The Manichaean character of economics. Charles Kindleberger. Abstract: Economics
is said to have adopted a certain degree of dualism. None of its tenets have
been absolute in terms of social effectiveness. To survive in an economic
system, rules must be enforced to ensure the peace. There are times when
pluralism is good for a society as a way recognizing social differences.
However, there are times, such as war, when the rule of a central authority is
preferred. Laws in economics are hardly permanent since such regulations are
enacted and enforced only when the need arises. Full Text: COPYRIGHT 1999 M.E.
Sharpe, Inc. Are there any absolute answers in economics? This international
trade economist and economic historian has his doubts. The answer to most
questions is "It depends." Manichaeus, as we all know from the Oxford
dictionary; was a Persian philosopher of the third century A.D., whose system
held some sway throughout the Roman empire and Asia until the fifth century
(with some elements lasting to the thirteenth). He believed in dualism, the
coexistence of good and evil, with Satan coequal with God. I suggest that
economics has a heavy dose of dualism, though I hesitate to characterize views
that differ from mine as evil or satanic. In the first edition of Economics: An
Introductory Analysis the only one I read when I was teaching the introductory
course - Paul Samuelson wrote that when one is offered a choice, it is not
legitimate to say "both." I hesitate to differ from my esteemed
colleague, but "both" is often a correct answer, as occasionally is
"neither." Is one supposed to believe in Say's law that supply creates
its own demand, or Keynes's law that demand creates the needed supply? In the
course of a long academic life, I have developed Kindleberger's law of
alternatives, based on historical examples. Often after extended policy debate,
the powers that be end up doing both. In 1931 Keynes recommended tariffs, others
devaluation or depreciation. Outcome: both. During World War II there was a
vigorous Allied debate as to how best to push back German railheads from the
Normandy beaches, whether by bombing marshaling yards, as the British called
them, or bridges. Answer again: both. Nor did questioning a German prisoner of
war, General des Transportwesen West, under Marshall von Runstedt, make clear
which was better. American interrogators got the answer from Oberst (colonel)
Hoffner they wanted - bridges - and the British theirs - marshaling yards.
Robert Heilbroner has been a Classicist (Say's law?) and a Keynesian (Keynes's
law?) and has been mildly infected with Marxism, but has never to my knowledge
adopted the absolutist position of denying all truth to the polar opposite. In
economic debates we have capitalism versus socialism; perfect markets with
rational and informed suppliers and demanders versus market failure; monetarism
versus Keynesianism; fundamentals (such as geography demography, technology, and
perhaps history) versus institutions, path dependency; externalities, and
occasional breakouts of herd behavior ending in financial crisis; free banking
versus regulation and central banks; public choice versus markets (governments
make mistakes but markets seldom do, and such mistakes as they rarely make are
quickly corrected); centralization versus pluralism; rules versus decisions by
authorities . . . One could go on. In international trade, which I taught before
I learned the delight of historical economics, I was wont to say that the answer
to every question in economics is, "It depends," and that it usually
depended on the magnitude of the elasticities. President Truman sought one-armed
economic advisers because of his unhappiness with the answer to his question
"On the one hand, . . .; on the other hand, . . ." I have admiration
approaching reverence for the thirty-third president of the United States, but I
cannot endorse his pleas for an answer of "Yes," or perhaps
"No," followed by a number. Let me illustrate this deeply
philosophical or perhaps cowardly position with a few examples drawn from
history. I skip capitalism versus socialism because most of us believe in the
mixed economy, perhaps leaning slightly to one or the other, but in any case
nowhere near the limits. Such, as I interpret it, is the Heilbroner take on
Marxism since his infection at (by?) the New School. Centralization versus
pluralism can be disposed of in two sentences, though I have a book of 100 pages
on the issue: In quiet times, pluralism is better because it is more democratic.
In crisis or on deep moral issues such as slavery or racism, some central
authority is preferable. It is, however, difficult to change back and forth as
conditions alter. Events since World War II seem to have tarnished both pure
monetarism and pure Keynesianism, bringing us to versions labeled
"post-" or "neo-." But take the notion that inflation is
always a monetary question. If this means that increases in the money supply are
always exogenous, the believer should be referred to Gerald Feldman's The Great
Disorder on the German inflation from 1914 to 1923. Sometimes it is the money
supply that leads as government borrows from the banking system in "silent
finance"; sometimes it is "structural inflation" in the cost-push
of labor, especially the civil service and industry; sometimes the depreciating
exchange rate. In the end, the Reichsbank could not keep printing the currency
fast enough and the real money supply declined. Institutionalists emphasize the
importance of private property to economic incentives and growth. There are
necessary exceptions. Michael Walzer has a list of items that should not be
bought and sold, including, inter alia, human beings, political power, criminal
justice, freedom of expression, marriage and procreation rights, exemption from
military service and jury duty; basic services such as police protection,
desperate exchanges such as permission for women and children to work long hours
in the day; prizes and honors, love and friendship, addictive and noxious
substances such as heroin, perhaps transplanted organs. . . . When government
bureaucracies were limited in size and efficiency; taxes were
"farmed," that is, the right to collect and keep the proceeds of a tax
was sold to private capitalists in return for an advance sum. The system worked
well, say; in Britain, where the right was limited in time such as four years
and auctioned again at renewal. In contrast, in France the right to farm a tax
became private property, bought, sold, left as an inheritance by the original
possessor The system broke down only in the Revolution as twenty-eight tax
farmers were guillotined in the Terror of 1793. In contravention of Walzer's
prescription, the position of regent in many Dutch provinces became hereditary
as private property, occasionally occupied by widows and even minor children. In
The First Modern Economy, Jan de Vries and Ad van der Woude note that in the
Dutch Republic land was rented by nonfeudal owners on leases of five years,
continuously renewed, supported by a concept of property rights different from
Roman law in that it defined not the owner's rights but those of the tenant.
Moreover, access to and use of water in the republic was controlled communally
as early as the sixteenth century - like irrigation in Spain, and drainage
boards in Britain and the United States in modern times. Private property yes,
but allow for variation and exceptions. Free banking is a flag that many
economists enlist under. Deregulate entirely. Abolish central banks. Gresham's
law will work in reverse, good money driving out bad, as allegedly happened in
Scotland between the failure of the Ayr Bank in 1772 and the Bank Act of 1845,
when Scottish banks were brought under British legislation. A classic modern
case is that of the Franklin National Bank, in which the other New York banks
appealed to the Federal Reserve Bank of New York, and, when that was slow to
act, brought the Franklin National to its knees by refusing to lend it overnight
money or to accept its repossession offers. In the Scottish case, the three
major joint-stock banks collected notes of the smaller, more adventurous
competitors and presented them for collection when the lending of any one
appeared reckless. But the proponents of Scottish bank history neglect the fact
that the Scottish banks had reserves in London, too, and could adjust their
positions by borrowing or depositing in London. The experience does not warrant
the abolition of central banking and substituting a rigid rule of increasing the
money supply on trend. This is especially the case when money as a medium of
exchange - though not as a unit of account - remains in Darwinian evolution:
coin, banknotes, bank deposits, NOW accounts, checkbooks issued by thrift
institutions, credit cards, and so on. I have discussed "Rules versus
Men" on frequent earlier occasions. It is not clear to me on which side of
this issue to find Heilbroner, but I suspect it would be a rather looser version
of men than I would support, though I allow for men far more than many
economists and economic historians. As in the past, I can cite hallowed
authority - Walter Bagehot and Sir Robert Peel: Walter Bagehot: "In very
important and very changeable business, rigid rules are apt to be dangerous. . .
. The forces of the enemy being variable, those of the defense cannot always be
the same. I admit this conclusion is very inconvenient."(1) Sir Robert
Peel: "My Confidence is unshaken that we have taken all the Precautions [in
the Bank Act of 1844] which can prudently be taken against the Recurrency of a
pecuniary Crisis. It may occur in spite of our Precautions; and if it be
necessary to assume a grave Responsibility, I dare say Men will be found willing
to assume such a Responsibility."(2) Sir Robert was correct. The Chancellor
of the Exchequer suspended the Bank Act in 1847, 1857, and 1866, issuing letters
of indemnity to relieve the Bank of England of all loss for having violated the
Act, in each case bringing the financial panic to an end. Three other compelling
cases come to mind: In 1925 the Bank of France violated legislative ceiling
limits on its note issue and holdings of government securities. But it did so
secretly rather than appealing to the public that the rules were crippling but
not vital, as one economist, Pierre de Mouy; advised. In the Weimar Republic in
Germany, Chancellor Heinrich Bruning deflated the economy strongly, against the
economic and especially the political interest of the German people, after the
failure of the Austrian Creditanstalt in May 1931. Wilhelm Lautenbach, an
official of the Reich Economic Ministry who has since been characterized as a
pre-Keynes Keynesian, recommended that Germany default on reparations and
foreign credits, depart from gold, to which it was committed under the Dawes Act
of 1924, and expand public works. There is a classic debate among economic
historians in Germany whether Bruning had any real options. Knut Borchardt
thinks he did not. Carl-Ludwig Holtfrerich (and Lautenbach at the time) thinks
he did. The third episode relates to U.S. free gold in the fall of 1931 after
Britain had abandoned the gold standard. First Belgium, the Netherlands, and
Switzerland - small countries with limited responsibility for the system -
cashed their dollars for gold, and then the French, deliberately but inexorably,
followed suit. There was abundant gold in Fort Knox, but it was not
"free." Foreign trade had declined, its financing had changed, and
rediscounted paper, which counted with gold certificates against the Fed's
liabilities, was in short supply. Milton Friedman and Anna Schwartz shrug off
the free-gold issue; Elmus Wicker regards it as a serious constraint. But the
answer for "Men" would have been for Herbert Hoover to call in
congressional leaders, square it with them, and announce publicly that there was
a crisis, that the Federal Reserve Act would be violated briefly until
legislation could be enacted, allowing the substitution of government bonds for
rediscounted trade paper, as was accomplished in February 1932. The law, as I
understand it, has an excuse for breaking a contract or rule: force majeure, a
major change of circumstances beyond the control of one side to the contract or
the ruled body. In 1940, I used force majeure in resigning from the Bank of
International Settlements, with which I had an understanding (not a contract) to
work for three years - this because of war, especially after the fall of Paris
on June 17. But Bagehot is certainly correct that it is inconvenient to break a
rule; after fifty-eight years I still have a tiny twinge of conscience. Rules
are mostly needed, and when broken they are hard to mend or replace. Violations
create precedents. One more example of Manichaeanism: In Britain, after
parliamentary investigations in the nineteenth century, legislation was enacted
requiring inspection of ships before they left port, checking their loading and
general seaworthiness, as too many (though few) ship owners had sent fully
insured vessels off with subsequent loss of ship, cargo, and crew. No
legislation was needed in Norway (or earlier in Venice) because ship owners, as
the Scottish bankers were alleged to do, regulated themselves to a high
standard. Life is Manichaean. It has two rules: Look before you leap, and he who
hesitates is lost. I do not know whether Bob looks or hesitates, but in his
brilliant career he has never seemed lost.

Bibliography1. Walter Bagehot, "Lombard Street," in The Collected Works of
Walter Bagehot, ed. N. St. John-Stevens (London: The Economist, 1978), vol. 9,
pp. 207-8. 2. Great Britain, Parliamentary Papers, Monetary Policy, Commercial
Distress (1857), (Shannon: Irish University Press, 1969), vol. 3, p. xxlx.
CHARLES KINDLEBERGER is Ford International Professor of Economics Emeritus,
Massachusetts Institute of Technology. This article was originally presented as
a speech in honor of Robert Heilbroner at the New School for Social Research,
New York, November 12, 1998.