The Central Issue in Macroeconomic Theory Is the Extent to which the Economy May Be Regarded as a Self-Regulating System

The central issue in macroeconomic theory is the extent to which the economy, or at least its market sectors, may properly be regarded as a self-regulating system. While the general belief in the superiority of self-regulating, polycentric, market-based economic systems had undoubtedly been intensified since the collapse of the former Soviet Communist system, now two decades ago, in the field of money and banking authoritative economists still adopt a radically different stance, and go on developing proposals for what are essentially new variants of central planning in monetary matters. 

While it is today seldom contested that we can rely on self-regulating, decentralized, market-based systems as far as the production and allocation of commodities in general — such as automobiles, computers etc. — is concerned, in the field of money and banking the monocentric presupposition still almost universally prevails: in order to function properly the monetary and banking system has to be constantly monitored by a central agency, viz. by the central bank. A number of economists have nevertheless recognized the inconsistency implicit in this special treatment of the monetary and banking sectors as contrasted with economic issues in general, and have developed models of decentralized monetary and banking systems which are supposed to function as polycentric, self-regulating orders. While the general direction of this branch of research can be welcomed with some enthusiasm, the ways in which the “details” of some of the better known proposals for “free banking” have been elaborated until present, remain subject to a certain amount of well-founded criticism. The recent republication by the Ludwig von Mises Institute of Larry Sechrest’s Free Banking offers an opportunity to draw special attention to two particular claims revealed by the argumentation off the free bankers which struck this author as rather questionable. 

—Ludwig van den Hauwe, “Free Banking, the Real-Balance Effect, and Walras’ Law,” Procesos de Mercado: Revista Europea de Economía Política 7, no. 1 (Spring 2010): 242-243.