The year 2020 continues to take a toll on humanity with several people perishing both because of COVID-19 and other ways. Diego Maradona, the legendary football player who is often considered as Greatest Of All Time, joins the sad list as he bid adieu to mother earth and retires in his heavenly abode. As tributes flow, here is another one discussing the valuable lessons Maradona gave us in the world of central banking.
Maradona has scored several memorable goals, and in 1986 led his Argentina team to famous World Cup victory. However, there is one match in which his goals have been etched on memory like none other. The (in)famous match was in the 1986 World Cup quarterfinal against England. Maradona not just fashioned victory but also scored two goals: first, a not so memorable and the second memorable and voted as the goal of the century by FIFA.
In the first goal, Maradona used his hand, which was unspotted by the referee. Maradona famously called it as ‘a little with his head, and a little with the hand of God’ suggesting even God wished for an Argentina victory. Students of economics cannot help but relate hand of god to Adam Smith’s invisible hand! Though the difference between the two could not be starker.
On one hand (yes, pun intended), Smith’s invisible hand helps demand meet supply as if gods are enabling the transaction. On the other hand, Maradona’s ‘hand of God’ is seen as ungodly and an act of cheating. The several English supporters continue to not just rue the goal, but also believe that Maradona should have been shown a red card for the conduct and then there would perhaps be no Argentina win.
In the second goal, the situation was opposite, and it was as if God had chosen Maradona to score one of the most scintillating goals ever. Maradona took the ball a little before the half line on Argentina’s side and tore through the English side, dribbling past four players and then beating the goalkeeper Peter Shilton. The sheer pace and skill with which the left-footed Maradona scored the goal left everyone stunned in the stadium & TV screens and continues to do so even today.
Interestingly, both the goals have lessons for central banks and monetary policy.
In a stimulating lecture in 2005, former Bank of England Governor (who else!) Mervyn King referred to the two goals for explaining the changes in monetary policy. The period of 1970s and 1980s were characterised with high inflation across most countries. The policymakers promised to lower inflation but were unable to do so. The policymaking was also opaque and markets expected central banks/policymakers to do the opposite of what they intended. In economists’ jargon such policies are termed as time inconsistent. However, after the advent of inflation targeting in 1989 central banks learnt the art of not just managing inflation but also be consistent in their saying and doing.
King termed Maradona’s first goal as akin to monetary policy of the earlier era where there was “mystery and mystique” associated with central banking. Maradona’s “action was unexpected, time-inconsistent and against the rules” and “he was lucky to get away with it”.
The second goal, on the other hand, belonged to the modern central banking era. The modern central banks keep the inflation expectations anchored to the inflation target. The households consider any change in inflation as a random one-time event and expect inflation to revert back to the target. This implies central banks do not need to change the interest rates frequently. This is what the Bank of England also did as explained by King in the lecture.
How does one connect this esoteric monetary theory to the second goal? Maradona did what modern central banks are expected to do whereas English players seemed to think he will behave like the traditional older central bank. Maradona ran straight for the goal/target, whereas English players expected him to move to the left or right. This way he could hoodwink the English players, and score a celebrated goal.
This is one of the most interesting ways to explain role of expectations and central banking. Paying a tribute 15 years earlier, King termed the second goal as the ‘Maradona theory of interest rates’.
In many ways, there was an unintended irony in King’s speech. Argentina’s central bank and government have rarely been able to get the inflation management or monetary policy right. They have also failed to win the Football World Cup since 1986 despite having talented players. The Argentines should have learnt a few lessons from their most charismatic personality, both on the field and on central banking as explained by Mervyn King.
Amol Agrawal is faculty at Ahmedabad University. Views care personal.
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