Robust Political Economy: An Institutional Alternative Against Monetary Disequilibrium and Market Discoordination

Abstract

The scope of this essay seeks to understand how we can achieve a more stable and dynamically self-correcting monetary arrangement which will minimize the likelihood of having severe monetary disruptions on the economic system. We wish to find systems that minimize systemic macroeconomic disequilibrium, which arises whenever money severely distorts the structure of relative prices, creating market discoordination and hampering economic exchanges. Monetary equilibrium theory provides the propitious theoretical tool allowing us to comprehend how monetary disequilibrium may arise within the economic system. It also serves as a benchmark to which we can compare different monetary institutions; this enables us to determine which system might perform closer to our monetary equilibrium benchmark. Under this framework, we analyze two monetary arrangements: central banking and free-banking. Through a process of institutional comparison, we can establish which one can minimize overall market discoordination and therefore will do the least harm to the epistemic role of prices and other market signals in communicating the embedded information present in them. Finally using the framework of Robust Political Economy, we reevaluate the main assumptions which sustain the case for a centralized monetary institution on being capable of reaching the monetary equilibrium benchmark. We specifically reevaluate the assumptions concerning political pressure, self-interest, aligned incentives and the degree of decisionmakers’ omniscience present in central banking and free-banking. By relaxing these assumptions, we analyze how different monetary arrangements would be considered robust or fragile in achieving and maintaining monetary equilibrium.