Saturday, February 09, 2008

Alexander Hamilton, Fredrich List and Adam Smith

Is it true that Alexander Hamilton was the first to theorise for protective tariffs ‘to allow American industry to develop without too much foreign competition’?

Not quite. Hamilton’s Report was published in 1791. Adam Smith’s Wealth Of Nations was published first in 1776 and its 5th English edition in 1789. The first American edition was published in 1789 in Philadelphia, by Thomas Dobson. 1789 (3 vols), though copies of the 1st English edition were shipped to the American colonies, and widely read by the American legislators a few months after they were printed in London (and a ‘pirated’ edition in Dublin) on 9 March, 1776.

The colonies had proclaimed their Declaration of Independence in July, 1776. Adam Smith took a close interest in the ‘recent disturbances’ leading up to independence and published his analysis and sentiments in Wealth Of Nations, but his book arrived too late to influence events.

However, Adam Smith advised the colonists, should independence be gained, against erecting tariff barriers against manufactured products from Europe (note: not just Britain). Partly, this was because he considered the ‘natural’ sequence of developing agriculture, including mining, should precede manufacturing, and he put the inverting of this process in Europe as a cause of the mercantile obsession of colonies, jealousy of trade, and colonial wars.

His admiration for the potential future of the ex-colonies was fulsome – he thought that ‘America’ within a hundred years could overtake Britain to become the world’s largest economy. The risk was that the American colonies would slide into the mercantile trap of tariff protection (once imposed, harder to remove) and all the negatives that Adam Smith associated with those policies.

In The Devolved Intellect Blog, David Kidder writes on ‘Alexander Hamilton’s Economics’ (here)
7 February:

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.

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. … 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 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.

Arguments for protection are well known. So is the work of Friedrich List, The National System of Political Economy, 1844 (my copy was published in 1916 by Longman, Green and Co, London) and his ideas were featured among economists throughout much of the 19th century and translations into English were common. List visited the USA and picked up Hamilton’s ideas and included in them his polemic, much of it against Adam Smith.

List attempts mischievously to lump a charge of Adam Smith projecting charades by saying one thing but meaning another. England (by which he means Britain) exhorted the benefits of free trade while conducting a drive for national wealth through the interests of a strong state. His theory is an intellectual theory of nationalism, born at a time when the weakness of the various German states was a result of national disunity. He was a German nationalist, of which the later 19th century and the early 20th century was to hear a lot more from his adherents.

Adam Smith was accused of having disguised the real intentions of creating a strong national English state by imposing free trade on weaker states while it protected its industries. The problem was that while Wealth Of Nations received great admiration among intellectuals for its free trade advocacy, the English state continued constructing ‘National Wealth’ from its hidden ‘National Political Economy’.

Much of this confusion in List’s thinking came from the undoubted fact that Wealth Of Nations was a critique of mercantile political economy in mid-to –late 18th century, at a time when UK military power was rising – wars on Continental Europe, across the Atlantic – and its reach extended across the world to India, the Pacific, Australia and the Caribbean. But the British state did not adopt free trade as a policy until it was the most powerful economy in the world. That, of course, had nothing to do with Adam Smith’s intentions. His critique of mercantile political economy was read in English and in translation but adopted nowhere.

To write that List was not ‘as resolute a free-market advocate as Smith, placing national interest above the principle of market competition’ is disingenuous. Adam Smith was not ‘resolute’ about free trade. That misleading image comes from his epigones in US academe and their exponents in the media. It does not come from Wealth Of Nations (excluding out of context quotations).

Smith was pragmatic about changes in policies arising from political economy. He was not an ideologue. He was not in a hurry for change. He looked backwards to how a country arrived at where it was at. He rarely made predictions about the future.

He observed and reported on what he observed, and he cautioned people who read his books not to rush at making the needed changes he identified in Britain’s political economy. His free trade analysis arose from what the mercantile political economy of Britain since the 15th century had done to hold back the ‘natural’ growth of the economy, which could spread opulence deeper into society, particularly to the vast majority of the labour poor who supported all the rest.

He recommended ‘slow and gradual change’in Britain’s monopolistic and protectionist regime, in the interests of ‘common humanity’ to ensure those vulnerable to its dismantling would be able to adjust over a period of time. He didn’t think free trade would ever be completely established, given the institutions and interest groups who benefited from protection.

He was not a ‘militarist’. He opposed wars for frivolous ends, especially those based on ‘jealousy of trade’ and seeing trading partners as enemies. He was not a pure pacifist either. His historical studies showed the awesome consequences of not being able to defend against ‘barbarian’ warlords, such as those who overran the Western Roman Empire in the 5th century, which devastated ‘tolerable’ Roman opulence and took a thousand years for Europe to begin to recover from the 15th century.
For this he favoured the maintenance of the British ‘Navigation Acts’, themselves the major instrument of British colonial monopoly, because ‘defence is more important than opulence’, given the consequences of the weakness of Britain as an island.

List took the wrong lessons from Wealth Of Nations, as did Alexander Hamilton. Neither of them was unique in making a case for state-sponsored economic development. Almost all governments of nation states apply protectionism in trade. Britain, a supreme mercantile constitutional monarchy, long practised protectionism allied to military strength. Smith exposed in Wealth Of Nations the true cost of such political economy. Continental Europe, in confusing what Wealth Of Nations suggested should be done with what successive British governments persisted in doing (the second British Empire), inflicted on themselves and their hapless colonies a high price.

Blaming Adam Smith for what followed, when he warned against such policies, is an error of high magnitude.


Blogger Willbert said...

What would Adam had said about Europe of today? I guess that he had voted YES to Free Europe Constitution at!

8:14 am  
Blogger Gavin Kennedy said...

Hi Wilbert

Thank you for your post. I looked at the Free Europe site and broadly agreed with is general thrust.

However, Lost Legacy does not take an institutional view for or against constitutional reforms in Europe. It does not express
political views.


4:44 pm  
Blogger Brian Shapiro said...


Its important to understand that Adam Smith also saw cases in which tariffs might be beneficial, which he discusses in Part II of Book IV of the Wealth of Nations : 'Of Restraints Upon the Importation from Foreign Countries of Such Goods as Can Be Produced at Home' .

He argues that the two cases in which it would be advantageous are when an industry is required for national defense, and when there is some internal tax placed on domestic industry which makes it more difficult to sell domestic products compared to foreign products.

Then he goes on to talk about cases in which there have to be deliberation, including retaliatory tariffs. His difference from mercantilists was he thought retaliatory tariffs always should have the goal in mind of returning the situation to how it was and influencing the other party to drop tariffs.

So there's a question to me of how much Hamilton really strayed from Smith compared to others who went even farther than Smith and become doctrinaire partisans against tariff.

Hamilton, and later List, expanded on Smith's limits, and suggested tariffs may appropriate for things like 'infant industry protection'.

But like Smith, they opposed the old System of mercantilism, which was more than about protective tariffs -- in establishing state sponsored monopolies, privileges, control of trading ports, determining who colonies could trade with, creating strict quality regulations that were punishable by death. Mercantilists also assumed the point of trade was to always encourage exports over imports, which Hamilton didn't accept either.

The opponents of Hamilton and List, who were free trade exponents and disliked all tariffs, were no better as heirs of Smith.

8:51 pm  
Blogger Isaac Marmolejo said...

And expanding from Brain Shapiro's comment, I think Hamilton's call for tariffs are partially due to Smith's book too. Hamilton WAS NOT a protectionist, he called for moderate tariffs, as did Smith. I dont know if you are aware but protectionist policies were advocated by his most main political rivals, specifically Madison, who set the first protection tariff in American history. It should be stressed that just because one advocates moderate tariffs, does not mean that they are protectionist.

9:00 pm  

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