I have not weighed in on the vigorous and welcome discussion on the dual mandate of the Reserve Bank to both target inflation and maintain maximum sustainable employment. This note is about why the new government gave so much priority to abolishing it.

One reason for not joining in is that I am unsympathetic to the underlying paradigm which says a central bank can (normally) determine the level of inflation in the medium run. I have set out my views elsewhere, but briefly the underlying model assumes a closed, single-product commodity economy with a high degree of flexibility, simple financial markets, population homogeneity and hardly any government.

Aside from its unrealism there is little empirical evidence. Technically I don’t think the demand  for money equation is sufficiently stable. Sure, sometimes monetary policy has contributed to price stability, but sometimes it has failed, but not because of the incompetence of central banks but because it was being asked to do more than it was capable of.

I see the prime role of a central bank is to maintain order in money markets. Fortunately, under normal prudent financial supervision, a bank does not have to take a lot of actions to pursue this objective in normal times; in abnormal times (such as during the GFC) its role is crucial.

Setting the base interest rate in the economy is a part of that maintaining of order. So is price stability. Setting the interest rate with price stability in mind is a practical proposition in paradigms different from today’s favourite. In practice I have not particularly disagreed with the Reserve Bank settings – timing aside. I see much of its ‘failure’ as result of the paradigm failure because it is being applied in circumstances in which it does not practically apply.

For me the dual mandate with its inclusion of sustainable employment is to remind the Reserve Bank that while its primary purpose is to maintain in order in monetary markets that purpose is subordinate to the wider aim of the pursuit of the wellbeing of the population – employment is an integral part of that wellbeing.

So, I am relaxed about the dual mandate although I would not have framed the legislation in quite the way it has been. I do worry about the way it appears to give the Reserve Bank multiple targets with limited policy instruments (practically one); this infringes of the Tinbergen rule of (at least) one instrument per objective.

So, I can live with the current legislation or that with the dual mandate of the previous government, providing monetary policy is managed with commonsense. Moreover I can understand why others, more committed to the current paradigm and more involved with its setting  feel more passionate than I do. But that does not explain the speed with which the current Parliament reversed Labour’s amendment. (Do I mean Parliament or the Government?) Has it not better things to do? Especially as it seems it is almost universally agreed that the change will make no current difference.

I want to suggest that one reason for the repeal – perhaps the main reason for the hasty repeal – was that it was intended to be an ideological marker of the strengthening of neoliberalism in the government.

I am not arguing that all those who support ending the dual mandate are neoliberals. Many are strongly neo-Keynesian in their thinking. (To me a major distinction between neo-Keynesians and traditional Keynesian are the former’s faith in a stable demand for money equation.) The point here is the haste suggests an ideological rather than pragmatical explanation.

One of the core principles of neoliberalism is price stability – the stability of the value of money. Most economists see such stability as immensely helpful for a well-functioning market. Neoliberals see it as more fundamental than that. On the other hand, ‘full employment’ is not among their objectives.

I’ve only sketched their argument out here. I hope it sufficient to alert that the repeal was a signal – ‘we neoliberals are back in force; we have the ear of the government.’ How much force they will have in the coalition government is yet to be seen. But pragmatists need to think about the implications of the signal.