Lessons from Voltaire, the enlightened economist

By Patrick Neiertz and Nicholas Cronk

Where is the Voltaire of our times? As financial institutions and politicians wrangle over eurozone bonds and so on, they could do worse than think back to that great figure from Europe’s past. National indebtedness is after all not unique to the 21st century.

European states in the Enlightenment faced debt problems as chronic as we do, albeit for different reasons. They were not overspending on social programmes; they were waging senseless wars to shore up dynasties or bolster pride. The cost of paying off mercenaries virtually emptied their treasuries.

As Voltaire noted time and again, France was involved in just such adventures, propped up by debt financing. How did the French monarchy cover its exposure? By manipulating inflation, appealing to bankers, defaulting on repayments and raising taxes. Sound familiar?

Voltaire saw himself primarily as a poet and dramatist. He never considered himself an economist but he certainly could have. He was an outstanding manager of his own assets – “a rarity among men of letters”, he proudly wrote of himself – and a frequent commentator on public indebtedness.

From his base of operations on the Swiss border, he became a modern entrepreneur, running a sort of conglomerate of agriculture, tanning, ceramics, real estate investment, a textile mill and a 1,000-employee watchmaking enterprise. He combined his laisser-faire capitalism with dirigiste protectionism. In other words, he was a Frenchman.

The great man was a fan of Adam Smith and wrote about many areas of the new economic science. At the same time that he was fighting against civil injustice, Voltaire the private man was fascinated by the workings of high finance and ways to rectify the miscalculations of governments.

What does he tell us about financial problems that still resonates? Be careful of international lenders. As he put it, remember that “any state that borrows from its own people is no poorer for it”. Having lent considerable sums to foreign princes, he was well placed to understand the risks of sovereign debt when the financing goes international. And he was sometimes the beneficiary.

He had to accept a default by Charles Theodore, prince-elector and count palatine of Bavaria. The first loan, in 1753, was for 100,000 livres, then in 1757 he borrowed another 130,000 livres, considerable sums for the day. The promised reimbursement never came.

On the other hand, the Duke of Württemberg, known as a poor risk, was obliged to refinance his recurring indebtedness, and in the end paid three times his borrowings in interest alone, because of the financial acumen of the lender – Voltaire. So from his writings we can glean a foretaste of today’s markets.

The continuation of Voltaire’s phrase on indebtedness is worth considering – “... and these debts even serve as an encouragement to industry”. By this prophetic formulation, Voltaire means that debt service, and repayment, can irrigate a national economy – today’s European economy? – with revenue that is transformed into consumption and investment when local institutions are flush with cash. Elsewhere, he notes that when a government only borrows from its own people, “confidence and the circulation of wealth are sufficient to ensure repayment”. Wouldn’t it make Voltairian sense for Europe, in many ways, to lend to itself and reimburse its own people? Yet there has never been a Europe-wide loan financed by its private citizens’ savings.

Of course, Voltaire was not just a self-interested benefactor of German princelings. He was mainly the moral inspiration and master poet of the principal among them – the King of Prussia, later known as Frederick the Great. They had their differences but once their dispute was over and Voltaire had fled Prussia, Frederick’s admiration for him was stronger than ever. Voltaire was not able to dissuade his friend from making war (and winning) against France but he might well have persuaded him to back a fledgling eurozone bond to finance an Enlightened Europe, including Prussia.

Voltaire, we miss you.

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The writers are associate researcher at the Sorbonne’s centre for research into French language and literature of the 17th and 18th centuries, and director of the Voltaire Foundation, University of Oxford Copyright The Financial Times Limited 2012.