Friday, April 9, 2010

Fallacies of Simple Conclusions – II

Continuing with the previous post on fallacies created by simple conclusions that get codified into '”law”, another one of these fallacies comes to mind almost immediately.

Fallacy 2) “The RBI knows best”: Why? Why does the RBI know best? There can be only two explanations for this “law”. The first is that the RBI has the best brains in the country working for it. Or the RBI knows more than the market and hence it’s decisions are based on better information.

As far as the RBI having the best brains in the country is concerned, I would guess that the private sector has people who are as good, if not better than those in the RBI. Today’s private sector is not the one that existed a couple of decades ago. It has the ability to attract and retain qualified & knowledgeable individuals who have the ability to hold their own as far as economic policy making is concerned. So any assertion that puts their ability in doubt is suspect at best, and criminal at worst.

The second possibility is that the RBI knows more. Once again, the question to be asked is, Why? Why does the RBI know more? Or rather, why isn’t the information available to the RBI also available to the market? What harm could it possibly do if the market was aware of everything that is going on with the economy? One possible harm would be that the market would then have the ability to question the RBI’s decisions and probably judge them to be wrong. Something that is prevalent in more developed markets where not only basic information, but minutes of all decision making committee discussions are made available to the public and the market.

This fallacy is especially harmful as it allows the RBI to exist as an autocratic institution in  a democracy. It allows it’s decisions to go unchallenged and absolves it of any accountability to the people, which should be the bedrock of all arrangements in any democratic form of government. Central Bank '”independence” cannot, and should not, be construed to mean that the Central Bank isn’t accountable for it’s actions. Yet, one disaster after another, the RBI gets away without explanation, because “the RBI knows best”.

I am not suggesting even for a moment that any individual knows better than the RBI. But the market certainly does. The RBI cannot claim monopoly of wisdom to the extent that it believes itself to be smarter than the collective wisdom of the markets.

There are corollaries to this “law” which are almost as prevalent, if not more. It will take at least a couple of days to enumerate and explain them, which I will try and do in coming days.

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