Historical Economics Art or Science? Charles Kindleberger Suggested citation: Kindleberger, Charles P. Historical Economics: Art or Science?. Berkeley : University of California Press, 1990. http://ark.cdlib.org/ark:/13030/ft287004zv/ Contents · INTRODUCTION · PART 1— ECONOMIC HISTORY OR HISTORICAL ECONOMICS? o 1— Historical Economics a Bridge between Liberal Arts and Business Studies?* o 2— Economic History* · PART 2— EUROPE o 3— Spenders and Hoarders the World Distribution of Spanish American Silver, 1550–1750* o 4— Introduction to England's Treasure by Forraign Trade, or The Ballance of Our Forraign Trade Is the Rule of Our Treasure by Thomas Mun* o 5— The Historical Background: Adam Smith and the Industrial Revolution* o 6— Commercial Policy between the Wars* o 7— The Postwar Resurgence of the French Economy* · PART 3— THE UNITED STATES o 8— US Foreign Economic Policy, 1776–1976* o 9— The Aging Economy* o 10— America in Decline? Possible Parallels and Consequences* · PART 4— FINANCE o 11— Financial Deregulation and Economic Performance: An Attempt to Relate European Financial History to Current LDC Issues* o 12— Write-Off or Work-Out? A Historical Analysis of Creditor Options* o 13— Exchange-Rate Changes and Ratchet Effects: A Historical Perspective* o 14— The Panic of 1873* o 15— Capital Flight: A Historical Perspective* · PART 5— CONCLUSION o 16— Conclusion INTRODUCTION This is the eighth book of my collected papers, each on a fairly narrow range of topics within economics — international economics, international financial questions, financial history and economic history (including some specialized topics such as the multinational corporation and the Marshall Plan). The exercise has strong overtones of narcissism, which makes me uneasy, but may serve a useful purpose in assembling in convenient locations work that would otherwise remain scattered and in part lost (as perhaps it should be). And yet I am a sufficient believer in the market test to defend myself against the charge of vainglory by pointing out that none of the eight has been published by a vanity press, subsidized by me, but each has been more or less willingly taken on, if not fought over, by some commissioning editor. This collection deals with economic and financial history. The title implies that there is a difference between an economist who deals with historical issues and a historian who studies past economic questions. I come back to this in the Conclusion, which deals with the methodological question of whether history is a necessary dimension of the compleat economist, as I think it is. The scattered provenance of the separate papers — written for symposia, delivered at conferences, as lectures on special occasions, and one on Spanish silver that appeared as a pamphlet (Chapter 3) produced on my own initiative to satisfy curiosity — is indicated in the first footnote of each chapter. None is the typical paper for a refereed journal that enjoys the highest standing in academic circles. Chapter 2, in fact, was commissioned and then rejected by the editors of an encyclopedia, on the ground that it did not conform to their idea of how the subject should be treated. ? x ? I am grateful to Peter Johns of Harvester Wheatsheaf for urging me to proceed with the collection, and to omit a couple of my beloved intellectual offspring which he thought, doubtless rightly, were out of place. CHARLES P. KINDLEBERGER LEXINGTON, MASSACHUSETTS NOVEMBER 1989 PART 1— ECONOMIC HISTORY OR HISTORICAL ECONOMICS? ? 3 ? 1— Historical Economics a Bridge between Liberal Arts and Business Studies?[*] If one looks through the Directory of the American Economic Association for addresses, it will become clear that some economics departments are located in business schools and some in schools of arts and sciences. My brother-in-law was very fond of a New Yorker cartoon in which a man returned home, happened to discover an unkempt bearded hippy in his wife's boudoir closet, and elicited the remark "Like, man, everybody's got to be someplace." This, I suppose, is true of economics departments as well as of hippies, but the fact that they choose liberal arts on some occasions, or have it chosen for them, and business schools at other times, emphasizes the ambiguity embodied in the subject. One could perhaps distinguish between technical economics, heavy with mathematics and econometrics, models and n -dimensional diagrams, and literary or anecdotal or intuitive economics — the former allied to operations research, statistical inference and sharp-pencil subjects like finance, and belonging really in a business school; the latter flirting with sociology, politics, perhaps even psychology, more comfortable with social science, and, to the extent that it is historical, perhaps with the liberal arts. I say "perhaps" because economic history itself has bifurcated into cliometrics, manipulating statistics and models to try to prove contentions in history, or more generally disprove those of others, and traditional economic history, which is more inductive. I happen to profess historical economics, rather than economic ? 4 ? history, using historical episodes to test economic models for their generality. Many economic models are plausible and will fit particular circumstances; the question is how general they are and how much one can rely on them to provide understanding and wisdom in particular circumstances. I do not say prediction: I am a non-believer in positive economics that permits prediction because I take the view that in general-equilibrium models, with scores or perhaps even hundreds of variables, it is difficult to the point of impossibility — what literary people sometimes call infinitely difficult — to be certain that the various arguments in a given function have been accurately specified the first time and replicated the second. Historical economics, as I view it, believes in partial equilibrium, ceteris paribus , rather than mutatis mutandis , and looks for patterns of some uniformity but is wary of insisting on identity. I have moved into historical economics from international economics, and in this paper I propose to strike out in the directions of the international aspects of business, on the one hand, and the liberal arts on the other, meaning, I suppose, mostly history, politics, cultural anthropology, sociology, perhaps even a little geography. But first let me suggest that business schools may not have enough, and liberal arts too much, of ambiguity. In mathematics and some business schools, the task is to prove theorems, relationships which are universally true. In the real world, ambiguity is king. Should one look before one leaps, or is it true that he who hesitates is lost? If it ain't broke don't fix it fits some occasions, but others demand a stitch in time that saves nine. When in Rome do as the Romans do is one rule for the multinational corporation, but there are occasions when it is better to follow Polonius and to thine own self be true. Good, better, best, never let it rest, until your good is better and your better best is the optimistically American rule, but the French remind us that the best is the enemy of the good. Quit while you are ahead often applies but occasionally keep going when you are on a roll, embarked on the: tide in the affairs of men Which taken at the flood leads on to fortune Omitted, all the voyage of their life Is bound in shallows and miseries. (Julius Caesar IV,3.) I could go on, but forbear, reminding you, however, not to stay spellbound before ambiguity, catatonic, like the ass of Bouridon, the French philosopher, which starved to death equidistant between two bales of hay, unable to decide which to go for first. In such circumstances it is important to do something; don't just stand there. On the other hand, there are occasions when it is important to stand there, rather than just do something. ? 5 ? My interest in historical economics most recently has been in the fields of international finance and economic growth and decline. The two subjects occasionally dovetail. Since the Renaissance there has generally been one dominant world financial center — Florence, Venice, Bruges, Antwerp, Amsterdam, London, New York — with economies of scale. Savers wanting to invest money take it to the center to examine various outlets; entrepreneurs and impecunious governments wanting to borrow go to the center because that is not only where the money is, as Woody Allen noted, but also where it is cheapest. The dominance of a center at any one time is never complete because there are costs of information, and diseconomies if all the information on the credit standing of everybody is gathered in a single place. The centers at the national level are sometimes the same as the capitals, e.g. London and Paris; sometimes not, e.g. New York, Toronto, and Zurich. The continuous shifts of the top international financial center follow the change of the fortunes of countries, and in part are the result of accident. In recent years a number of explanations of the rise and fall of nations has been given. To Cipolla (1970), editing The Decline of Empires , the problem is that as a country improves its standard of living, more and more people demand to share the benefits. Incomes increase and extravagances develop. Prosperity spreads to neighboring countries which may become a threat and force the empire into military expenditures. Public consumption has a tendency to rise sharply and outstrip production. Survival of the empire demands new methods of productivity, and in general, empires seem to resist change. A related view is that of Mancur Olson (1982) and is expressed in terms of distributional coalitions, vested interests in old-fashioned terminology, that lobby in democracies in their own interest, seeking to get protection, resisting taxation thought to bear on them, blocking the national agenda, and edging the country into inflation.