American History07 Feb 2008 11:07 am
Alexander Hamilton’s famous Report on Manufactures occupies an odd place in the history of economics. He advocated for protectionist tariffs to allow American industry to develop without too much foreign competition, so this put him at odds with the views of the Scottish Enlightenment philosopher Adam Smith. Hamilton had read Smith’s most famous work, An Inquiry into the Nature and Causes of the Wealth of Nations, and used Smith’s theories about the “division of labor” in the first part of the Report. However, he was not as resolute a free-market advocate as Smith, placing national interest above the principle of market competition. On the opposite end of the spectrum are the socialist theories of Karl Marx (a contemporary, incidentally, of the president most influenced by Hamilton: Abraham Lincoln). Hamilton may have advocated some governmental controls, but nothing like as many as Marx suggested.
Though Hamilton’s vision seems unique in the history of economic thought, it has been the basis for many developing economies in the past few centuries. Few countries have launched economic development programs without an initial set of protections, and fewer still have experimented with Marx’s entire socialist model. Could it be true that an extremely important economic model has only been theorized in an 18th-century Congressional report? Not quite. Every theory that Hamilton set forth was later developed by a brilliant (if little-known) 19th-century German economist named Friedrich List.
List was well versed in the works of Adam Smith and other economists, but he disagreed with their explanations of how economies worked at important transitional points. When it came to the day to day operations of commerce and trade, List conceded that Smith’s theories worked. But when it came to exceptional circumstances, like fostering a new economy or recovering from a major downturn, List felt otherwise. This excerpt from List’s 1837 The Natural System of Political Economy (which you can find in this introduction to List from The Atlantic) could have been lifted directly from Hamilton’s report:
The cosmopolitan theorists [List's term for Smith and his ilk] do not question the importance of industrial expansion. They assume, however, that this can be achieved by adopting the policy of free trade and by leaving individuals to pursue their own private interests. They believe that in such circumstances a country will automatically secure the development of those branches of manufacture which are best suited to its own particular situation. They consider that government action to stimulate the establishment of industries does more harm than good….
The lessons of history justify our opposition to the assertion that states reach economic maturity most rapidly if left to their own devices. A study of the origin of various branches of manufacture reveals that industrial growth may often have been due to chance. It may be chance that leads certain individuals to a particular place to foster the expansion of an industry that was once small and insignificant—just as seeds blown by chance by the wind may sometimes grow into big trees. But the growth of industries is a process that may take hundreds of years to complete and one should not ascribe to sheer chance what a nation has achieved through its laws and institutions.
List’s theories are completely at odds with almost everything taught in Western universities today, or recognized by the Nobel committee. Nonetheless, it takes less work to find historical precedents that fit with List’s theories and, most importantly, newer industrial powers like Japan and Korea self-consciously apply his theories today. They ought to be better known.
For a more complete introduction to List, click here.
2 Responses to “Alexander Hamilton’s Economics”
Leave a Reply
You must be logged in to post a comment.