Skip to main content

Polycentric banking and macroeconomic stability


We contribute to the post-crisis literature on macroeconomic stability by arguing that polycentric banking systems can better achieve stability than monocentric systems. Building on the theories of E. Ostrom, we engage the literature on free banking systems to show that these systems met the requirements of polycentric governance systems, and that the unintentional result of the underlying governance institutions was macroeconomic stability. In contrast, modern central banking, because it is monocentric, lacks important features regarding knowledge aggregation and incentive compatibility conducive to generating macroeconomic stability. We conclude by discussing various legal barriers that stand in the way of a transition from monetary monocentrism to monetary polycentrism.

Corresponding author
* Corresponding author, Alexander William Salter, Texas Tech Unitersity, Rawls College of Business, Lubbock, TX, e-mail:
Vlad Tarko, Dickinson College, Economics Department, Carlisle, PA, e-mail:
Hide All
Aguiar-Hicks Robin., Hogan Thomas L., and Smith Daniel J.. 2015. “Stability and the gold standard.” Working paper. Available online at:
Aligica Paul Dragos and Boettke Peter J.. 2009. Challenging Institutional Analysis and Development. New York: Routledge.
Aligica Paul Dragos and Tarko Vlad. 2012. “Polycentricity: From Polanyi to Ostrom, and Beyond.” Governance 25 (2): 237262.
Aligica Paul Dragos and Tarko Vlad. 2013. “Co-Production, Polycentricity and Value Heterogeneity: The Ostroms’ Public Choice Institutionalism Revisited.” American Political Science Review 107 (4): 726741.
Aligica Paul Dragos and Tarko Vlad. 2014. “Institutional Resilience and Economic Systems: Lessons from Elinor Ostrom's work.” Comparative Economic Studies 56: 5276.
Bagehot Walter. 1873. Lombard Street: a description of the money market. London: Henry S. King and Co.
Barro Robert J. and Gordon David B.. 1983. “A positive theory of monetary policy in a natural rate model.” Journal of Political Economy 91 (4): 589610.
Boettke Peter J. and Aligica Paul D.. 2009. Challenging institutional analysis and development: The Bloomington school. New York: Routledge.
Boettke Peter J. and Leeson Peter T.. 2004. “Liberalism, socialism, and robust political economy.” Journal of Markets and Morality 7 (1): 99111.
Boettke Peter J. and Smith Daniel J.. 2013. “Federal Reserve independence: a centennial review.” Journal of Prices and Markets 1 (1): 3148.
Boettke Peter J. and Smith Daniel J.. 2015a. “An episodic history of modern Federal Reserve independence.” Independent Review 20 (1).
Boettke Peter J. and Smith Daniel J.. 2015b. “Monetary policy and the quest for robust political economy.” GMU Working Paper in Economics No. 11-08. Available online at:
Boettke Peter J., Lemke Jayme, and Palagashvili Liya. 2015. “Polycentricity, self-governance, and the art and science of association.” Review of Austrian Economics 28 (3): 311335.
Boettke Peter J., Lemke Jayme, and Palagashvili Liya. 2016. “Re-evaluating community policing in a polycentric system.” Journal of Institutional Economics 12 (2): 305325.
Borio Claudio E. V. and Disyatat Piti. 2011. “Global imbalances and the financial crisis: link or no link?” BIS Working Paper 346. Available online at:
Buchanan James and Tullock Gordon. 1962. The calculus of consent: logical foundations of constitutional democracy. Ann Arbor: University of Michigan Press.
Cachanosky Nicolas. and Salter Alexander W.. 2016. “The view from Vienna: an analysis of the renewed interest in the Mises-Hayek theory of the business cycle.” Review of Austrian Economics, forthcoming. Available online at:
Calomiris Charles W. and Haber Stephen H.. 2014. Fragile by design: the political origins of banking crises and scarce credit. Princeton, NJ: Princeton University Press.
Calvo Guillermo. 2013. “Puzzling over the anatomy of crises: liquidity and the veil of finance.” Mayekawa Lecture, Institute for Monetary and Economic Studies Conference, Bank of Japan.
Caplan Bryan. 2000. “Rational irrationality: a framework for the neoclassical-behavioral debate.” Eastern Economic Journal 26 (2): 191211.
Caplan Bryan. 2001. “Rational ignorance versus rational irrationality.” Kyklos 54 (1): 326.
Carlson J. M., and Doyle John. 2000. “Highly Optimized Tolerance: Robustness and Design in Complex Systems.” Physical Review Letters 84 (11): 2529–32.
Carlson J. M., and Doyle John. 2002. “Complexity and Robustness.Proceedings of the National Academy of Sciences 99 (suppl 1): 2538–45.
Cosmides Leda, and Tooby John. 1994. Better than rational: Evolutionary psychology and the invisible hand. American Economic Review 84 (2): 327332.
Dixit Avinash. 1991. “Irreversible investment with price ceilings.” Journal of Political Economy 99 (3): 541557.
Dixit Avinash. 1992. “Investment and hysteresis.” Journal of Economic Perspectives 6 (1): 107132.
Dixit Avinash. 1995. “Irreversible investment with uncertainty and scale economies.” Journal of Economic Dynamics and Control 19 (1–2): 327350.
Dixit Avinash., and Pindyck Robert. 1994. Investment under uncertainty. Princeton, NJ: Princeton University Press.
Dowd Kevin., eds. 1992. The experience of free banking. New York: Routledge.
Dowd Kevin. 2015. “Free banking.” In The Oxford handbook of Austrian economics, edited by Boettke P. and Coyne C.. Oxford: Oxford University Press.
Fink Alexander. 2014. “Free banking as an evolving system: the case of Switzerland reconsidered.” Review of Austrian Economics 27 (1): 5769.
Friedman M. and Schwartz A.. 1963. A monetary history of the United States. Princeton, NJ: Princeton University Press.
Gigerenzer Gerd, ABC Research Group, and Todd. Peter M. 1999. Simple Heuristics That Make Us Smart. New York: Oxford University Press.
Gigerenzer Gerd, Hertwig Ralph, and Pachur Thorsten, eds. 2011. Heuristics: The Foundations of Adaptive Behavior. Oxford: Oxford University Press.
Gorton Gary, and Metrick Andrew. 2010. “Regulating the Shadow Banking System [with Comments and Discussion].” Brookings Papers on Economic Activity, 261312.
Gorton Gary. 2014. “The Development of Opacity in U.S. Banking.” Yale Journal on Regulation 31: 825–51.
Gorton Gary and Donald J. Mullineaux. 1987. “The joint production of confidence: endogenous regulation and nineteenth century commercial-bank clearinghouses.” Journal of Money, Credit, and Banking 19 (4): 457–68.
Hayek Friedrich A. 1948. Individualism and economic order. Chicago: University of Chicago Press.
Hayek Friedrich A. 1960. The constitution of liberty. Chicago: University of Chicago Press.
Hayek Friedrich A. 1976. Choice in currency: a way to stop inflation. London: Institute of Economic Affairs.
Hendrickson Joshua R. and Salter Alexander W.. 2016. “Money, liquidity, and the structure of production.” Journal of Economic Dynamics and Control 73: 314–28.
Hetzel Robert L. 2012. The Great Recession: market failure or policy failure? Cambridge: Cambridge University Press.
Hogan Thomas L. 2015. “Has the Fed Improved U.S. Economic Performance?Journal of Macroeconomics 43 (1): 257266.
Hogan Thomas L., Le Linh, and Salter Alexander W.. 2015. “Ben Bernanke and Bagehot's Rules.” Journal of Money, Credit and Banking 47 (2–3): 333348.
Koppl Roger. 2002. Big players and the economic theory of expectations. London: Routledge.
Koppl Roger. 2014. From crisis to confidence: macroeconomics after the crash. London: Institute of Economic Affairs.
Kydland Finn E. and Prescott Edward C.. 1977. “Rules rather than discretion: the inconsistency of optimal plans.” Journal of Political Economy 85 (3): 473492.
Leeson Peter T. and Subruk Robert J.. 2006. “Robust political economy.” Review of Austrian Economics 19 (2): 107111.
Leijonhufvud Axel. 2009. “Out of the corridor: Keynes and the crisis.” Cambridge Journal of Economics 33 (4): 741757.
Mankiw N. Gregory. 2006. “The macroeconomist as scientist and engineer.” Journal of Economic Perspectives 20 (4): 2946.
McGinnis Michael, ed. 1999. Polycentricity and Local Public Economies. Ann Arbor, MI: University of Michigan Press.
Miller John H. and Page Scott E.. 2007. Complex Adaptive Systems: An Introduction to Computational Models of Social Life. Princeton, NJ: Princeton University Press.
Niskanen William. Jr. [1971] 2007. Bureaucracy and representative government. Piscataway, NJ: AldineTransaction.
Ostrom Elinor, ed. 1976. The Delivery of Urban Services. Beverly Hills and London: Sage.
Ostrom Elinor. 1990. Governing the commons: the evolution of institutions for collective action. Cambridge: Cambridge University Press.
Ostrom Elinor. 1998. “A behavioral approach to the rational choice theory of collective action.” American Political Science Review 92 (1): 122.
Ostrom Elinor. 1999. “Polycentricity, Complexity, and the Commons.” The Good Society 9 (2): 3741.
Ostrom Elinor 2005. Understanding institutional diversity. Princeton, NJ: Princeton University Press.
Ostrom Elinor 2010. “Beyond markets and states: polycentric governance of complex economic systems.” American Economic Review 100 (3): 641672.
Ostrom Vincent 1997. The meaning of democracy and the vulnerability of democracies: a response to Tocqueville's challenge. Ann Arbor: University of Michigan Press.
Ostrom Vincent [1971] 2008a. The political theory of a compound republic: designing the American experiment. Plymouth, MD: Lexington Books.
Ostrom Vincent [1973] 2008b. The intellectual crisis in American public administration. Tuscaloosa, AL: University of Alabama Press.
Page Scott E. 2007. The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies. Princeton, NJ: Princeton University Press.
Pennington Mark 2011. Robust political economy: classical liberalism and the future of public policy. Northampton: Edward Elgar.
Romer Christina D. 1999. “Changes in business cycles: Evidence and explanations.” Journal of Economic Perspectives 13 (2): 2344.
Rothbard Murray. 1960. “The politics of political economists: comment.” Quarterly Journal of Economics 74 (4): 659665.
Taylor John B. 2007. “Housing and monetary policy.” National Bureau of Economic Research Working Paper No. 13682. Available online at:
Taylor John B. 2009. Getting off track: how government actions and intervention caused, prolonged, and worsened the financial crisis. Stanford, CA: Hoover Institution Press.
Salter Alexander W. 2013. “Not all NGDP is created equal: a critique of Market Monetarism.” Journal of Private Enterprise 29 (1): 4152.
Salter Alexander W. 2014. “Is there a self-enforcing monetary constitution?Constitutional Political Economy 25 (3): 280300.
Salter Alexander W. 2016. “Robust political economy and the lender of last resort.” Journal of Financial Services Research 50(1): 127.
Salter Alexander W. and Smith Daniel J.. 2016. “What you don't know can hurt you: knowledge problems in monetary policy.” Working paper. Available online at:
Schuler Kurt. 1992. “The world history of free banking.” In The experience of free banking, edited by Dowd K.. London: Routledge.
Sechrest Larry J. 2008. Free Banking: theory, history, and a laissez-faire model. Auburn, AL: Ludwig von Mises Institute.
Selgin George. 1988. The theory of free banking: money supply under competitive note issue. New York: Rowman & Littlefield.
Selgin George. 1994. “Free banking and economic control.” Economic Journal 104 (427): 14491459.
Selgin George. 2012. “L Street: Bagehotian prescriptions for a 21st century money market.” Cato Journal 32 (2): 303332.
Selgin George, Lastrapes William D., and White Lawrence H.. 2012. “Has the Fed been a failure?Journal of Macroeconomics 34 (3): 569596.
Selgin George, and White Lawrence H.. 1994. “How would the invisible hand handle money?Journal of Economic Literature 32 (4): 17181749.
Smith Vera C. [1936] 1990. The rationale of central banking and the free banking alternative. Indianapolis, IN: Liberty Fund.
Smith Vernon. 2008. Rationality in Economics: Constructivist and Ecological Forms. Cambridge: Cambridge University Press.
Stringham Edward 2015. Private governance: creating order in economic and social life. New York: Oxford University Press.
Sumner Scott. 2011. “Re-targeting the Fed.” National Affairs 9 (Fall).
Sumner Scott. 2012. “How nominal GDP targeting could have prevented the crash of 2008.” In Boom and bust banking: the causes and cures of the great recession, edited by Beckworth D., Oakland, CA: Independent Institute.
Sumner Scott. 2015. “Nominal GDP futures targeting.” Journal of Financial Stability 17: 6575.
Taylor John. 2012. “The dangers of an interventionist Fed.” Wall Street Journal, 29 March (Accessed 5 January 2017).
Tullock Gordon. 2005. Bureaucracy. Indianapolis, IN: Liberty Fund.
von Mises Ludwig. 1944. Bureaucracy. New Haven, CT: Yale University Press.
Wilson David Sloan, Ostrom Elinor, and Cox Michael E.. 2013. “Generalizing the core design principles for the efficacy of groups.” Journal of Economic Behavior & Organization 90 (Supplement): S21S32.
White Lawrence H. 1989. Competition and currency: essays on free banking and money. New York: New York University Press.
White Lawrence H. 1995. Free banking in Britain: theory, experience, and debate, 1800–1845. 2nd ed. London: Institute of Economic Affairs.
White Lawrence H. 1999. The theory of monetary institutions. Oxford: Blackwell.
White Lawrence H. 2008. “Is the gold standard still the gold standard among monetary systems?Cato Briefing Papers 100.
White Lawrence H. 2012. “Making the transition to a new gold standard.” Cato Journal 32 (2): 411422.
White Lawrence H. 2014. “The troubling case of suppression of competition from alternative monies: the case of the Liberty Dollar and e-Gold.” Cato Journal 34 (2): 281301.
White Lawrence H. 2015a. “Free banking in theory and history.” In Renewing the search for a monetary constitution, edited by White L., Vanberg V., and Köhler E.. Washington, DC: Cato Institute.
White Lawrence H. 2015b. “The merits and feasibility of returning to the gold standard.” Journal of Financial Stability 17 (2): 5964.
Yeager Leland B. 1997. The fluttering veil: essays on monetary disequilibrium. Indianapolis, IN: Liberty Fund.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Business and Politics
  • ISSN: -
  • EISSN: 1469-3569
  • URL: /core/journals/business-and-politics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Full text views

Total number of HTML views: 5
Total number of PDF views: 34 *
Loading metrics...

Abstract views

Total abstract views: 447 *
Loading metrics...

* Views captured on Cambridge Core between 3rd March 2017 - 13th December 2017. This data will be updated every 24 hours.