Manichism In Economics

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.

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 hat 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 lternatives, 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 ccasional 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 conomic 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 rescription, 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 oards 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 ct, 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 oney 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 uthority – 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 o 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.

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