How to Do Things with Interest Rates

Economics

What happens when economists finally admit the rhetoric of economics.

Alexander Stagnell 7 min read

In yesterday’s announcement of the 2026 laureates of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, Michael Woodford and Robert E. Hall, the Royal Swedish Academy of Sciences noted that the laureates “have helped us smooth out economy’s peaks and troughs”. As the Academy goes on to explain, “[a] central component” of their contribution is what is today known as forward guidance, because “[w]hen governments and central banks communicate their plans for economic policy, they can influence this view of the future and move the economy in the right direction.” In a paper from 2005 on central bank communication and policy effectiveness, Woodford himself offered an illuminating analogy to explain why communication matters to central banks:

Central banking is not like steering an oil tanker, or even guiding a spacecraft, which follows a trajectory that depends on constantly changing factors, but that does not depend on the vehicle’s own expectation about where it is heading. Because the key decisionmakers in an economy are forward-looking, central banks affect the economy as much through their influence on expectations as through any direct, mechanical effects of central bank trading in the market for overnight cash. As a consequence there is good reason for a central bank to commit itself to a systematic approach to policy, that not only provides an explicit framework for decisionmaking within the bank, but that is also used to explain the bank’s decisions to the public.

Michael Woodford, Central Bank Communication and Policy Effectiveness, p.2.

Behind the concept of forward guidance lies an idea of the performativity of language. As J. L. Austin famously argued in the lectures published as How to Do Things with Words, language is not only used to make statements about the world that are either true or false. It also has a performative dimension, illustrated by the many situations in which we try to achieve things and change the world through the use of words. The idea was, however, by no means new. In his famous Encomium of Helen, the sophist Gorgias had already pointed out that logos is a mighty lord, which with the smallest and most invisible body accomplishes the most divine deeds: it can stop fear, remove grief, create joy and increase pity. (§8) By acknowledging the performative aspect of language, central bankers and economists could be seen as also admitting that language cannot be reduced to the truth value of sentences, and that speaking is always also a politico-ethical act, even in something as small as declaring a meeting open, to use Austin’s famous example.

For a rhetorician, forward guidance could be read as a great victory for our discipline. Against McCloskey’s claim in The Rhetoric of Economics (first published in 1985) that economists saw their own field as “free of rhetoric” (p. xx), contemporary economic theory has been forced to admit, not least in the wake of the 2008 financial crisis, that it too deals in rhetorical rather than absolute truths. And even though one might ask whether such a simple realisation is worthy of a prize associated with the name of Alfred Nobel, it does appear as if the rhetorical perspective has won the day. But it may be a victory of the kind Pyrrhus won: one that costs the victor what it was fought for.

For I wonder whether the notion of forward guidance does not commit the same sin that Aristotle identified at the opening of the lectures known as Peri rhētorikēs, or On Rhetoric. There, Aristotle criticises the handbooks of his day for giving “most of their attention to matters external to the subject; for verbal attack and pity and anger and such emotions of the mind do not relate to fact but are appeals to the juryman” (1354a, trans. Kennedy). Woodford, who of the two laureates has written most on forward guidance and central bank communication, cannot be accused of simply focusing on the arousal of emotions. Yet Aristotle’s larger point remains relevant: language cannot be treated simply as a matter of causes and effects. For him, the interesting question was how speakers attempt to persuade audiences in different situations, not the impossible task of prescribing effective ways of influencing others. This is what he meant when he defined rhetoric as “an ability, in each particular case, to see the available means of persuasion” (1355b, trans. Kennedy). To see, here, is the Greek theōrein: to behold and to contemplate mentally, that is, to perceive and evaluate the available means of persuasion theoretically, not to build a persuasion machine, to borrow Roland Barthes’s phrase (1970, p.197).

Yet a persuasion machine seems to be the ultimate dream of forward guidance. Woodford’s own analogy already points in that direction: the central bank should commit to “a systematic approach”, one that governs not only its decisions but also the way they are explained to the public. Communication, in other words, is to become as systematic as policy itself. And the task he sets central banks at the end of the same paper is “the challenge of efficient communication with the markets” (p. 57), where efficiency is measured, as in any machine, by the reliability of the output.

What Woodford and his fellow economists in central bank communication research are looking for is a rulebook for effective communication: how central banks should formulate themselves to achieve the intended effects in their audience, the markets. Such a rulebook requires effects that can be measured, and this is where the field’s second fundamental attachment comes in: its attachment to quantitative data. As scholars in the field admit, there is a strong “mistrust” of qualitative approaches to communication. (Moessner et al., 2017) But when language is stripped of its context to allow for quantification, the particular meanings of specific linguistic choices are lost in generalisation. In seeking to reduce uncertainty, central bank communication research thus also erases the ambiguities and situational specificities of language: the multiple and sometimes contradictory functions that an utterance can serve in its particular situation. It therefore not only fails in its stated goal of universally effective communication, but undermines even the basic task of understanding what is said.

Austin distinguished between two ways in which saying is doing. An illocutionary act achieves its effect in being said, by convention, as when a chair declares a meeting open. A perlocutionary act produces its effect by being said, in the minds and actions of the hearers, and that effect is never guaranteed. The dream of central bank communication research is a world in which every statement works like the first kind, even though what central banks actually seek, from markets, households and firms, is always the second. What remains unsaid is that such a world can only work if a rule-bound performativity is enforced: if the audience is trained to respond as convention dictates. Gone, then, are the values of transparency and democratic legitimacy that the new communicative central banks so often proclaim. Communication designed to produce pre-set effects in markets is a form of steering, not a form of accountability to a public, which would have to be free to respond otherwise. This also shows why economics’ acknowledgement of communication and rhetoric is a Pyrrhic victory for rhetoric itself: rhetoric is acknowledged only as a tool, not as a form of knowing.

And in the ultimate irony of the contemporary dissemination of the notion of performativity, in which Austin’s careful attention to the conditions under which words fail has been reduced to the slogan that words do things, the Riksbank, by funding a prize now awarded to a theorist of central bank communication, consecrates its own illusions about effective communication.

Literature

1. Aristotle. 1991. On Rhetoric: A Theory of Civic Discourse. Translated by George A. Kennedy. New York: Oxford University Press.
2. Austin, J. L. 1962. How to Do Things with Words. Edited by J. O. Urmson. Oxford: Clarendon Press.
3. Barthes, Roland. 1970. “L’ancienne rhétorique: aide-mémoire.” Communications 16: 172–223.
4. Gorgias. 1982. Encomium of Helen. Edited and translated by D. M. MacDowell. Bristol: Bristol Classical Press.
5. McCloskey, Deirdre N. 1998. The Rhetoric of Economics. 2nd ed. Madison: University of Wisconsin Press. First published 1985.
6. Moessner, Richhild, David-Jan Jansen, and Jakob de Haan. 2017. “Communication about Future Policy Rates in Theory and Practice: A Survey.” Journal of Economic Surveys 31 (3): 678–711.
7. Royal Swedish Academy of Sciences. 2026. “The Prize in Economic Sciences 2026.” Press release, 12 October 2026. https://www.nobelprize.org/prizes/economic-sciences/2026/press-release/
8. Woodford, Michael. 2005. “Central Bank Communication and Policy Effectiveness.” NBER Working Paper 11898. Cambridge, MA: National Bureau of Economic Research. Also published in The Greenspan Era: Lessons for the Future, 399–474. Kansas City: Federal Reserve Bank of Kansas City.]

Cite this essay: Stagnell, A. (2026). How to Do Things with Interest Rates. stagnell.com. https://stagnell.com/how-to-do-things-with-interest-rates/