In response to: “The King’s Revolt” (Vol. 2, No. 4).


To the editors:

Henri Lepage made an invaluable contribution to the renewal of economic thought in France at the end of the 1970s. He introduced the new economics of the Chicago school, institutional economics, the economics of Public Choice, and Austrian economics. His knowledge of the field, his constant monitoring of current theory, and the keenness of his reasoning make him a formidable opponent and reviewer. For his review of The End of Alchemy by Mervyn King, a former governor of the Bank of England, Lepage chose the title “The King’s Revolt.” King does indeed revolt “like a king”, i.e. against a system which, in reality, he once led. I agree with the central theme of Lepage’s critique and share his feelings about a work that is, ultimately, somewhat perplexing. I would like to add some complementary ideas along the same lines.

The term alchemy, used by King to describe the transformation of risk by private banks, could have been employed for at least two additional monetary and financial issues. Indeed, what about the alchemies practiced by central banks and states? To transform private losses into public debts (through bail-outs) is a form of alchemy, as is the manipulation of interest rates so that they fall to negative levels (thus, in a certain way, ignoring time and risk).

King is certainly aware of the first problem, which is at the center of his thinking, but he reserves the term alchemy solely for the banks, which is something of a pity. He seems to view the world, essentially, through the lens of central banking and from a macro perspective. But the basis of his reasoning could also have led to other conclusions.

King writes at length on radical uncertainty, a theme that is not only very Keynesian, but also, as Lepage points out, very Austrian. One feels compelled, at times, to ask of King: “So what?” For someone who comes from the mainstream this may seem a revelation, but radical uncertainty is the lot of life, and a fact of economic life. King also acknowledges this: radical uncertainty is “the spice of life” but also “the precondition of a capitalist economy.” How then does the 2007–2008 crisis constitute a radically unpredictable occurrence? Could we not have predicted it, to some extent? King attributes the cause of the crisis to the global savings glut and imbalances between countries. Some economists had seen the crisis arrive as the logical consequence—a radical certainty, one might say!—of the convergence of different developments, largely underpinned by a crucial element: lack of accountability.

It is not so much lack of regulation in terms of Government regulation (King, moreover, rightly criticizes its complexity and unwieldiness), but lack of regulation in terms of accountability which seems to have characterized this crisis. A system can be regulated in an exogenous or endogenous way. In a free system such as the market economy, the first level of regulation is not government regulation (exogenous), it is accountability (endogenous). How does endogenous regulation work? The system of profit and loss is the measure, or compass, of the system, and ownership of a company ensures that its owners have skin in the game, so to speak. This provides an incentive to behave responsibly in the face of risk and, insofar as it is possible, to anticipate it. With all these incentives set at the microeconomic level, as a result of an institutional approach heading in this direction, there is a good chance that radical uncertainty, or the likelihood of a black swan, is greatly reduced.

Some public policies may, in effect, diminish accountability. We have seen this with public and parapublic risk management programs in the United States such as the American Dream Downpayment Act (to a certain extent), the actions of Fannie Mae and Freddie Mac, and, of course, the bailouts since Continental Illinois. At different levels (households, banks), it was thus the institutionalization of privatizing profits but socializing losses (thus breaking the “compass”) that led to the establishment of a society of non-accountability—radical non-accountability quite often, moreover—under the guise of various so-called social or national objectives. The institutionalized availability of “other people’s money” as a safety blanket, in effect, kills accountability. Worse, mechanisms of exogenous control can weaken those of endogenous control, while, at the same time, creating a false sense of security.

King refers to the toxic connection between limited liability, insured deposits, and the lender of last resort, which constitutes an implicit subsidy for bankers’ risk-taking. While King deals briefly with the question of the capitalist responsibility of bankers in chapter three, with a few paragraphs on the advantages of partnerships, he quickly sets the idea aside, which is a real shame. Rather than the theme of “innocence regained” developed by King, I would have preferred to see the theme of “accountability finally found,” with further reflections on an institutional structure that would offer a banking capitalism combining freedom (with fractional reserves) and accountability. This freedom and accountability would go so far as to allow bankers themselves to establish prices according to supply and demand—like truly accountable entrepreneurs in a competitive system... King refers to this possibility (along with the monetary competition model of Hayek) in his section on the future of money. Again, he quickly closes the door, since his preferred solution is to eliminate the money creation by banks.

The lasting impression is that for King, it seems, radical uncertainty cannot be dealt with at the microeconomic level, that of the banker. Meanwhile, even if it does present an enormous challenge for the central banker, he must be able to manage it, more or less. This is symptomatic of a “centralized” way of thinking. Indeed, the small banker faces a problem of knowledge that can be surmounted at his level, and he is encouraged to resolve it in a responsible way—if the institutional structure is adequate. That of the central banker, on the other hand, is in reality almost insoluble. He is like a director of Gosplan; he must fix a price outside, or almost outside, the price system. While King notes all the dangers and possible challenges faced by the central banker—in terms of feedback, anticipation, etc., on the part of the markets—it seems obvious that he cannot shed his former role as governor of the Bank of England. And are not central banks also guilty of another form of “alchemy”? Supplying liquidity to the system in the event of tension, even with unconventional policies, is one thing, but the current manipulation of rates—and hence the value of time and ultimately the structure of capital—is quite another. This type of alchemy should have been given more extensive consideration in a work of this nature.

Finally, another “toxic connection” that deserved further analysis: that of capitalism and politics. In many respects, and in line with the tendency towards lack of accountability, the recent crisis has also been that of crony capitalism. The problem is not simply that public policy has distorted the mechanisms of accountability, it has often been under concerted pressure from lobbyists to privatize profits and collectivize losses. The ties between states and banks can only be incestuous, since they lend to each other: “you scratch my back, I’ll scratch yours.” It seems difficult to seriously reform the banking sector without at the same time reforming public spending and public debt. Private banks in France are all too often owned by former members of the government. In the U.S., Treasury Secretaries come from the banking sector. In short, there is a revolving door. It is difficult to reconcile this with free market capitalism. As a great French economics professor once said when the debate turned to the nationalization of the banks, the real issue was, in fact, to finally genuinely privatize them...

From this point of view, a passage from King describes his vision of liberalization:

After the 1980s, when banking was liberalized, the degree of alchemy, and hence of subsidy, inherent in the risk and maturity transformation in the system increased. No individual bank could easily walk away from the temptation to exploit the subsidy.1

This conception of “liberalization” betrays the thinking of its author. The former governor of the Bank of England, who writes eloquently about the concept of trust, simply does not trust bankers. Rather than considering institutional changes that could make bankers more accountable and trustworthy, he prefers to maintain their liberty, albeit under high surveillance—controlled, obviously, by the central banks. As Lepage correctly observes (in the French original):

the work is revealed… in the end, to be nothing but a new plea, highly questionable but of a very orthodox nature, in favor of the omnipotence of an institution which (wrongly) cannot imagine a world in which it does not exist.

Emmanuel Martin


Henri Lepage replies:

Emmanuel Martin correctly highlights the lack of accountability as the most important element in the debate about the banks, banking system, and monetary stability. With the benefit of hindsight, I regret not having discussed it in my review. Similarly, I noticed, a bit late, that there was another point I should have raised: the limitations of King’s method for integrating the notion that interest rate = time cost in his account of the delayed effects of the crisis. But his book deals with so many subjects that it was impossible to be exhaustive.

“Indeed, it is not so much lack of control by regulation… but of lack of control by accountability which seems to have characterized this crisis.” This observation from Martin’s letter is crucial. Martin echoes the worries expressed by Vincent Bénard in his letter. Bénard evokes a kind of institutional solution that would allow for the existence of a banking capitalism combining freedom and accountability, to use Martin’s words. It would be interesting to hear his thoughts regarding Bénard’s proposition.

Perhaps both Martin and Bénard would be interested to discover the work of Carolyn Sissoko, an American economist who has written a profound thesis on the secrets of Britain’s formidable financial power during the nineteenth century. There are many lessons to be learned from it.2


Emmanuel Martin is an economist and currently manager of the French MOOC project “École de la liberté.”

Henri Lepage is a French economist.

Translated from the French by the editors.

  1. Mervyn King, The End of Alchemy: Money, Banking, and the Future of the Global Economy (London: W. W. Norton & Company, 2016), 254. 
  2. See Carolyn Sissoko’s blog: Synthetic Assets: A Deconstruction’s View of Financial Markets