Births on February 6

Allan H. Meltzer, American economist and academic (d. 2017)

Allan H. Meltzer, an eminent American economist whose lifespan spanned from February 6, 1928, to May 8, 2017, held the distinguished title of Allan H. Meltzer Professor of Political Economy at Carnegie Mellon University. This prestigious role was based within both the Tepper School of Business and the Institute for Politics and Strategy, located in Pittsburgh, Pennsylvania, marking him as a cornerstone of economic thought at the institution. His tenure at Carnegie Mellon cemented his legacy as a leading authority in his field.

Meltzer's Expertise in Monetary Policy and the US Federal Reserve System

Professor Meltzer dedicated his extensive career to the intricate study of monetary policy and the operational dynamics of the US Federal Reserve System. Monetary policy, which refers to the actions undertaken by a central bank to influence the availability and cost of money and credit to help promote national economic goals, was a central pillar of his research. He authored numerous seminal academic papers and influential books that delved into the historical development, practical applications, and theoretical underpinnings of monetary policy. His scholarly contributions also significantly enriched the understanding of the history of central banking in the United States, providing critical insights into how institutions like the Federal Reserve evolved and impacted the nation's economic trajectory.

His work frequently explored the critical debates surrounding central bank independence, the role of money supply in economic stability, and the causes and cures of inflation. Meltzer was widely recognized as a proponent of monetarism, an economic school of thought emphasizing the importance of controlling the money supply as the primary means of influencing economic activity and managing inflation. His meticulous historical analyses, particularly of events like the Great Depression, offered fresh perspectives on the efficacy and consequences of various monetary interventions.

The Shadow Open Market Committee: A Critical Voice in Economic Policy

A pivotal contribution to economic discourse was Allan Meltzer's co-founding of the Shadow Open Market Committee (SOMC) alongside fellow economist Karl Brunner. Established in 1973, the SOMC functioned as a non-governmental, monetarist council created specifically to offer independent, critical assessments of the policies enacted by the official Federal Open Market Committee (FOMC). The FOMC, the monetary policy-making body of the Federal Reserve System, comprises the seven members of the Board of Governors and five of the twelve Federal Reserve Bank presidents. The "Shadow" committee aimed to provide an alternative perspective, often advocating for more predictable and rule-based monetary policies rather than discretionary interventions.

The SOMC's primary objective was to scrutinize and critique the Federal Reserve's monetary decisions, particularly its perceived failures in controlling inflation and promoting stable economic growth. Their monetarist viewpoint led them to argue that the Fed often focused too much on interest rates and not enough on the growth of the money supply, which they believed was the true driver of inflation and economic instability. This council served as an influential platform for monetarist thought, challenging the conventional wisdom and encouraging greater transparency and accountability from the central bank.

Meltzer's Enduring Aphorism on Capitalism and Failure

Allan H. Meltzer is widely credited with originating a profound aphorism that encapsulates a fundamental principle of market economics: "Capitalism without failure is like religion without sin. It doesn't work." This powerful statement underscores his conviction that the capacity for businesses to fail is not merely an unfortunate byproduct of a free market system, but an essential, integral component of its proper functioning and long-term health. The essence of this principle lies in the concept of market discipline.

As Meltzer elaborated, guarding companies from the natural consequences of their mistakes – that is, preventing their failure – effectively "removes the dynamic process that makes stockholders responsible for losses and disciplines managers who make mistakes." This absence of accountability can lead to several negative outcomes, including moral hazard, where companies or individuals take on excessive risks knowing they will be bailed out, and the misallocation of resources, as inefficient or poorly managed firms are artificially sustained. Meltzer's aphorism advocates for a system where success is rewarded and failure, when it occurs, serves as a crucial mechanism for learning, adaptation, and the efficient reallocation of capital within the economy, ultimately fostering innovation and sustainable growth.

Frequently Asked Questions about Allan H. Meltzer

What was Allan H. Meltzer's primary field of study?

Allan H. Meltzer primarily specialized in the study of monetary policy and the US Federal Reserve System, authoring extensive works on the development, application, and history of central banking.

What was the significance of the Shadow Open Market Committee?

The Shadow Open Market Committee (SOMC), co-founded by Meltzer, was a monetarist council that critically analyzed and challenged the monetary policy decisions of the official Federal Open Market Committee (FOMC), advocating for rule-based policies and greater accountability from the Federal Reserve.

What is the meaning behind Meltzer's quote on capitalism and failure?

Meltzer's aphorism, "Capitalism without failure is like religion without sin. It doesn't work," highlights his belief that market failure is essential for accountability and efficient resource allocation. Preventing companies from failing removes market discipline, making stockholders and managers less responsible for poor decisions, thereby undermining the dynamic nature and long-term health of capitalism.