The boast of modern economics is that it has broken from the past by providing businesses and government new tools to reduce risk and manage the business cycle: everything from central banks (the Federal Reserve) to sophisticated hedging techniques. The obsolescence of the past makes history irrelevant except as a curiosity. Kindleberger’s dissent rendered him an intellectual renegade whose revenge was that events kept proving him correct.
His best-known book, “Manias, Panics, and Crashes: A History of Financial Crises,” appeared in 1978 and was widely regarded as a charming account of an extinct problem. Government macroeconomic policies and deposit insurance, as well as professional investment advice, had essentially outlawed banking panics and financial crises. So held conventional wisdom. Kindleberger objected.
“Speculation often develops in two stages,” he wrote–first as a reasonable reaction to genuine investment opportunities, then as a frantic scramble for quick profits. So it was during the English railroad boom of the 1830s. Before 1835, projects were sensible; later, they were scams. “Professional promoters… [targeted] a different class of investors, including ladies and clergymen.” A similar pattern applied to U.S. farmland sales in the South in the 1830s and later; early price increases reflected better prospects for cotton, but speculation soon dominated. Sound unfamiliar? Not after the Internet bubble.
Before his death, Kindleberger suspected a housing bubble. Most economists discount the danger. Houses aren’t bought and sold like stocks, it’s said; price increases pale beside the stock bubble. All true. In the late 1990s, stock indexes rose 20 percent or more annually. By contrast, median home prices rose 7.1 percent in 2002.
But some other things are also true, as Kindleberger might have noted: (a) before a “bubble” pops, most people deny it exists; (b) some home-price increases have been huge (from 1998 to 2002, median prices rose 57 percent in Boston, 50 percent in Denver, 48 percent in Los Angeles and 65 percent in New York), and (c) cheap credit–a.k.a. low mortgage rates–has propelled the price rise. There are vulnerabilities. Even slightly higher interest rates could cause home prices to stagnate or fall.
Kindleberger taught at the Massachusetts Institute of Technology from 1948 to 1976, read three foreign languages (French, German and Italian) and wrote countless books (the obituaries say about 30, but the Library of Congress Web site has 74 entries, including many edited volumes of his and others’ essays). He came by his respect for history in part by living it.
After World War II, he worked on the Marshall Plan, the massive U.S. aid program to rebuild Europe. It convinced him that decisive government intervention sometimes alters events. His “The World in Depression, 1929-1939,” published in 1973, taught the same lesson. But in this case, it was the absence of action that caused calamity. After World War I, Britain was too poor to rescue the global financial system, and the isolationist United States wasn’t ready to do so. The resulting collapse contributed to World War II. Kindleberger concluded that free markets, though they generally work well, sometimes need help–just when is a question of judgment.
History matters. Somehow this common sense has bypassed much of modern economics, especially in universities. The continued preoccupation with elegant models and mathematical proofs is intellectually narrowing, because it excludes almost anything that cannot be reduced to an equation or data set. This may explain why so many economists were caught unawares by the Internet bubble and remain perplexed by the hesitant nature of the present recovery. Some giant economic changes defy equations, because they are also political, psychological and cultural.
China’s entry into the world economy and trading system will transform both. Aging populations will refashion advanced nations and their economies. But with some exceptions, economists bring little insight to these and other big issues. Their desperate need is to restore more realism to their discipline. It is to rediscover the complexity of the past so they can better understand the complexity of the present. Anyone who glances backward knows that economics does not exist in a vacuum.
Kindleberger knew. He dredged big and tiny nuggets from the past. In the South Sea bubble (1720), Isaac Newton lost about [Pound sterling]20,000 (perhaps $1.5 million today). Wonderful. When today’s trendy theorems are forgotten, people will still read Kindleberger for pleasure and profit.
