Manichism Essay, Research Paper

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 effectivity. 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.

647

1. 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.