Learning Loops and Flawed Assumptions
Congress formed the Federal Reserve System roughly 110 years ago. Over that period of time The Fed has undergone numerous changes in policy and operation, yet popular assumptions about The Fed have lagged behind those changes. Since Fed watchers and commentators place a high level of importance on the actions of the Fed, shouldn’t we take the time to question many of our assumptions about The Fed?
For example: Does The Fed really create” money?”
A Pattern of Flawed Assumptions
History has had long periods in which people lived happily with assumptions about their world that later proved flawed or in error.
For a long time, our ancestors lived on a planet that resided at the center of the universe. Claudius Ptolemy (2nd-century astronomer) even built an elaborate model that fairly accurately depicted the motion of the planets and the sun around the Earth. Even after Copernicus pointed out the flaws in that model, it took over 100 years to accept that truth.
People accepted Issac Newton’s theories of gravity as gospel for, again, over 100 years. Albert Einstein eventually pointed out that the instantaneous speed of the gravitational force at the core of Newton’s theories violated the universal speed limit of light—as theorized by Einstein himself. From that premise, he developed his general theory of relativity and the effect of curved space.
The belief in socialism provides the crowning example of the longevity of flawed thinking in economics. Those who continue to advocate for socialism argue, “Socialism would work if it were just done right.” They ignore the empirical evidence that socialism has not worked and the theoretical proof that it cannot work. (I will address the problems with socialism in some detail in future posts.)
The organizational theorist, Chris Argyris, coined the terms “single-loop” and “double-loop” learning. Single-loop learners take action based on a given assumption. If they get the results they want, they take it as confirmation of the validity of their assumption. (Students of deductive logic know that a valid conclusion does not prove the validity of the starting premise.) If the actor gets an unacceptable result, he assumes the flaw occurred in his execution; he does not question the starting assumption.
Argyris pointed out the need for double-loop learning, i.e., testing the validity of beginning assumptions. When an actor does not get his desired result, he needs to reexamine his starting assumptions.
One might argue that Copernicus, Einstein, and many others like them engaged in double-loop learning. They made breakthroughs because they reexamined their original assumptions.
I have begun this series about questioning assumptions about The Federal Reserve System with some general comments about double-loop learning and questioning assumptions because this Journal has the fundamental purpose of questioning assumptions. Much of what many assume about Free Markets has little or no basis in fact or logic, yet we continue to hear people base their comments on flawed assumptions.
At this time of high inflation and “bank crises”, I have decided to focus on assumptions about The Fed.
Next in Series: First Loop