was prominent while at the same time facing many years of a flat stock price after being mugged by the Clinton DOJ, and Facebook didn’t exist – Mark Zuckerberg was in high school.

How things change. Which is the point.

Underlying NGDP targeting is the idea that the Federal Reserve should manage the supply of money with an eye on keeping the economy from growing too much or too little. Except that it couldn’t on its best day. That’s the case because money, and the money circulated by the productive is as natural a market phenomenon as the goods, services, and corporations that are everywhere (and ever changing) in a market economy. Money’s supply or even the currency supplied cannot be planned. It can’t because even on their best day, central bankers have no clue about what’s ahead. If they did they wouldn’t be central bankers.

Money in circulation is production determined, yet production is an ever-moving target thanks to the endless surprise that springs from creativity. Thought of another way, no one, least of all central bankers, was demanding or foresaw the economy-transforming rise of companies like Amazon, Uber, and TikTok.

Furthermore, the notion of NGDP targeting presumes that money is the instigator of economic growth, when in reality it’s the certain consequence. Think what venture capitalists, private equity investors, and investment bankers do. All three professions work incredibly long hours in search of worthy ideas and businesses to finance, after which they compete with countless others in the hope of being chosen to finance the business they’re in hot pursuit of.

NGDP targeting imagines the central bank as not just the pipeline through which money flows, but also the entity permitting or not permitting economic growth. That’s not how investing works, nor does it describe how economies work. China is instructive in this regard. Particularly its technology sector.

Getting into specifics, American investors are not allowed to own Chinese internet companies. This would signal a huge problem for Chinese advance in the sector given the country’s still-primitive equity exchanges, but also the state’s substantive role in directing investment funds to future-shaping ideas. Talk about “tight money”! Yet it’s of no consequence. Try as China’s political class might to control investment from the proverbial Commanding Heights, American investment has been the catalyst for China’s booming technology sector. How? The answers are too many to count, but the main thing is that capital flows are faster than politicians and central bankers. Through offshore financings copious amounts of dollars have reached Chinese technology giants including Alibaba, Ant, Tencent, TikTok, and many, many others.

Please think about China’s porous borders to foreign capital with NGDP targeting stateside top of mind. Assuming a stingy or “easy” Fed, neither would be of any consequence. Credit is produced globally, and it flows to its highest use regardless of the modeling of central planners and central bankers. That the Fed projects its well overstated influence through banks that have near zero impact on the U.S. technology sector as is similarly reveals the folly of the Fed as planner, but that’s another opinion piece.

Beyond the happy truth of how rapidly capital moves without regard to central banks, we can’t escape the other basic reality that even if central banks could plan so-called “money supply” and other monetary aggregates, the ability to do so would only work if the U.S. economy were static, and wholly bereft of entrepreneurial creativity. If so, central planning would have a fighting chance at overseeing decline.

Alas, what NGDP targeting theorists imagine thankfully doesn’t at all describe the world we live in. Money is yet again as natural a phenomenon as production is, and well paid financiers are well paid precisely because they always get money to where it’s needed. The Fed doesn’t factor, and this truth will become more apparent in time, not less.