Mario Draghi: Luigi Einaudi and economic freedom
Address by Mr Mario Draghi, Governor of the Bank of Italy, at the presentation of the book Luigi
Einaudi: Selected Economic Essays, Italian Embassy, London, 17 October 2006.
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Ladies and gentlemen,
Let me thank the Ente Einaudi for the taking the initiative of having a selection of Luigi Einaudi's works
translated and thus introduced to a non-Italian public. I should like to congratulate the editors -
Riccardo Faucci, Luca Einaudi and Roberto Marchionatti - the translators and all other contributors for
a job magnificently done.
Luigi Einaudi had a long, very active life. When he published his first essay in 1893, Giuseppe Verdi
had just completed his Falstaff; when he died, aged 87, Federico Fellini had just shocked Italians -
and possibly even Britons - with La Dolce Vita.
A key actor in Italian public life, he passionately believed in the interaction between Italian, European
and American intellectual circles. He was friend to people like Hayek, Huizinga and Röpke; he was
instrumental in getting many authors translated into Italian, among them Beveridge, and he carried on
an intense activity as a consultant of the Rockefeller Foundation, with great benefit for many young
Italians who could study in British and American universities, even during the Fascist time. During
three decades he was The Economist's correspondent from Italy, so that it was also through his eyes
that politicians and business leaders of the world perceived Italian affairs.
Einaudi is certainly difficult to sum up in a phrase. He was in turn economist, historian, journalist, wine
maker, bibliophile, central banker, politician, statesman. He has left literally thousands of pieces of
writing. If I have to single out the one reason why he made such a profound mark on the intellectual
and political history of Italy, that is his faith in a fundamental idea: man is fallible; lawmakers and
planners are no less fallible than other humans; legislative and administrative commands often fail to
attain their goals or have unintended consequences; man must be free to experiment, to try new
solutions for old problems. He extolled "the beauty of the struggle": between people, ideas and market
players, even between social classes; individual and collective effort and competition engender
progress; excessive regulation, forced collectivism and decisions from above hinder it. All institutional
arrangements that foster human creativity he would praise; but when confronted with arrangements,
legal or otherwise, that block evolution, he would carefully, fastidiously analyse them, and then expose
their failings. He advocated a legal system based on a few, simple laws and unbending application.
Despite his intellectual authority, he did not always, or perhaps even often, succeed in persuading
legislators and policymakers in his time. For most of his life his voice was that of a respected minority.
Recognition usually came later. But the lesson has only been half-learnt and the issue is almost as
alive now as it was in Einaudi's time: the delusive quest for the perfect regulation and the perfect plan
still goes on in much of Europe.
A professor, but not an inhabitant of the ivory tower: to the very end of his life Einaudi was extremely
curious about real economic and political life. To cite just a few topics from a much more extensive list,
he collected information on, and wrote in newspapers about, union demands, capital taxation,
agricultural prices, steel production, monetary policy, foreign trade, bank raiders. He always made a
point of linking theory with facts. He was a clear, persuasive writer. Which is not just, I believe, a gift of
nature, but mostly the result of caring about the subject one writes about.
Though firm in his fundamental convictions about economic and political liberalism, he was not a
doctrinaire; his position can be described as optimism, not naïveté, about the market. He often
repeated that laissez faire is not a scientific principle, but just a convenient rule taught by experience.
Certainly subsequent developments of welfare economics have made us more sensitive to
externalities and to market failures than he ever was. However, he also was well aware of the
importance of the legal framework and a proper regulation for the markets' well functioning. He deeply
believed in equality of opportunities, and accepted a degree of income redistribution.
He observed that stumbling blocks to innovation (he called them "trincee", trenches), while found
everywhere, were especially plentiful in Italy: tariffs against foreign commodities, rules barring new
competitors from entering established trades, laws that put obstacles in the way of new trades or
commodities, cartel agreements among producers to limit competition and innovation: all to the
detriment of the consumer. A recurring theme in his writings is the denunciation of private monopolies
and of any attempts, by private firms, to restrict markets. However, in Italy he saw the state itself as
the main source of market restrictions: the dominating positions of many firms were, more often than
not, the product of laws and regulations. In 1947, as a member of the Constituent Assembly of the new
Italian Republic (of which he was to become the first full President), he proposed an anti-monopoly
clause for the Constitution:
La legge non è strumento di formazione di monopoli economici; ed ove questi esistano li sottopone a
pubblico controllo a mezzo di amministrazione pubblica delegata o diretta.
[The law shall not be a means to form economic monopolies, and such monopolies as may exist shall
be subjected to public control through delegated or direct public administration]
His proposal was rejected on flimsy arguments, and antitrust legislation eventually came, well after
Einaudi's death. But the alliance between public bodies and private interests to carve out privileges
has bedevilled Italy to this day.
He applied his convictions about the power of market forces to the banking sector. In a 1935 article
that is partly included in the selection, he showed his distrust for the views of a fictitious character, the
"rationaliser", who wanted to regulate from above the banking industry all the way down to dictating
what the number of banks should be. He also had little sympathy for the many restrictions on banks'
activity (on area, sector, type of credit) which were not to disappear in Italy until the 1990s. On banking
supervision he favoured a flexible approach and disliked rigid administrative rules: "If the regulation
really regulates, it only prevents the good transactions and does not prohibit the bad", he wrote. This
resonates with certain main themes in the evolution of supervisory activity in recent times.
Much impetus for market-oriented reforms in Italy eventually came from European institutions. Europe
was, indeed, a recurring theme in his writings from very early days. He supported a European
federation immediately after the First World War. From the columns of the Corriere della Sera he
argued, under the pen-name "Junius", that the League of Nations would be ineffective because it
depended on the will of individual states, and advocated the creation of a federation of European
nations. The articles went virtually unnoticed at the time.
In the final years of the Second World War, he started to write again on the same theme. What should
a European federation do? His views were ambivalent in a way reminiscent of today's debate. Einaudi
is absolutely clear about the urgent need for "unifying some economic matters", among these money.
"Devolution to the federation of the regulation of money and money surrogates appears to be
uncontroversial", he writes. (It took a mere 45 years for this "uncontroversial" item to materialise). He
goes on to list the advantages of European monetary union in terms unmistakably similar to those
used in the debate on the euro that took place almost half a century later. The main virtue of a
monetary union lies in its doing away with the monetary sovereignty of national states, which "boiled
down often to the right to falsify money" via inflation, or hyper-inflation.
On the political aspects his views are less clear-cut. He does not want member states to renounce
political independence, a step for which "our spirits are not prepared". But following the tragic
experience of war, he comes down squarely in favour of a fully unified "army, navy and air force", and
of clearly defined federal legislative and executive bodies. These are boldly integrationist views, even
by today's standards.
In 1939 Einaudi's thoughts on Europe came to the attention of two careful readers who would later
play a key role in European federalism. Ernesto Rossi and Altiero Spinelli - the first a friend and
student of Einaudi's, the second a former Communist party member - had been imprisoned by the
Fascist government for 10 years, and later exiled to the tiny Mediterranean island of Ventotene.
Spinelli was at once fascinated by the "Junius" articles; Rossi managed to get through to him material
on the debate on federalism in England, including works of Lionel Robbins. We may say that Einaudi
contributed indirectly to the birth, in 1941, of the Manifesto di Ventotene, a cornerstone of the
European political federalist movement.
I cannot refrain from briefly recalling Einaudi's role in ending post-war inflation and opening the way to
a long period of sustained growth and stability. The monetary stabilisation of 1947 bore his mark and
is an enduring legacy left by Einaudi as a policymaker. Economic historians still debate the respective
roles that Einaudi himself and Donato Menichella, the then Director-General of the Bank of Italy,
played in devising the stabilisation plan. Whatever the details, it is clear that Einaudi, as Governor of
the Bank of Italy first, then as Budget Minister and deputy Prime Minister, took prime responsibility.
Even if he had not had any policymaking role, Luigi Einaudi would be remembered as a communicator
and educator. In fact, his very success as a policymaker owes much to his clear, effective way of
speaking to the general public, at a time when this was very unusual. His frank and direct style of
communication, his choice of explaining, in plain language, policy decisions in a special final chapter
of the Bank's annual report, were at the time a significant advance towards greater accountability of
monetary policy.
Sixty years ago Einaudi gave his last speech as the Governor of the Bank of Italy. In the new Italian
democracy it was under his leadership that the Bank of Italy, already a well-respected institution,
started shaping its special role in Italy, unique among central banks, a role upheld by all of Einaudi's
successors: that of a trusted, independent advisor to Parliament, the Government and the public
opinion.