In a previous post of this series on How America Was Built (HAWB), I pointed to the importance of Alexander Hamilton, because he basically designed and created the USA economy. Hamilton was our first Secretary of the Treasury, serving under George Washington.
Amazingly, Hamilton has been written out of mainstream "neo-liberal" and conservative economics textbooks. In my previous post I discuss the example of the most used economics textbook, by H. Gregory Mankiw (who advised both George W. Bush and Mitt Romney) This is actually not that surprising, because the truth is that Hamilton rejected and refuted the laissez faire and free trade doctrines of Adam Smith and classical British political economy, which are the preferred policy outcomes of the one percent elites who basically fund, shape, and guide the economics profession.
In European Origins of the Economic Ideas of Alexander Hamilton (Arno Press, New York, 1977), Robert James Parks examines Hamilton's important economic writings, especially Hamilton's five major reports he submitted to Congress as Secretary of the Treasury. Parks begins the fifth chapter by noting that Hamilton’s December 1791 Report on the Subject Manufactures "demonstrates even more conclusively that [Hamilton] was not Smith’s disciple…. Careful analysis of Hamilton’s Report reveals basic conflicts with Smith so deep that Hamilton had to dedicate a major portion of his Report to attacking the validity of Smith’s system for American use…. From the beginning Hamilton disagreed with Smith over the logical course for America to follow in her economic development.”
(The full text, as well as excerpts, of Hamilton's Report on Manufactures is available at a number of web sites, including here.)
More below the Great Orange Emblem of Erudition....
What is conveniently forgotten by present-days adherents of Adam Smith and the economic doctrines of free trade and laissez faire, is that Adam Smith was the voice of the new, rising British commercial oligarchy which vehemently opposed the idea that the United States should attempt to be anything other than producers and suppliers of basic agricultural commodities. According to Smith and his fellow apologists for British imperialism, any attempt to foster the growth of manufacturing industries and thus establish America’s economic independence from the powers and princes of Europe, was “unnatural”: a violation of the established order of Nature—its equilibrium (a key concept of mainstream economics today, revealing the profession's refusal to repudiate its heritage of British imperial economic theory)—and therefore a sinful exercise in economic inefficiency and waste of resources. In Book II, Chapter V of Wealth of Nations, Smith wrote:
It has been the principal cause of the rapid progress of our American colonies towards wealth and greatness that almost their whole capitals have hitherto been employed in agriculture. They have no manufactures [and] The greater part both of the exportation and coasting trade of America is carried on by the capitals of merchants who reside in Great Britain.... Were the Americans, either by combination or by any other sort of violence, to stop the importation of European manufactures, and, by thus giving a monopoly to such of their own countrymen as could manufacture the like goods, divert any considerable part of their capital into this employment, they would retard instead of accelerating the further increase in the value of their annual produce, and would obstruct instead of promoting the progress of their country towards real wealth and greatness. (Emphasis mine)
In other words, the British oligarchs could actually tolerate the colonies achieving political independence,
so long as North America remained in economic bondage to Britain. This stratagem of
economic warfare was behind Lord Sheffield's 1783
Observations on the Commerce of the American States, and was exposed by Thomas Paine in
A Supernumerary Crisis II.
Today, we are largely ignorant of this history, in no small part because mainstream conservative and neo-liberal economists deliberately avoid studying or discussing it. See, for example, the difficulties encountered by Frank Bourgin and Michael Hudson in having their economics doctoral dissertations accepted; Bourgin at the University of Chicago in the early 1940s (discussed in a New York Times review of Bourgin's resulting 1989 book, The Great Challenge: The Myth of Laissez-Faire in the Early Republic), and Hudson at New York University in the early 1960s (discussed in the Preface to the 2010 edition of Hudson's America's Protectionist Takeoff 1815-1914: The Neglected American School of Political Economy.
The implications are stupendous. Much of USA history was determined by this struggle to understand and oppose the economic warfare of British oligarchs. Recall, for example, the historical American antagonism toward Britain captured in the phrase Perfidious Albion.
Unfortunately, it is all too easy to cloak this subject in the garb of conspiracy theory (i.e., Skull & Bones, the Trilateral Commission, Mont Pelerin, Bilderburg, Davos) and thus obscure the momentous struggle of what is basically a war of ideas over what type of society, culture, and economy the citizens of the new United States should endeavor to create. I think this excerpt from the Preface of Hudson's America's Protectionist Takeoff frames the issue, and the stakes, quite well:
[Mainstream economists treat] the American School [as if it] never existed. The modern abhorrence of protectionism expunged from history the logic that guided U.S. industrialization under Republican leadership from 1860 through 1912. The American School's trenchant critique of free trade and the theorizing of Ricardo, Malthus and other British writers caused a cognitive dissonance in the minds of professors eager to promote a view of American history driven by an inexorable drive for free trade and westward expansion as Manifest Destiny.
Actually, westward expansion was a Democratic Party policy to extend slavery and plantation agriculture. In an epoch when protective tariffs were the principal source of revenue for the federal government (that is, until the 16th Amendment created the federal income tax in 1913) the South based its cotton and tobacco production on foreign markets, seeking to feed its slaves with low-priced grain from the West. The Whig and Republican industrial program called for concentrating industry in the Eastern urban centers, whose population would be fed by farms that would find their major market at home, not abroad. But industrialization threatened to bid up food prices, eroding the competitiveness of plantation agriculture. This prompted the Democratic
Party to urge free trade, small government, and credit aimed mainly at export
financing, not industry. The slave states in particular decried industrialization and urbanization as culturally decadent rather than the key to economic progress. At issue was the kind of cultural, social and political structure America would develop and national trade policy would act to bring about.
For those wondering about the great ideological contest between Jefferson and Hamilton over whether the new republic would remain agrarian or would become industrialized and urbanized, Hudson explains in the first chapter of
America's Protectionist Takeoff how Jefferson's ideal of agrarian republicanism was usurped and replaced by the pro-slavery and anti-democratic ideas of Thomas Cooper, president of the University of (where else?) South Carolina during 1820-1834. If you think these issues of political economy are too esoteric, or don't have very long-lasting historical consequences, take a few seconds to ponder the continued ideological backwardness the South presents us today, as the stronghold of the Republican Party, which sadly is not the progressive Republican Party that led the nation through the Civil War and emancipation.
It is the clash between these contending philosophies of political economy which have largely determined the course of American history. For example, if the Hamiltonian / Federalist program of industrialization had been fully embraced, instead of obstructed, with the result that the pressure generated by soil depletion to migrate westward had been reduced and even eliminated, is it possible that the whole tragic history of genocidal atrocities against Native Americans might have been avoided?
In his Report on Manufactures, Hamilton paraphrased, then refuted, four major arguments Smith made in favor of free trade and laissez faire. I will quickly summarize these four points, and Hamilton’s refutations of them, but I abjure the reader to keep in mind that summarizing these arguments so briefly runs the danger of minimizing their momentous historic impact. If Hamilton had not succeeded in establishing a new national economy which included an activist role for government, it is likely the United States would never have emerged as a single, unified superpower, but probably would have broken up over a number of issues and crises which threatened the Union—even before the Civil War.
It should also be noted here that Hamilton's paraphrasing of Adam Smith has been, and still is, used by conservatives and neo-liberals to promote the falsehood that the USA economy is based on the ideas of Adam Smith. The fact is that Hamilton paraphrased Smith not to agree with Smith, but to refute him.
First was Smith’s argument that agriculture provided higher returns to capital, because the puny efforts of man are assisted and magnified by the biological power of nature. (Smith, Wealth of Nations, ed. Edwin Cannan, Modern Library, New York, 1937, pp. 345, 639-641.) Hamilton merely pointed out that the art and skill applied by artisans, craftsmen, and workers to manufacturing activities often created much more value than the simple labor of man and nature in agriculture. Moreover, Hamilton pointed out, the aid of nature is widely applied to manufacturing activities through the use of water power. Hamilton also noted that the application of the power of nature to agriculture was seasonal, and occasioned periodic unemployment, while manufacturing remained steady all year round. (Parks, pp 123 ff.)
Second was Smith’s argument that agriculture yields revenue which manufacturing does not, namely, rent. (Smith, p 345.) It should be noted here that political economists, in the century after Smith and Hamilton, would greatly refine and change the concept of economic rent. With that proviso, Parks explains that
Smith regarded rent as the surplus remaining from the labor af nature after the returns to man and capital had been deducted. Hamilton’s analysis used Smith’s division of returns into the profits on stock (capital) and rent to attack him. He reclassified land as a form of stock, argued that it earned profits, and held Smith's distinction as merely a verbal one. (Parks, pp 126-127.)
At first glance, you might wonder if this point is significant, or just a splitting of hairs. But arguing that land was as much a malleable "stock" as other factors of production, strikes at the heart of the British Ricardo-Malthus school which held that land was a fixed and finite resource, which could only be abandoned when its fertility was exhausted. In a fascinating chapter of the origins of the USA Department of Agriculture, Hudson shows how pro-slavery Democrats in the 1840s and 1840s resisted the introduction and dissemination of the breakthroughs in agricultural chemistry and soil science made by European scientists Justus von Liebig, Albrecht Thaer, and John Bennet Lawes. The very basis of soil science destroyed the Ricardo-Malthus model of diminishing returns which underlay British free trade doctrine. American System economists instead argued that industrialization—promoted by an activist national government—would create a home market for agricultural products: the "forge and anvil" would take their place next to the "farm and plow," "putting the consumer by the side of the producer" and cutting out the middlemen in the British system who enriched themselves by trading and transporting goods around the British Empire but added nothing of real value.
Hudson writes:
Here was an argument against the Ricardo-Malthus model that underlay free-trade doctrine and its doctrine of class warfare and social immiseration by portraying population growth as leading to diminishing returns in agriculture. Ricardo’s notion of soil having “original and indestructible powers” was unwarranted, as was his idea of diminishing returns resulting from increasing population density. Far from reflecting the laws of nature, the misery forecast by Malthus and Ricardo was at odds with the rules of well-managed nature. It was not the growing density of population that threatened America’s soil productivity, but just the reverse—the fact that the free availability of land in America’s sparsely populated interior led to soil-depleting modes of cultivation. (p 322)
Hamilton further argued that Smith failed to account for the full value of the output of manufacturing. "The Artificer," Hamilton wrote,
may be regarded as composed of three parts; one by which the provisions for his subsistence and the materials for his work are purchased of the farmer, one by which he supplies himself with manufactured necessaries, and a third which constitutes the profit on the Stock employed. The two last portions seem to have been overlooked in the system [of Smith], which represents manufacturing industry as barren and unproductive.
Not content to just explain how Adam Smith was incorrect to believe agriculture was inherently more productive than manufacturing, Hamilton also observed that the advantages of manufacturing would be squandered under a policy of free trade, since
manufacturing pursuits are susceptible in a greater degree of the application of machinery, than those of Agriculture... all the difference is lost to a community, which, instead of manufacturing for itself, procures the fabrics requisite to its supply from other Countries. The substitution of foreign for domestic manufactures is a transfer to foreign nations of the advantages accruing from the employment of Machinery, in the modes in which it is capable of being employed, with most utility and to the greatest extent.
Third was Smith’s argument for free trade, and its basis in the ideas that 1) nations were “naturally” specialized to produce only certain commodities and goods, and 2) nations would gain more economic benefit by focusing only on what they specialized in, and trading for what they did not. (Parks, pp. 134 ff.) To Smith, it was clear that America with its vast and amazingly fertile unsettled lands should specialize in agriculture and purchase all needed manufactured goods from overseas. Hamilton dismissed this idea as valid only in theory. The plain reality, Hamilton argued, was that the nations of Europe simply did not follow Smith’s theoretical principles of free trade, but continued to apply mercantilist policies of favoring and protecting certain economic interests. Hamilton stated emphatically that given the trade restrictions imposed by European nations, and their lack of reciprocity, it would be suicide, not just folly, for the United States to attempt to practice free trade.
Parks notes that these 1791 elaborations by Hamilton, of the dangers to America of free trade given the realities of European practices, is a repeat of the arguments Hamilton put forward his February, 1775 Revolutionary pamphlet, The Farmer Refuted. Parks also notes that within two years (1793), Thomas Jefferson, as Secretary of State, had swung around to a similar position on foreign trade. (Jefferson, Report on the Privileges and Restrictions on the Commerce of the United States in Foreign Countries, December 1793.) Jefferson's presidency would later founder on his abandonment of a realistic Hamiltonian approach to foreign trade, and his attempt to bludgeon France and England into a reverse form of reciprocity: trade restrictions, and finally an all-out embargo.
The fourth point Hamilton refuted in the Report on Manufactures, was Smith’s argument for laissez faire. Here, I think I cannot explain Hamilton’s attack on Smith any better than Parks has:
One of the doctrines of the physiocrats which Smith had accepted was that of non-regulation of business, with a neutral policy toward its growth. Let alone, neither encouraged nor discouraged, industry would seek its most useful and profitable employment. Against this hypothesis, Hamilton offered several objections. These were that the supposed tendency of industry to seek its most profitable employment was inhibited by the force of habit, the spirit of imitation, fear of new ventures, the intrinsic hazards of new enterprises, and the unfair competition created by the bounties and subsidies given in competitive nations. Experience teaches that men change habits only slowly and reluctantly. It is the job of government to encourage and speed up change. He argued that capital is cautious, and can only be made venturesome if the government removes some of the risks. Moreover, it is the job of the government to protect infant industries and compensate for unnatural advantages given to foreign products by foreign governments.
We have here a very important, even, crucial, point: that the free enterprise system under laissez faire is actually not that innovative and entrepreneurial without the support and nurturing of government. In my first post in this HAWB series, I included an abbreviated list of the policies and programs of the federal and state governments behind almost all the major technological developments in the USA economy.
I was therefore very pleased to read the interview of Microsoft founder Bill Gates in the latest issue of The Atlantic, entitled "We need an energy miracle." Gates recognizes "governments worldwide could stimulate ingenuity to combat climate change by dramatically increasing spending on research and development," and talks openly about the important role government has played in spurring and creating innovation and new technologies:
the original Internet comes from the government, the original chip-foundry stuff comes from the government—and even today there’s some government money taking on some of the more advanced things and making sure the universities have the knowledge base that maintains that lead. So I’d say the overall record for the United States on government R&D is very, very good....
Gates goes on to explain that he looked very carefully at R&D spending by the Department of Energy, with an eye to its effectiveness, and concluded that government spending in this area should not just be double or tripled, but increased four-fold.
Near the end of his book, Parks explicitly attacks “the proponents of a conservative interpretation of American history,” by noting “Hamilton rejected Adam Smith’s system as a basis for American economic development. Those features of Smith which he adopted for his own use are descriptions of processes, rather than major tenets of Smith's laissez faire system. The Report on Manufactures is an attack on Adam Smith which defends the right of government to direct the economic affairs of the nation.”