Rules Rather Than Discretion

The Compromisers' idea was that the quantity of money could be varied to "lean against the wind," increasing more rapidly when unemployment was high, and more slowly when it was low, thus (so to say) smoothing out the economic fluctuations. This would require the monetary authorities to exercise discretion, judging from month to month whether the conditions are right for an expansion of the money supply. The Monetarist position, by contrast, held that the monetary authority should not attempt this sort of judgment but should be governed by "rules rather than discretion."

In the chapter on Government and Efficiency, I defined a "liberal" position as one that holds that the government might or might not intervene in the market, and that this should be judged on a case by case basis. I defined the "conservative" view as the view that government action ought to be guided by an inflexible rule, with a strong presumption against government intervention. This general idea -- that the government ought to be guided by rules, rather than discretion -- is an idea that grew up in discussions of macroeconomic, not microeconomic policy. It is a generalization of the monetarist prescription for control of the monetary system.

It seems fair to describe the Monetarist school as conservative, in the American sense of the word, by which a "conservative" is one who favors a limited government and would limit the government specifically to the enforcement of law, contracts, and property rights and national defense (or as nearly so as possible). Certainly Friedman -- among many other things an eloquent political philosopher -- espoused that view, and many other Monetarists followed him in this. Monetarism is the origin of the conservative view as I have defined it.

For, indeed, this kind of conservatism is new, distinct, and has much broader implications than those for monetary policy or even economic policy. The broader principle might go something like this: If government cannot be trusted to be benevolent, then it certainly should be limited. But if the government is benevolent -- if it "feels the pain" of the citizens and takes action to reduce the pain -- then the citizens will come to expect this support, and will act in ways that frustrate the government's benevolent intentions. Thus, any sort of government policy based on discretion, rather than rules, will be ineffective. If the government is to bring about good results, it must act as if it were not benevolent, and instead act according to rules that ignore the "pain" the citizens feel.

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