FRIEDRICH LIST, THE ULTIMATE GLOBALIST
Regulating Entrepreneurship and World Power
JEL classification: B 25 & 31, F 02 & 15, and O 19.
History of Economic Ideas on: Growth; Development; Trade, Economic Integration
For the essay-collection on Free Trade and the Nation State
Edited by Jürgen G. Backhaus, as an outcome of
Arno Mong Daastøl
SUM - Centre
for Development and Environment,
Friedrich List was a “globalist” at heart while still being a protectionist and an economic nationalist, by force of the prevailing situation. I will try to untangle List’s apparent and somewhat contradictory stance by way of explaining some crucial points of List's criticism of the free trade policy of Adam Smith's followers. These concern the role of co-operation of labour based on immaterial production forces focused in particular at promotion of productive powers, through production of public goods in a wide sense. After giving a necessary general background and description of his ideas I will return to the task of untangling the "contradiction".
The German-American economist, Friedrich List, is known historically among economists as the foremost proponent of railroad construction - and above all as a trade protectionist. In this article I will show that he held beliefs quite contrary to this ordinary appreciation of him. He worked for a more elevated form of global civilisation and therefore was a devoted believer in the promotion of free trade, international law, world trade congresses, a world trade organisation, and a world government. Concerning all these points he came forward with specific suggestions on how to go about to succeed and what resistance to expect. To him, this was most likely to be fulfilled through a development that was gradual and that involved legal, administrative and democratic measures.
The core of List’s strategy was the theory of productive powers as opposed to “the theory of exchange values”, which English writers termed the rather monetary oriented outlook of Adam Smith and his followers. The means to elevate civilisation was the establishment of an urban industrialised society. The crucial and basic instrument was to be tax and trade policy, besides property regulation. On a more concrete level this would involve arranging for incentives that would spur investment into infrastructure of all kinds, into manufacture, especially machine tool production, and into agriculture, especially science related agriculture.
List’s strategy differs from that of the acknowledged free traders in that he paid more respect to factors of production that can be summarised under the label “immaterial”. This is connected to List’s inclusion of the role of co-operation or “confederation of labour” as an important factor of production - in addition to Smith’s “division of labour”. This focus on immaterial factors had consequences for the practical application of the legal and administrative measures in that he would advocate transitional remedies related to national learning to overcome the different prevailing circumstances of each individual nation.
List therefore stressed the difference between private and national (public) economic principles. Knowledge being the public good # 1 makes learning and therefore cultivation and protection of skill crucial, therefore the need for governmental intervention. He believed that the following motive / incentive oriented factors were crucial for the development of a more elevated global civilisation: Stability & order for predictability (for investments of all kinds), freedom & participation (for creativity), morality & know-how (for predictability and productivity). These factors were all goals in their own right that needed an accompanying industrialisation. These factors were also instruments of his program for industrialisation.
This is why List in his pursuit of a more elevated and free civilisation, and therefore as an adherent of free trade, of international law, and of a world government, could also be devoted to the promotion of the national principle (applying state intervention) in economics, as the necessary instrument. It is this author’s belief that List’s version of free trade would represent a more genuine type, if free trade ever would be possible.
The basic core of List's contribution to economics or rather Political Economy, may be said to be that of,
… a prophet of the ambitions of all underdeveloped nations. (Laue, 1963, p.57)
Industrialisation and urbanisation were meant to be means to further general and individual freedom of thought and action, and to develop the spiritual characteristics of Man by offering potential for the creation, implementation and exchange of ideas, including morality.
That List was a free trader and an Globalist by heart should be obvious from the following quotes. The last point of his criticism against his own beloved industrial system as opposed to the monetary system (or Mercantile- as he named it) was,
7. That chiefly owing to its utterly ignoring the principle of cosmopolitanism, it does not recognise the future union of all nations, the establishment of perpetual peace, and of universal freedom of trade, as the goal towards which all nations have to strive, and more and more to approach. (* 1841, p.341)
In other citations in the same direction, List claims that,
The highest ultimate aim of rational politics is … the uniting of all nations under a common law of right (* 1841, p.410)
Thus the question as to whether, and how, the various nations can be brought into one united federation, and how the decisions of law can be invoked in the place of military force to determine the differences which arise between independent nations, has to be solved concurrently with the question how universal free trade can be established in the place of separate national commercial systems. (* 1841, p.114)
… the countries which have reached the second and third stage of industrialisation should form an association of their own to press for the establishment of world free trade which should be the common aim of all countries. (* 1837 a, p.52)
Chapter headings of his Natural System (* 1837 a) speak for themselves: The Common Interest of all Manufacturing States in Free Trade (Ch. 7), Transition from the Policy of Protection to the Policy of as much Free Trade as possible, (Ch.25) and How best to introduce and foster Free Trade (Ch.26)
Still he might claim that,
Free trade is the fantasy of the merchants engaged in foreign commerce, (* 1837 a, p.58)
This following statement makes this contradiction more understandable,
The system of protection … appears to be the most efficient means of furthering the final union of nations, and hence also of promoting true freedom of trade. (* 1841, p.126)
Friedrich List (1789-1846) was one of the earliest and severest critics
of what he labelled Cosmopolitical School of Economics, i.e. the tradition from
the Physiocrats and Adam Smith: The Classical and
List is generally known as a proponent of a protective, nationalist economic policy and of railroad construction, in the early nineteenth century. This is only correct from a superficial point of view, as his fundamental ideas were far wider reaching, dealing with questions like the ultimate and immaterial basis of economics and of civilisation, within a dynamic long-term, global perspective. Moreover, it is in this perspective his ideas on trade must be seen - as one of several instruments. Any inquirer into the ideas of List would be well advised to consult the last chapters of his Natural System (* 1837 a, Ch.33 & 34).[i]
List wrote under the impressions of a mainly rural
List agreed with Smith on the desirability of global free trade. List claimed, however, that instant deregulation and radical free trade would lead to a monopoly under the strongest nation, technologically and economically (* 1841, p.126). Before any major deregulation could take place, other nations therefore had to be lifted up to the level of the leading nation (* 1841, p.127). This had to be done gradually through legal and regulatory arrangements (* 1841, p.125), involving among other instruments, limited and differentiated protection at home and proper international legal agreements.
Actually Smith would not have disagreed to the disastrous effects of sudden deregulation and wrote on the matter of trade that,
Changes of this kind should never be introduced suddenly, but slowly,
gradually, and after a very long warning. (Smith, 1776, Book IV, Ch.II, p.44 - p.471 in
Liberty Fund’s edition).
have been a greater free trader than his main adversary Adam Smith, in the sense that List's strategy would promote
long-term competition to a larger degree than would Smith's strategy, and
thereby promote wealth-creation more efficiently. This was List’s own
opinion (* 1841, p.131). This is a matter of perspective, of
time; and of economic complexity, regarding for instance inter-relationship
between markets. List would claim that Smith might be said to be a free trader
only from a static short-term and relatively superficial perspective concerning
the interests of
List's basic argument against Smith, was that his materialist, static, and superficial generalisations hid the crucial differences that made the state and different policies in different circumstances necessary - concerning types of goods, capital, markets, institutions, private vs. public interests, historical stage of development, the role of time in general and of learning.
In particular this concerned the difference between private vs. public interest, between commodities and refined goods and the level of development of a nation in all respects. He claimed the short-term merchant interest and its accompanying monetarist outlook to be Smith‘s point of departure. Thereby Smith could overlook the necessity of installing an active government that would create a policy that differentiates, and therefore would defend the macro point of interest, by establishing regulations and legal arrangements, nationally and internationally.
List's claimed that his economic strategy would also promote the basic and crucial non-monetary factors for economic development that Smith mainly overlooked. His perspective did not only pay attention to material factors, as he claimed Smith to do, more or less. List, in contrast, saw the immaterial factors as the most important for the development of economics as well as civilisation in general.
List also argued that Smith and his followers confused causes and effects in their arguments by using non-historical static arguments. (* 1841, p.126, 135) This added to the above tendency of disregarding the need for legal and regulatory intervention in the economic sphere. Concerning in particular underdeveloped nations, this generally promoted short term merchant interests contrary to long term national interests (including the merchants), List charged.
List was, sometimes, too much of a free trader, in the sense that his opinions were ill founded. (See the second last chapter on criticism.) In this sense, List often showed too much faith in the withering away of necessary public regulation, being at the bottom of his heart a liberalist emotionally and politically. When advocating free trade for agricultural produce for instance, he for some peculiar reason overlooked the role of agriculture as a stable home market for domestic manufacture and as a crucial producer of necessities in times of convulsion.
Although development of human civilisation at large was indeed List's main preoccupation, his he was also devoted to promotion of more concrete and intermediate matters such as promoting larger markets through economic and political integration. This was to be realised by political and economic integration and by innovations and investments into activities related to communication first of all but also investments into industry and agriculture. More efficient transport systems would further urbanisation, the division and co-operation / confederation of labour. This would foster the power of the individual and of democracy, he believed, and thereby further boost the creativity of the individual. This would again boost scientific, moral, and economic progress, and so on.
Nevertheless, a crucial point of criticism against Smith was Smith’s one-eyed focus on the role of the division of labour. List applauded Smith’s contribution in this area but claimed that Smith had forgotten the other side to this phenomenon, namely the union or confederation of labour, i.e. the co-operation of individuals and institutions (firms, regions and nations) in order to produce a result. This concerns several sub-issues. One concerns the immaterial side: The skill, morality, and insight required to co-operate. Another concerns the implications for transport and tariff policy. A higher union or confederation of labour requires better communication and co-operation. Geographical proximity between actors furthers better such co-operation and thereby synergy between skills, trades and branches. Besides it may be economical in the sense that it requires less transport and therefore use of resources like time and energy. However, such local confederation of labour may not develop “naturally” and spontaneously but may require “artificial measures” as governmental intervention and restriction of some sort.
List emphasised the crucial roles of two phenomena intimately related to legal arrangements, arranged here according to importance:
Political and religious freedom, security and morality.
Although primary goals by themselves these immaterial goals also served the next
Arrangements to invoke incentives for, and investments into: Education, science, research and communication / transportation as well as into production in manufacturing and agriculture. This would also serve the first point. One type of arrangement was regulation of national trade - and eventually international trade by means of differentiated protection outwards, and liberalisation inwards - as well as voluntary customs unification to reap economics of scale benefits.
The ultimate goal in List’s strategy was of an immaterial and moral and
the prime instrument was
therefore to be the legal system. Changed legal regulations were to
promote social progress. Educated
in law and having practised within the legal- and parliamentary system this was
logical to him, however much they had to be fought through in political
and bureaucratic battles. National and international legal arrangements were
also main preoccupations of List's forerunners in
Surprisingly, it is little realised today, in the so-called information age, that List was also the prophet of the economics of communication. His strategy was based on an idealistic image of Man, regarding the human spirit as the ultimate source of wealth and of power, preferably over nature and less over other human beings. This crucial fact places his insight and strategy far ahead of his materialistically based adversaries within the economics profession, like those of the Smith-Ricardo-Mill-Marshall tradition, concerning the "new" so-called "knowledge-" or "information-economy" and also as regards the entrepreneurial aspect., as he thoroughly discussed the incentive structure in many aspects. (* 1841, Ch.25)
List warned against the destabilising effects of a lack of industry,
It is dangerous to allow the prosperity of a country's arable land to be entirely dependent upon the export of cereals and raw materials in exchange for manufactured products. Such agricultural exports are liable to serious fluctuations. (* 1837 a, p.56)
To this he added the danger and vulnerability of one-sided economies in particular those lacking an industrial sector and therefore dependent upon foreign consumption for its own economic stability. A monocultural primitive economy was more prone to indebtedness and commercial crisis than a mature and heterogeneous economy. (* 1841, pp.147, 280ff). On the other hand he argued that industrialisation would elevate civilisation by demanding a highly developed infrastructure and therefore educated and skilled workers with a high moral standard ensuring high quality conditions of work and trade.
List's eagerness to promote general and individual freedom of thought and action was the major reason why he was so eager to industrialise and urbanise. In fact his reasons may have been quite philosophical if not even religious, apart from the reaction to the personal persecution he experienced. List grew up in a country that for ages had been dominated by a high regard for learned knowledge.
A trait in the post-everything
age we are presently going through is that some forgotten questions are
being put forward again. For example concerning development. Who has the
legitimate authority to
define (the content of) development for others? Development is by itself
a relatively empty concept,
and may be twisted into any shape and content we might prefer. What therefore
must be emphasised and
questioned is the goal of development, the deliberate content of
development that we decide upon. And this is where we enter the philosophical
and religious arena. This question cannot be decided by social scientists as
such not any other scientist - in a more
proper understanding of the word. This concerns the Image of Man, the meaning of our
limited life on earth. In
The question that must be asked was: What is Man, and do we want her to be? The answer would have to be somewhere between Man as spirit and as matter- situated between God and Animal. The answer would have dire consequences for Man's individual freedom since the image and goal, Man as Animal, would leave individual freedom not room and instead have collective instincts gain the dominance. On the other hand, the goal: Man as God, pure spirit or reason, would direct attention to the potential of in principle limitless creativity, i.e. individual freedom. The mainstream of German social thought in the 19th Century, and Friedrich List, was geared towards the latter reason-oriented perception of Man and of development. Therefore, the weight attached to the development of industry and cities in this tradition was directly a result of the starting point of the German economic tradition, based on German idealism in philosophy.
Industrialisation and urbanisation were therefore means to develop the spiritual characteristics of Man by offering potential for the creation, implementation and exchange of ideas, including morality. In this way, money as a means of exchange may certainly be said to fill the same spiritual function, by making division and co-operation of labour possible so that everybody may work with their speciality, for everybody else. However, the monetary institution may be arranged so that other characteristics may counter this function - cf. hoarding and narrow-minded speculation.
High morality and skill in a society would require general welfare. In order to industrialise, any country's government would need to consciously develop the country's infrastructure in all of its ideal and material aspects; its educational, communicative and administrative system, including the legal system, which was to have the pivotal role. According to List's stage theory, which he developed further after his American Experience (* 1827 a, 161)[iii], an industrialising country would have to go through a period of free trade and export of commodities and gradual introduction of industry. Then a period of protective trade policy, in conjunction with establishment of protective navigation laws and naval policy. And finally back to free trade when ALL economic sectors had been developed. This pragmatic attitude toward regulation of trade was more normal in practice than we tend to think nowadays in our quasi-religious times, concerning the economic doctrines of free trade. The core organiser of this strategy of List was to be - the legal system.
In Chapter 15, of the National System (called Nationality and the Economy
of the Nation) we find an opening phrase, much like a compressed
theoretical and political program and attack on the
The system of the school suffers, as we have already shown in the preceding chapters, from three main defects: firstly, from boundless cosmopolitanism, which neither recognises the principle of nationality, nor takes into consideration the satisfaction of its interests; secondly, from a dead materialism, which everywhere regards chiefly the mere exchangeable value of things without taking into consideration the mental and political, the present and the future interests, and the productive powers of the nation; thirdly, from a disorganising particularism and individualism, which, ignoring the nature and character of social labour and the operation of the union of powers in their higher consequences, considers private industry only as it would develop itself under a state of free interchange with society (i.e. with the whole human race) were that race not divided into separate national societies.
Between each individual and entire humanity, however, stands THE NATION, ... As the individual chiefly obtains by means of the nation and in the nation mental culture, power of production, security, and prosperity, so is the civilisation of the human race only conceivable and possible by means of the civilisation and development of the individual nations. (1841, Ch.15, p.174)
A central and crucial part of his world of ideas and his agitation was freedom, the lack of which had persecuted List more than once. He claims that industry will transform the morality of habit into conscious morality and tolerance. (* 1841, pp.208-209) It was List's firm belief that religious and political freedom could only be attained through industrialisation and vice versa. (* 1841, pp.107, 142 etc.) This had to be enacted through the legal system, establishing a rule of law, and of just and egalitarian law.
… It is from manufactures that the nation's capability originates ... all the mental powers of a nation, its State revenues, its material and mental means of defence, and its security for national independence, are increased in equal proportion by establishing in it a manufacturing power. (* 1841, p.209)
It has been the experience of all ages and of all countries that freedom and industrial progress are like siamese twins. (* 1837 a, p.153)
The spirit of enterprise, economic progress, technical knowledge, and artistic skill develops only in countries enriched by political and religious freedom. (* 1837 a, p.164)
Great, however, as have been the advantages
heretofore mentioned, they have been greatly surpassed in their effect by those
Chaos seldom fosters freedom for the average man. As with language and games, a culture need some collective rules in order to make it possible for the individual to play with these, in order to benefit himself and perhaps society at large. The following quote gives an idea of the important role List gave to freedom guaranteed by the legal order ,
Everywhere and at all times has the well-being of the nation been in equal proportion to the intelligence, morality, and industry of its citizens; according to these, wealth has accrued or been diminished; but industry and thrift, invention and enterprise, on the part of individuals, have never as yet accomplished aught of importance where they were not sustained by municipal liberty, by suitable public institutions and laws, by the State administration and foreign policy, but above all by the unity and power, of the nation.
History everywhere shows us a powerful process of reciprocal action between the social and the individual powers and conditions. (* 1841, p.107)
The of purpose of List’s strategy was to establish a multifarious variety competitive national industries in order to promote national sovereignty and productive synergy between economic sectors
The whole social state of a nation will be chiefly determined by the principle of the variety and division of occupations and the cooperation of its productive powers. (* 1841, p.159),
List argued that industrialisation and urbanisation is necessary to construct a truly human society, establish freedom of mind as well as democracy and a say for small people, preserve nature and its resources, thereby improving the efficiency of the economic system and adding to wealth creation. List argued that nation-building was generally a continuation of the principles of city-building, in that,
The agricultural-manufacturing-commercial State is like a city which spreads over a whole kingdom... (* 1841, p. 339)
Against the claims of the orthodox school, List suggests that industry rather than trade is the founding stone of freedom and tolerance,
The popular school has attributed this civilising effect to foreign trade, but in that it has confounded the mere exchanger with the originator. Foreign manufactures furnish the goods for the foreign trade ... (* 1841, p.142)
List here points to the effects of manufacturing for trade through the instrument of protectionism by creating a home market that eventually would contribute positively to the size of the world market. (See below.)
Economic progress was in List's mind inseparable from progress in civilisation, which in List's opinion meant a liberal world modelled after the British experience (see * 1841, pp.48-52, 56, 130) - As Britain later was to be Hitler's model country, being the ruler of India etc. In the typical German idealist and rationalist Renaissance tradition, as opposed to the materialist Enlightenment tradition and to the irrational Romantic tradition of the 19th and early 20th Century, List argues for the rational, humanistic and liberating benefits for the individual of the industrially based urban life-style. (* 1837 a, p.69)
... the confederation of the productive powers, press with irresistible force the various manufacturers towards one another. Friction produces sparks of the mind, as well as those of natural fire. Mental friction, however, only exists where people live together closely, … Therefore liberty and civilisation have everywhere and at all times emanated from towns; … (* 1841, pp. 203-204)
The country derives energy, civilisation, liberty, and good institutions from the towns, ... (* 1841, p.208)
This urban oriented tradition is very strong throughout German history: We find the same individualistic (in the non-egotistic sense) and humane orientation with Nicholas Cusa some four centuries earlier in the 15th Century; with Leibniz 150 years earlier (Anners, 1983, p.211), and later, after List, with for instance Karl Bücher (Bücher, 1893) and Georg Simmel (Simmel, 1902) in their discussions on transportation and urbanisation. The irrational and backward-looking biology oriented “Blut und Boden” tradition of the late 19th Century and early 20th Century seem to be a temporary breech in this humanistic tradition. List writes that,
The productive powers of agriculture are scattered over a wide area. But the productive powers of industry are brought together and are centralised in one place….. Only in such conurbations can a public opinion develop which is strong enough to vanquish the brute force, to maintain freedom for all, and to insist that the public authorities should adopt administrative policies that will promote and safeguard national prosperity. ... (* 1837 a, p.69)
List also point out the benefits of democracy and the benefits of improved communication for democracy. (* 1837 b) Democracy is another way of saying universalism, i.e. equal rights, and this was a strong tendency in the tradition of German economic thought. Bücher pointed more descriptively to the same phenomenon in transportation and health service (Bücher, 1893).
List pointed out how manufacturing, as opposed to agriculture, creates higher potential for diversification of social activity and enhanced possibilities for utilisation of individual abilities, especially mental abilities, thereby enhancing and harmonising equal rights to develop one's abilities and happiness with general social welfare and prosperity, ... (* 1841, Ch.17, p.200) Today, we may argue that agriculture has changed a lot and that it often embodies so much knowledge and combined skills that it often may offer the individual a more varied life if not as specialised as the industry based life might do. However, even in his days, List argued that industry was necessary for science and he argued for the introduction of science in agriculture, as for instance in breeding, so that by this,
agriculture itself is raised to a skilled industry, an art, a science. ...
The power of machinery, combined with the perfection of transport facilities in modern times, affords to the manufacturing State an immense superiority over the mere agricultural State. (* 1841, p.200)
… industry calls forth and promotes the growth of intellectual and moral forces of every kind. … the productive powers of industry awaken in industry and agriculture the spirit of enterprise and innovation. … a great many resources - formerly of little value - have become increasingly valuable as industry expands. .. industry …. stimulates the improvement of communications, … (* 1837 a, p. 68)
List argues that industry and science extends human potential to utilise new materials and to utilise the ones already in use more efficient and thereby save waste and energy, concerning both production and transportation. (Cf. * 1841, p.210)
Industry is the mother and father of science, literature, the arts, enlightenment, useful institutions, and national power and independence. (* 1837 a, p.67ff see also p.79)
In addition the manufacturers are the focus of a large, lucrative, and world wide trade with peoples of varied standards of culture who live in many distant countries. Industry turns cheap bulk raw materials, which cannot be sent long distances, into goods of low weight and high value which are in universal demand. (* 1837 a, p. 69)
List's criticism was generally directed against short-term and narrow-mindedness in economic affairs, and it had in mainly four targets who he claimed acted contrary to their own long-term interests;
1) Landed interests -
2) Merchant interests -
3) Governmental regulation - in general
4) International politics - in particular
In all these cases List pointed out the international aspect of the problems. As well, in all these cases he insisted that his targeted actors did not have a sufficient understanding of their own interests and how these could benefit from contributing to the interests of other actors. They therefore acted contrary to their own long-term interests. His suggestions on to remedy this was in part through legal and regulatory arrangements as well as education and moral enlightenment.
He focused on the gains to welfare to be earned by everyone from a more long-term and wider-minded approach, so to say within a positive sum game. This constitutes Man's unified effort to gain power over nature. On the other hand, he criticised a policy devoted to Man's power over Man. This kind of power struggle is by definition a zero-sum game, where one Man's gain is the other's loss. In the long run this will be destructive.
List called these two traditions respectively the manufacturing tradition and the mercantile tradition, and favoured the former. (* 1837 a, p.178) Most likely, he saw A.Smith's position as a continuation of the latter. And historians have argued that liberalism is a child of a power-oriented and beggar thy neighbour type of mercantilism as opposed to a prosper thy neighbour type of mercantilism - of the leading nation. It still seems like List was a little naïve about this in general, and in particular regarding his personal life. In all cases, his suggestions for remedies of these long-term, market inefficiencies were of a legal nature.
Concerning the landed aristocracy, protection should be lifted and implementation of manufactured inventions promoted. This would raise industrial production, demand and landed rent. Instead, the English,
... landed aristocracy ... killed the hen that had laid the golden eggs" (* 1841, p.370),
It is therefore evident, that keeping down the manufacturing
industry of the Continent, though it certainly hinders the progress of
the Continental nations, does not in the least further the prosperity of
the merchants, economic integration
should be encouraged through law-enforced investments in communications and
through trade agreements where the Dutch were to buy more from
Concerning politicians and lacking investments into infrastructure, suggestions were for the establishment of schools, scientific academies and journals, telegraphs, railroads etc. through public regulation and administration, in particular taxation arrangements which he claimed to be of far higher significance than any other intervention into industrial matters.
Concerning industry he advocated instruments like differentiated cheap credit, differentiated tariff protection, limited monopolies, differentiated subsidies, grants, patent-laws, prizes, exhibitions.
international politics and the role of
List sees radical free trade policy as in the interest of one special social group, the merchants, in which he includes what we may call the money managers. This reflects his beliefs in an institutionalist approach to economic studies. He exclaims,
Free trade is the fantasy of the merchants engaged in foreign commerce, (* 1837 a, p.58)
… commerce must be regulated according to the interests and wants of agriculture and manufactures, not vice versâ.
.. 'Laissez faire, laissez passer,' an expression which sounds no less agreeably to robbers, cheats, and thieves than to the merchant, and is on that account rather doubtful as a maxim. This perversity of surrendering the interests of manufactures and agriculture to the demands of commerce, without reservation, is a natural consequence of that theory which everywhere merely takes into consideration present values, but nowhere the powers that produce them, and regards the whole world as but one indivisible republic of merchants. The school does not discern that the merchant may be accomplishing his purpose (viz. gain of values by exchange) at the expense of the agriculturists and manufacturers, at the expense of the nation's productive powers, and indeed of its independence. … It is therefore evident that the interest of individual merchants and the interest of the commerce of a whole nation are widely different things. … Commerce emanates from manufactures and agriculture, and no nation which has not brought within its own borders both these main branches of production to a high state of development can attain (in our days) to any considerable amount of internal and external commerce. (* 1841, pp.259-260)
Although a firm adversary of the using the
merchant principle in national economic affairs, List’s view of the merchant is rather sober
It is the nature of things that he must buy in the cheapest markets and sell in the dearest. (* 1837 a, p.99)
This phenomenon of short-sightedness in various ways, was also the target of his criticism, concerning passivity of governments in the production of public goods, including machine tools and new technology. In a way his criticism could be regarded as a criticism of the passivity of private entrepreneurs, but keeping the incentives structure in mind, this would not be a just charge, since after all the main task of individual "micro" entrepreneurs is staying alive as such. List did not make this charge. Rather, he hailed them – the micro actors - for their initiatives in this sector (* 1837 a, p.62). The main task of individual entrepreneurs is staying alive as such.
Therefore the charge should be directed towards the passivity of the "macro" entrepreneur with responsibility for the entirety, i.e. government, not fulfilling their task of promoting an efficient national economy by using its tools of regulation and law-making to this purpose, this being a prime goal of the nation state as such. List's insistence of the duty and necessity of governments to initiate investments into innovative production, education and infrastructure was based on his experience with insufficient or even lacking private investments into these public goods areas.
Public goods are generally phenomena that are connected to promotion of knowledge, like innovation and communication - or more specifically like general education, basic science, communication and transportation networks. They have in common the feature of concentrated costs and dispersed benefits. For this reason there tends to be structural under-investment in these areas, if private initiative alone is to be relied upon. In other words, markets for these public goods tend not to work properly without governmental intervention. This might not be a major problem, had it not been for the fact that these areas function as a carpet and a productivity enhancing locomotive for all other sectors of economic activity, in practically speaking any society throughout history. Public goods activities are therefore a prime target of governmental regulation and law making.
All branches are mutually interdependent as List points out. (* 1841, pp.39, 387) Still some branches are more "dependence creating" in the sense that they are have public goods characteristics. This means that it matters especially much to an economy whether these markets function. And since List singles out regulation of law, knowledge production and communications as his particularly favoured sectors we may infer that he saw these as the foundation of other sectors, in other words as the public goods markets.
List never used the phrase public goods nor did he explain the basic characteristics of these - concentrated costs and dispersed benefits (as opposed to rent seeking: Concentrated benefits and dispersed costs) but his criticism of A.Smith concerning private and public interests takes the difference between private and public goods as the crucial point of departure. (* 1827 a, Letter 5, p.75 and 1841, Ch.14: Private and National Economy) As with his advocacy of knowledge based production, he never seemed to develop a thorough and analytical theory on this issue, but his defence may be that neither had anybody else developed these concepts thoroughly at this historical point.
A student of trade cannot be oblivious to the role of industry and of communication as the foundation of trade. List was an epitome of this opinion. In the preface (in the main unfortunately missing in the English edition) to the National System he writes, concerning the lessons he learned about infrastructure in Little Schuylkill,
Only now did I recognise the reciprocal relationship which exists between manufacturing power and the national system of transportation, and that the one can never develop to its fullest without the other. (* 1841, § 22)
And he also underlined the importance of cheap energy,
Nothing is more important for industrialists than the availability of cheap fuel and also easy, speedy, and regular transport at a low cost for all the products and raw materials which they need to build factories and to produce manufactured goods. (* 1837 a, p.62)
and innovation have in common that they are perhaps the most important types of
public goods that distribute their benefits widely throughout the economies, both nationally and
internationally. They also work mutually reinforcing each other and this is
also true for also for the machine
tool industry. As communications, it distributes innovations throughout
the economies. Innovative transport technology, as with the steam-powered
locomotive at List's time, combines communication and innovation and thereby
plays an immense productivity-increasing role.
The following point is of great importance in order to understand List's trade policies. The mental foundations of (economic etc.) welfare makes learning necessary. This implies the necessity of stability, security and protection.
List agreed with Smith that division of labour was an important reason for productivity of labour, and he equally agreed that confederation of labour was important. However, he severely criticised Smith for dealing to too shortly with the latter side to the coin, namely the confederation of labour, which to List was at least equally important. This different emphasis would have important implications. Division of labour may lead the way to “beastly” competition, and may be open to relatively mechanically analysis and biological metaphors and has made formalisation of economics easier and more devoid of real life relevance. Formalisation implies machinery that runs “frictionless” without the transaction costs and externalities that human beings and institutions involve.
Kropotkin argued against Darwin and Spencer, but attributed the co-operative force to biological forces (Kropotkin, 1904). List however, attributed this force to the human spirit. List attacks the “Smith school” such,
The school is indebted to its renowned founder for the discovery of that natural law which it calls 'division of labour,' but neither Adam Smith nor any of his successors have thoroughly investigated its essential nature and character, or followed it out to its most important consequences.
The expression 'division of labour' … may be called with equal correctness a union of labour; …... The cause of the productiveness of these operations is not merely that division, but essentially this union. ... the division of commercial operations without combination of the productive powers towards one common object could but little further this production. (1841, Ch.13, pp. 149-151)
One side to the synergy effect of this division and co-operation of labour is, that it is greater the more variety there is among branches and occupations, and the closer they are in space (urbanisation). Among these he ranked those that demanded skill higher since they would increase this same variety more - as would for instance manufacturing as compared to agriculture. Apart from this he did not attach any higher moral rank to mental than to material occupations. The variety of branches and occupations is potentially larger the more populated, “infrastructured”, and urbanised a society is.
The whole social state of a nation will be chiefly determined by the principle of the variety and division of occupations and the cooperation of its productive powers. ... the whole nation depend on the exertions of all individuals standing in proper relation to one another. We call this relation the balance or the harmony of the productive powers. (* 1841, p.159)
List has a longer discussion of Smith’s understanding of the causes of wealth. List argues that Smith did not understand the underlying spiritual causes, and that he was carried away by the dogma of free trade that he inherited from the Physiocrats. (* 1841, 347) Since co-operation of labour necessitates “mentally based” activity it is only natural that "Mental capital" in List's opinion was the core of the productive powers. This, as well as the focus on the state as the most important type of capital of a nation, he possibly learned from Adam Müller (Müller, 1808). On the other hand List was no one-eyed observer who ignored the dependency of mind upon matter - and vice versa. (* 1841, p.49) List claimed that,
Mental work is in the social economy what the soul is to the body. By means of new inventions, it continuously increases the power of the human being. (* 1927-36, vol.5, 1930, p.42)
Concerning Adam Smith, he writes that,
His investigations are limited to that human activity which creates material values. ... he illustrates solely by exchange, augmentation of material capital, and extension of markets. His doctrine at once sinks deeper and deeper into materialism, particularism, and individualism. ... and thereby laid the foundation for all the absurdities and contradictions from which his school (as we propose to prove) suffers ... This is undoubtedly not the science which teaches how the productive powers are awakened and developed, and how they become depressed and destroyed. M'Culloch calls it explicitly 'the science of values,' and recent English writers ' the science of exchange.' (* 1841, pp.137-138)
By basing their method on the erroneous labour theory of value once established by Aristotle, both Smith and Marx confused the problem of value and focused on the manual side of labour.
… Smith and Say … treat, therefore, principally of the effects of exchange of matter, instead of treating of productive power. … Greater part of the productive power consists in the intellectual and social conditions of the individuals, which I call capital of mind. (* 1827 a, p.63)
... can it be deemed scientific reasoning if we assign as the cause of phenomenon that which in itself is the result of a number of deeper lying causes? … What else can it be than the spirit which animates the individuals, the social order which renders their energy fruitful, and the powers of nature which they are in a position to make use of? (* 1841, Ch. 12: The Theory of the Powers of Production and the Theory of Values, pp.134-136)
Adam Smith regarded the physical labour which produces goods having exchange value as the sole source of goods and he failed to examine the origins that enable this work to be done. From this failure came his serious mistake of ignoring the intellectual resources that lie behind the creation of productive powers. (* 1837 a, 186)
It is meaningless to claim that the work people do is the origin and cause of wealth. ... If work produces wealth, what produces work? … We always find that there is some inner urge which sets the human body in motion. … (* 1837 a, p.184)
Moreover the labours of those who promote the expansion of productive powers are just as productive as those who actually make goods that have an exchange value. ...
Intellectual production and brainwork - like manual labour and the production of material goods - cannot be measured by counting the numbers of individuals concerned. …(* 1837 a, pp.184-185)
List points to the importance of immaterial production factors
We now see what extraordinary mistakes and contradictions the popular school has fallen in making material wealth or value of exchange the sole object of its investigations, and by regarding mere bodily labour as the sole productive power.
who breed pigs is, according to this school, a productive member of the
community, but he who educates men is a mere non-productive. ... A
Certainly those who fatten pigs or prepare pills are productive, but the instructors of youths and adults, virtuosos, musicians, physicians, judges, and administrators, are productive in a much higher degree. The former produce values of exchange, and the latter productive powers, ... The prosperity of a nation is not, as Say believes, greater in the proportion in which it has amassed more wealth (i.e. values of exchange), but in the proportion in which it has more developed its powers of production. (* 1841, p.142-144, original Italics).
List saw market pressure as an important factor for innovation and as well for improvement of general improvement of the manufacturer’s abilities,
... These circumstances produce in the manufacturer an energy which is not observable in the mere agriculturist. (* 1841, pp.198-199)
List's suggestions for reform in his early years included, in general, proposals intended to make the bureaucracy and the economy function more efficiently and more just, for the benefit of general welfare.
He did not see any contradiction between these legal and economic purposes and, quite on the contrary, argued that only a free and just legal system could mobilise the mental powers of the individual citizen, in particular as entrepreneur, crucial to economic development. The most obvious example might be List's repeated attacks on the institution of slavery (* 1827 a, Letter VI, pp.86-87; 1837 a, p.184; 1841, Ch.17, p.200; p. 416). As an anecdote within the theme of this article, I would like to add the following quote,
It is an old observation, that the human race, like the various breeds of animals, is proved mentally and bodily by crossings; … and comprising the whole nation, have surpassed all other nations in power and energy of the mind and character, in intelligence, bodily strength, and personal beauty. (* 1841, p.220)
List's stress on universality of law (jury trial); freedom of expression (for the press etc.) can be seen as an attempt to correct imperfections of the market for ideas and entrepreneurship, through vested interests and power structures. Through his liberal ideas, he intended to establish an efficient market for ideas, for innovation and for entrepreneurial activity.
List paid much attention to the role of incentives in economics and how these could be promoted by regulative and legal arrangements. He devoted chapter 25 to this in his National System: The Manufacturing Power and the Incentives to Production and Consumption (* 1841, Ch. 25, pp.303 ff.). Patents laws were one legal measure of promoting the mental powers of production. (* 1841, pp.56, 307). See the section on tariffs below, for other measures.
against the commonly accepted dogma that investors shun countries with
protective policies, and claimed the opposite. His point has been
It cannot be denied that only advanced civilised countries - ... can hope to become industrialised by attracting English capital and technical knowledge.
The arguments that we have advanced are no mere abstract propositions. They are based upon established facts. All countries in which, under favourable circumstances, industries have been established through the policy of protection ... (* 1837 a, p.79)
Protection by the imposition of a tariff enables factory owners to raise loans from capitalists. Only this protection gives the founder of a new factory the ability to secure for his undertaking the money with which to buy essential equipment. … (* 1837 a, p.89)
What we lack is simply and solely a guarantee for our capitalists and artisans by which they may be protected against loss of capital and want of work. (* 1841, p.426)
A key to understand List's theoretical criticism of A.Smith and his followers is to observe how he criticised the strategy of A.Smith as being too generalising, disregarding the empirical and historical particulars of each practical phenomenon (* 1841, pp.171, 224ff. and 316). Smith is therefore one originator of the so-called Ricardian wise of oversimplification. One of List's very basic argument against Smith, was that his materialist, static, and superficial generalisations hid the crucial differences that made the state and different policies in different circumstances necessary - concerning types of goods, capital, markets, institutions, private vs. public interests, historical stage of development, the role of time in general and of learning. List himself was victim to this Ricardian vice of generalisation in his earlier days, as I will discuss below in the chapter devoted to criticism.
List’s criticism reminds us of a part of the core arguments of the German Historical School in economics against the orthodox school, as well as of the present criticism of present international organisations, like the IMF, devoted to the same type of generalising economic policy as A.Smith, “one size fits all” economics. List and his followers held that every nation has its particular circumstances,
… Every nation must follow its own course in developing its productive powers; or, in other words, every nation has its particular Political Economy. (* 1827 a, p.75)
In regard to the expediency of protecting measures, I observe that it depends entirely on the condition of a nation whether they are efficacious or not. (* 1827 a, p.33)
Concerning Smith’s inability to crucially differ between various goods, List says,
The popular school does not discriminate (in respect of the operation of protective duties) between natural or primitive products and manufactured products. ...
The school fails to perceive that under a system of perfectly free competition with more advanced manufacturing nations, a nation which is less advanced than those, although well fitted for manufacturing, can never attain to a perfectly developed manufacturing power of its own, nor to perfect national independence, without protective duties. (* 1841, p.316, see also pp.171, 217)
Concerning stage of development,
The school recognises no distinction between nations which have attained a higher degree of economical development, and those which occupy a lower stage. Everywhere it seeks to exclude the action of the power of the State; ... nowhere is the individual left more to himself than in the savage state, nowhere is the action of the power of the State less perceptible. (*1841, p.171)
And concerning capital,
That which we understand by the term 'instrumental powers' is called 'capital' by the school. ... It clearly ought, therefore, to specify wherever it speaks of capital, ... The omission of this distinction, where it ought to be drawn, must necessarily lead to false reasoning, or else serve to conceal false reasoning. (* 1841, p. 224ff.)
List then discusses transferral of “capital” between different occupations in a way that is a strikingly acute undermining of modern economics’ overly generalised notion of the term capital and thereby foregoes the Capital Controversy and its problem of aggregation, in the 1970s,
The school gives to all these objects and properties the general name of capital, … The reason why the school so deliberately obscures things which are so clear is apparent enough. If things are called by their proper names, it is easily comprehended that the transfer of the productive powers of a nation from one field of employment to another is subject to difficulties and hazards which do not always speak in favour of 'free trade,' but very often in favour of national protection. (* 1841, p. 234)
In a his chapter on trade policy, where Smith totally excludes the phenomena of learning, he says that,
… the immediate effect of every such regulation is to diminish its revenue, and what diminishes its revenue is certainly not very likely to augment its capital faster than it would have augmented of its own accord had both capital and industry been left to find out their natural employments.
Though for want of such regulations the society should never acquire the proposed manufacture, it would not, upon that account, necessarily be the poorer in any one period of its duration. … The natural advantages which one country has over another in producing particular commodities are sometimes so great that it is acknowledged by all the world to be in vain to struggle with them. (Smith, 1776, Book IV, Ch.II, pp.13-15, and p. 458 in the Liberty Classics edition)
The interest of a nation in its commercial relations to foreign nations is, like that of a merchant with regard to the different people with whom he deals, to buy as cheap and to sell as dear as possible. But it will be most likely to buy cheap, when by the most perfect freedom of trade… (Smith, 1776, Book IV, Ch.II, p.30, and p. 464 in the Liberty Classics edition)
List commented on the theory of natural advantages that,
We have in a previous chapter adduced proof that this argument is only true in
reference to agriculture, in which production depends for the most part
on climate and on the fertility of the soil, but that it is not true in respect to manufacturing industry,
for which all nations inhabiting temperate climates have equal capability
provided that they possess the necessary material, mental, social, and
Disregarding the differences between raw materials and finished goods also opens up for disregarding the beneficial effects of industrial policy and the need for the state as such. Smith and his followers agree that law enforcement and defence are public goods that the state has to care for. They do not understand, however, that there are other goods that equally share the quality of being public goods and which therefore are liable for the same governmental care. As pointed out elsewhere these are goods related in particular to knowledge and communication. This constitutes precisely the difference between raw materials and finished goods: knowledge-based (manufactured and refined) goods distributed by ideal and material communication.
The tradition of confusing private and community interests is old. Windelband describes the tradition as “hedonism”, “the selfish system” and “utilitarianism” as a dominant trait of the Enlightenment period – as opposed to the Renaissance period. (Windelband, 1893, pp.70, 85ff and 165, 170). It concerns the legitimation of egotism and was opposed to the duty-oriented tradition of among others Stoicism.
The materialist faction of the philosophical tradition of Natural Rights claimed that Man's ultimate duty was biological survival. These Enlightenment philosophers created a system ultimately based on the assumption that Man is irrational. Action is caused by will based ultimately on feelings or so-called “sympathy” (Windelband, 1893, p.516-517) as opposed to the rationalism of the dominant altruistic systems. These were rooted in the idealist traditions of Natural Rights, like Platonism, Stoicism and Christianity, that regarded Man's ultimate duty as moral perfection. (Windelband, 1893, pp. 85, 427-434, 524)
Concerning the possibility of different interests between the individual and the nation, List writes
Montesquieu has well said, 'If the State imposes restrictions on the individual merchant, it does so in the interest of commerce, and his trade is nowhere more restricted than in free and rich nations, and nowhere less so than in nations governed by despots.'(1*) (* 1841, Ch. 21)
List's criticism of A.Smith's confusion of private vs. national economic interests is almost endless. (E.g. * 1827 a, Letter 5, p.75, * 1841, p.172) Hildegard Schwab-Felisch List has edited a collection of List's writings devoted to this issue. (* 191?, Staatsinteresse und Privatwirtschaft). List devotes, an entire chapter to this problem (* 1841, Ch.14: Private and National Economy, p.163). As a consequence of denying this sometimes-existent fact of a conflict of interest between private and community interest, A.Smith, plays down the necessity of organised action through the institution of the nation. List was no admirer of regulation for its own sake, but saw clear advantages of regulation for justice and prosperity in opposition to the principle of laissez faire et laissez passer, (* 1827 a, Letter VI, pp.86-87).
In 1827 List writes,
Conditions, events, etc. may be profitable in individual economy for some persons, and injurious to the community; or on the contrary, they may be injurious to individuals, and prove highly beneficial to the community: Individual economy is not political economy.
So - measures, principles can be beneficial to mankind, if followed by all nations, and yet prove injurious to some particular countries, and vice versa. Political economy is not cosmopolitical economy.
1. Every nation has its particular economy. (* 1827 a, Letter 5, p.75)
By denying the recurring conflict of interest between private and community interest, A.Smith, makes the logical mistake of playing down the necessity of organised action through the institution of the nation, claims List,
... the popular school has concealed its misunderstanding of the national interests and of the effects of national union of powers, by confounding the principles of private economy with those of national economy.
'What is prudence in the conduct of every private family,' says Adam Smith, (Smith, 1776, Book IV, ch.ii) 'can scarce be folly in that of a great kingdom.' Every individual in pursuing his own interests necessarily promotes thereby also the interests of the community. … Adam Smith concludes from this: 'Restrictions on trade imposed on the behalf of the internal industry of a country, are mere folly … (Smith, 1776, Book IV, Ch.ii, quoted in List, 1841, Ch.14: Private and National Economy, p.163)
This principle [AMD: of Laissez faire et laissez passer] would only be true if individual and national interest were never in opposition. But this is not the case. A country may possess many extremely rich men, but the country is poorer, because there is no equal distribution of property.
Every new invention has some inconvenience for a number of individuals, and is nevertheless a public blessing. (* 1827 a, Letter VI, pp.86-87)
These interests of the community are, however, infinitely different from the private interests of all the separate individuals of the nation, if each individual is to be regarded as existing for himself alone …(* 1841, p.172)
This difference between private and public interests is the basis for differentiating between private and public goods. This difference is therefore the basis of trade policy since it is an instrument in furthering public goods understood as know-how creation. As noticed above, since public goods have in common the feature of concentrated costs and dispersed benefits, there tends to be structural under-investment in these areas.
List claims that Smith's and Cooper's conscious confusion of private and public interests is a reason for his downplaying of the role of public regulation and therefore the role of the nation. But there are often contrasting interests, List claims,
…Individuals may become rich by hazardous bank schemes, but the pubic may loose by them.
Without interference of national power there is no security, no faith in coined money, in measures and weights... no patents, no copyright, no canals and railroads, no national road. Industry entirely left to itself, would soon fall to ruin, and a nation letting everything alone would commit suicide. (* 1827 a, Letter VI, p.87, Cf. 1841, pp.166)
In a thousand cases the power of the State is compelled to impose restrictions on private industry. (* 1841, p. 166) … For similar reasons the State is not merely justified in imposing, but bound to impose, certain regulations and restrictions on commerce (which is in itself harmless) for the best interests of the nation. (* 1841, p.167)
Nevertheless, List is no admirer of regulation for its own sake,
… Individuals without the regulation of a society are savages. … Here too the truth lies in the middle. It is bad policy to regulate everything and to promote everything, by employing social powers, where things may better regulate themselves and can be better promoted by private exertions; but it is no less bad policy to let those things alone which can only be promoted by interfering social power.
Look around, and you see everywhere the exertions and acts of individuals restricted, regulated, or promoted, on the principle of the common welfare. (* 1837, p.XXX)
List's strategy concerned, in particular, active fostering of infrastructure and of know-how, and concerning the latter, protection of infant industries as against foreign superiority. This would create a protected home market that List regarded as absolutely crucial for the development of a particular new and young industry. (* 1841, pp.24, 186-187, 191) Apart from trade policy List emphasised many instruments like investments into transport and financing these through, for instance, state credit. He writes,
... above all things we must have enough national spirit at once to plant and protect the tree, which will yield its first richest fruits only to future generations. We must first gain possession of the home market of our own nation, at least as respects articles of general necessity, … (* 1841, p.194)
List attacks the allegations of Adam Smith that any product that may be bought cheaper abroad should be bought there instead of creating a home market for this domestically produced product,
The school cannot deny that the internal market of a nation is ten times more important to it than its external one, even where the latter is in the most flourishing condition; but it has omitted to draw from this the conclusion, which is very obvious, that it is ten times more important to cultivate and secure the home market, than to seek for wealth abroad, and that only in those nations which have developed their internal industry to a high degree can foreign commerce attain importance. ….(* 1841, p.186)
… every nation which gains entire possession of its own home market for manufactures, gains in the course of time, ... because a nation which manufactures ... consequently is enabled to consume infinitely more fabrics, than it could import while depending on a foreign manufacturing nation for its supply. (1841, p.191)
Against Smith’s renunciation of the benefit of protective measures, as being costly outlays, reducing saving and weakening a nation’s power of acquiring capital, List claims that Smith thinks like a rentier and a bookkeeper (“it’s all numbers" and "all expenditures are of the same nature”). As opposed to an industrialist for whom investments are of a different nature than consumption.
If, therefore, a sacrifice of value is caused by protective duties, it is made good by the gain of a power of production, which not only secures to the nation an infinitely
greater amount of material goods, but also industrial independence in case of war. (* 1841, p. 145)
List also claims that control over the home market is an early stepping stone of an export strategy,
… a manufacturing Power which exclusively possesses its home market can work so much the cheaper for foreign trade. (* 1841, p.396-397)
Nevertheless, control over the consumption of a nation's production makes stability of production more likely and thereby provides for stable progress in a nation's welfare as List outlined in, Chapter 24: The Manufacturing Power and the Principle of Stability and Continuity of Work (* 1841, p.298)
The following quote hints at a counter argument to Schumpeter’s creative destruction, as List argues for stability - and accordingly the need for protection,
We may rest assured that it is (as a rule) incomparably easier to perfect and extend a business already established than to found a new one. (* 1841, p.294)
On manufactures, however, the least and briefest interruption has a crippling effect; a longer one is fatal. The more art and talent ... capital ... so much the more detrimental ... Thus in a short time a complex combination of productive powers and of property becomes lost, which had been created only by the exertions and endeavours of several generations... so is the ruin of one branch of industry always the forerunner of the ruin of several others, and finally of the chief foundations of the manufacturing power of the nation.
The conviction of the great effects produced by the steady continuation of industry and of the irretrievable injuries caused by its interruption, and not the clamour and egotistical demands of manufacturers and traders for special privileges, has led to the idea of protective duties for native industry. (* 1841, p.298)
So, although international division of labour was good, local production would be even better, because in addition to efficiency there is the question of security, stability, and local synergies to take into consideration. A local variety of production would potentially provide demand and consumers to local products as well as inspiration to other kinds of production.
If, however, trade in the manufactures of far distant lands exercises admittedly so beneficial an influence on our agricultural industry, how much more beneficial must the influence be of those manufactures which are bound up with us locally, commercially, and politically, which not only take from us a small portion, but the largest portion of their requirements of food and of raw materials, which are not made dearer to us by great costs of transport, our trade in which cannot be interrupted by the chance of foreign manufacturing nations learning to supply their own wants themselves, or by wars and prohibitory import duties? (* 1841, p.142)
The son of one of List's hosts and close friends in the
The nearer the consumer and the producer can be brought to each other, the more perfect will be the adjustment of production and consumption, the more steady will be the currency, and the higher will be the value of land and labour. (Carey, 1851, p. 190)
Carey studied the "disturbing causes" further in his
Financial crisis: their causes and effects (Carey, 1864), he claims that
The nearer the consumer to the producer the more instant and the more regular the exchanges of service, … (Carey, 1864, Letter First)
Carey finds these causes to lie in speculation that is made possible in periods with free trade since these periods are also accompanied with a buyer's market in the labour market. (Carey, 1864, Letter Second)
It might be a good idea to point to the development of List’s ideas. At first he was a free trader. Most people in the German speaking areas were followers of Adam Smith, in the aftermath of Napoleon’s imposed protectionist “Continental System”. The general mood was for freedom and liberalism. Quite consistent with the views of Adam Smith (Smith 1776, Book IV, Ch. Ii, p.39, p.468 in the Liberty edition), List suggested, in his petition to the German Federal Assembly in Frankfurt a.M. (* 1819), that it should establish a national customs union and abolish the 38 customs borders in order to establish an efficient internal free trade. Furthermore, he suggested that it adopt an external policy of retaliatory duties, as this would be a good policy in order to force other trading nations to comply with free trade. Whereas Smith argued for retaliation as a temporary measure, List argued for retaliation as a permanent measure. In practice, however, the difference might be negligible. Later, List argued strongly against such retaliatory practices (* 1841, Ch.18) and claimed that any arrangement of duties, customs should serve the long-term needs of the productive powers. It is clear that already in his early period, the ultimate goal of this policy was an elevated civilisation through the instrument of free trade. We can also notice the early ideas on a stage theory, when he argued for
… the cause of general free trade, by which
In his so-called Vienna Memorandum and letters to Count Metternich (* 1820), List argued likewise,
… and alone in this way can we achieve world free trade which uniquely seems to represent means though which we may reach the highest stage of human welfare. (* 1820, p.539)
Both the above writings point out the injustice that whereas
externally produced British goods were imported more or less freely to the
German states, “internally” produced German products were faced with
considerably higher duties. He also argues for imposition of a general externally oriented duty.
We may therefore not say, as some do, that List had changed his mind after his
contact with the American experience, and thereafter argued for protection, as
in his Outlines (* 1827). Nevertheless, he may be said to have sharpened his argument with time.
Also this experience (as well as his visit in
List elaborated on the system of differentiating and temporary protective tariffs regarding different questions: Incentives and security for the investor (* 1837 a, p.89, * 1841, pp.167-168, p. 426); need for uninterrupted production and stability (* 1841, pp.294, 298); protection and importance of home market (* 1841, pp.24, 186-187, 191); trade wars and dumping (* 1841, pp.95, 146-147, 299); differentiated tariffs according to: skill, experience, machinery, capital involved (* 1837 a, p.145, * 1841, pp.178-179); necessity of life, i.e. articles of general consumption (* 1841, p.311); time, i.e. a bell shape of tariffs along time axis (* 1837 a, p.145, 1841, p.314); special key branches like machine tool industry (* 1841, p.314); historical setting (* 1837 a, p.145, 1841, p.115, 130, 314, 329); fiscal side of tariffs secondary (* 1837 a, p.36); necessity of averting inefficient monopolies (* 1837 a, p.81, 1841, pp.81, 169-171); necessity of state credit and interest free loans as a kind of subsidy or negative tariff (* 1841, pp.296, 300, 315); state investments into infant industry, preferential interests rates to the investors; temporary subsidies to promote infant industry (all in * 1841, p.315).
The means and ultimate goal was an elevating of the spirituality of all citizens. His example (later reproduced by Roscher in Grundlage, 1882) of the family that invested in the education of their children and reaped the benefit years later outweighing the initial outlays, was used to illustrate the necessity of investments in infant industry. With time, the youngsters would be able to pay back the costs they had procured upon their parents. With growth of know-how, infant industries would emerge as competitive on the international market and would be able to pay back to the nation the initial burden it had carried for the education of skill and know-how in the infant industries. The German term for such infant industry tariff was Erziehungszoll or education tariff as opposed to Schützzoll - or protection tariff- of "grandfather industry".
In a lengthy passage, List claims that tariffs, far from encroach upon the liberty of the individual, but actually improve the opportunities of the individual,
it does not in the least degree restrain private industry; on the contrary, it secures to the personal, natural, and moneyed powers of the nation a greater and wider field of activity. It does not thereby do something which its individual citizens could understand better and do better than it; on the contrary it does something which the individuals, even if they understood it, would not be able to do for themselves (* 1841, p.167).
The above argument concerns very much the direct liberty of the individual citizen. List's argument that tariffs promote liberty is even more suited to the situation of a nation and it sovereignty. Here the effects on the citizen are indirect but far from less important, rather the contrary. See the discussion below in the chapter called The international "security market": debt and navy.
List criticised excessive protection that did not confirm to the promoting principles of awaking and sharpening the productive powers of the nation but instead stupefied and blunted them. He also criticised protection of the wrong products (with little content of skill) or at the wrong moment (* 1841, pp.309-311) and was almost hostile to bounties.
None of these kinds of protection are invariably beneficial or invariably objectionable; and it depends on the special circumstances of the nation and on the condition of its industry which of these is the right one to be applied to it. (* 1841, pp.309)
List's theory of tariffs emerged from his historical understanding of how policy had to be adjusted according to the practical circumstances. One clear indication of this is his description of French economic history,
… Every nation must follow its own course in developing its productive powers; or, in other words, every nation has its particular Political Economy. (* 1827 a, p.75)
In regard to the expediency of protecting measures, I observe that it depends entirely on the condition of a nation whether they are efficacious or not. (* 1827 a, p.33)
A hero of
List, in addition to Jean Baptiste
Colbert, in the early history of economics as a science, was Antonio Serra.
Serra comments that the same economic policy has different results in different
circumstances and metaphorically comments that the sun melts butter but makes
clays hard. (* 1841, p.333, Serra, 1613). Concerning Colbert’s efforts to
For the record, List here blamed this French failure not on Colbert, but on the establishment; king, aristocracy and clergy.
On the issue of development stages, he writes,
The industrial history of nations, and of none more clearly than that of England, proves that the transition from the savage state to the pastoral one, from the pastoral to the agricultural, and from agriculture to the first beginnings in manufacture and navigation, is effected most speedily and advantageously by means of free commerce with further advanced towns and countries, but that a perfectly developed manufacturing industry, an important mercantile marine, and foreign trade on a really large scale, can only be attained by means of the interposition of the power of the State. ...
On the other hand, the more that the agriculture of a nation, its industries, and its social, political, and municipal conditions, are thoroughly developed, ... -- only in such nations are commercial restrictions justifiable for the purpose of establishing and protecting their own manufacturing power; and even in them it is justifiable only until that manufacturing power is strong enough no longer to have any reason to fear foreign competition, and thenceforth only so far as may be necessary for protecting the inland manufacturing power in its very roots.
The system of protection would not merely be contrary to the principles of cosmopolitical economy, but also to the rightly understood advantage of the nation itself, were it to exclude foreign competition at once and altogether, and thus isolate from other nations the nation which is thus protected. If the manufacturing power to be protected be still in the first period of its development, the protective duties must be very moderate, they must only rise gradually with the increase of the mental and material capital, of the technical abilities and spirit of enterprise of the nation. Neither is it at all necessary that all branches of industry should be protected in the same degree. Only the most important branches require special protection, for the working of which much outlay of capital in building and management, much machinery, and therefore much technical knowledge, skill, and experience, and many workmen are required, and whose products belong to the category of the first necessaries of life, and consequently are of the greatest importance as regards their total value as well as regards national independence (as, for example, cotton, woollen and linen manufactories, &c.). If these main branches are suitably protected and developed, all other less important branches of manufacture will rise up around them under a less degree of protection. It will be to the advantage of nations in which wages are high, …. to give less protection to manufactures in which machinery does not play an important part, than to those in which machinery does the greater part of the work,… (* 1841, Ch.15, pp.178-179)
List argued against protection of commodities and therefore of agriculture in the German situation, precisely as Ricardo and Cobden argued for free trade of agriculture - and Adam Smith argued for free trade for manufacture in the British situation. As noticed, List argued that tax and tariff policy protection should be adjusted according to the needs of the particular nation and the particular industry at the particular moment - and most of all with the future in mind! This is the practical core of his stage theory. Tariffs ought to be, so to say, "bell shaped" along the time axis. First tariffs ought to be low, when there was no industry in the concerned branch to protect, then as there emerged something to protect tariffs ought to rise, and as industry would grow, competitive tariffs should be lowered. This stage theory of tariffs and taxation is discussed thoroughly in his Natural System (* 1837 a).
Fiscally, when starting a phase of industrialisation, this would imply an immediate rise of revenue from tariffs when domestic production was still small. Later one would lower this source of revenue, as tax revenue from domestic production would grow and this type of imports would fall. The initial rise would secure a basis for potential public spending on infrastructure or subsidies for other domestic public goods production. The later rise in tax-revenues from domestic production would secure a domestic basis for new revenue-producing projects to be launched.
To raise money for the state should be only a secondary object of a tariff. Again import duties should not be levied in the hope of enticing specie into the country - and of keeping it there. This is a discredited aspect of the mercantile system. Such a policy would weaken rather than strengthen the country's productive power.
Import duties should be levied to protect and gradually to increase the nation's productive power. With this in mind the rates of duties levied under a tariff should be adapted to the needs of a particular country. (* 1837 a, p.36)
Manufacturing was a particular concern of List since they were knowledge intensive. They gave opportunities for employment of machines, for productive mechanisation. They would also promote a division of labour far greater than agriculture and thereby, on the other hand, manufactures also would give greater opportunity for a corresponding confederation of labour. The content of this greater confederation was that a far greater variety of skills could be developed and further specialised, through employment of science, knowledge, so as to create productive synergies.
Knowledge intensive activities were the economic activities to be protected more than any other, since these activities had most to give at a later stage through lifting the productive potential of the economy. Knowledge-intensive activities were also the most vulnerable since they were more difficult to foster and maintain. Accordingly they had to be cultivated and protected with careful attention. List explains the British practice of borrowing from more developed nations on several occasions. (* 1841, pp.39, 111)
List promoted the establishment of domestic manufacturing in order to erect competition to foreign monopolies that might dictate domestic consumption and production. (* 1841, p.168)
In any case striving
after monopoly forms part of the very nature of manufacturing industry.
This circumstance tends to justify
and not to discredit a protective policy; … The reason for this is the same as that why a
child or a boy in
wrestling with a strong man can scarcely be victorious or even offer
steady resistance. The manufactories
which constitute the commercial and industrial supremacy (of
List’s protectionist taxation-arrangement would support willingness to invest in production as well as making production more efficient. Strengthening the latter point, would be his repeated claim that protection might be damaging in a small nation, as it was likely to establish an inefficient monopoly. The strategy to overcome the problem of cosmopolitical - or as we would say today, global - competition, therefore, he argued, small nations would have to co-operate through customs unions arranged by means of international legal agreements. There would be differentiated protection, limited by time and branch, from external competition but no internal barriers to trade so that trade was made efficient by internal competition - a classic mercantilist strategy.
He criticised Smith for his theory of (exchange) value as an expression of narrow-minded merchant interests. (* 1837 a, p.102) Protection offers no eternal privilege to any individual who is willing to risk his capital for the public good, but is limited to the period it serves public interest. There are therefore both good and bad monopolies, and bad ones raise domestic prices permanently whereas good ones lower them in the longer term. (* 1837 a, p.81, in Ch.15: Does the Protection of Industry by a Tariff give Manufacturers a Monopoly prejudicial to the Consumers of the Goods they make?)
It is by confusing the theory of productive powers with the theory of value that economists, who support free trade, have taken over the merchant's principle: Laissez faire et laissez passer. (* 1837 a, p.102)
Merchants have condemned as a "monopoly" any system of protection that is introduced in a country to safeguard the home market in manufactured goods for citizens of that country. …
The policy of protection confers no privilege on one citizen at the expense of another. The privilege is one enjoyed by a whole nation at the expense of another. …
There are useful monopolies as well as harmful and unjust monopolies. Thus a useful and just monopoly is one granted to an inventor who enjoys the exclusive use of his discovery for a definite period of time. …
The granting of exclusive privileges in the home market to industrialists is open to criticism only if those privileges cause manufactured goods to be always sold at a higher price than similar goods made abroad. (* 1837 a, Ch.15: Does the Protection of Industry by a Tariff give Manufacturers a Monopoly prejudicial to the Consumers of the Goods they make? p.81)
List attacked the arguments that tariffs would create monopolies as being faulty, for instance because, protection intended to support the erection of multiple domestic producers and thereby establish internal competition as opposed to the foreign monopoly,
It is neither a privilege to the exclusive advantage of the producers, nor to the exclusive disadvantage of the consumers; for if the producers at first obtain higher prices, they run great risks, and have to contend against those considerable losses and sacrifices which are always connected with all beginnings in manufacturing industry. But the consumers have ample security that these extraordinary profits shall not reach unreasonable limits, or become perpetual, by means of the competition at home which follows later on, and which, as a rule, always lowers prices further than the level at which they had steadily ranged under the free competition of the foreigner. If the agriculturists, who are the most important consumers to the manufacturers, must also pay higher prices, this disadvantage will be amply repaid to them by increased demands for agricultural products, and by increased prices obtained for the latter.
It is a further sophism, arrived at by confounding the theory of mere values with that of the powers of production, when the popular school infers from the doctrine, 'that the wealth of the nation is merely the aggregate of the wealth of all individuals in it, and that the private interest of every individual is better able than all State regulations to incite to production and accumulation of wealth,' ...
This system everywhere takes into its consideration only individuals who are in free unrestrained intercourse among themselves, and who are contented if we leave everyone to pursue his own private interests according to his own private natural inclination. This is evidently not a system of national economy, but a system of the private economy of the human race, as that would constitute itself were there no interference on the part of any Government, were there no wars, no hostile foreign tariff restrictions. Nowhere do the advocates of that system care to point out by what means those nations which are now prosperous have raised themselves to that stage of power and prosperity which we see them maintain, and from what causes others have lost that degree of prosperity and power which they formerly maintained. (* 1841, Ch.14, pp.169-171)
Although in favour of politically based and limited economic protection and strongly against social interruptions, especially wars, List pointed out that,
In practice … the introduction of a protective system is generally the result of a war and has nothing to do with theories advanced by economists. (* 1837 a, p.110)
War exercises a great influence on the selection of the precise system of protection, inasmuch as it effects a compulsory prohibitive system. (* 1841, p.309)
War acts on it like a prohibitive tariff system. (* 1841, p.182ff)
List argues that Smith and his followers confuse
causes and effects concerning the contemporary wealth of
Like A.Smith before him (Smith, 1776, Ch. X, Part ii) and Thorstein Bunde Veblen later (Veblen, 1919, pp. 9-20), List was very well aware of the sabotage of the public interest that individual capitalists were willing to undergo in service of their own interests. But List’s genuine understanding of the spiritual foundation of innovations and its precarious nature in need of governmental care and sometimes protection sets him apart from the other two economists.
Every new invention has some inconvenience for a number of individuals, and is nevertheless a public blessing. (* 1827 a, Letter VI, pp.86-87)
Externalities like vested interests and power structures create transaction costs
that render markets inefficient. This is a central theme of law and economics and this gives
us yet another reason to claim that List is indeed the man who should be regarded as one of the
important forerunners of law and economics. To List power was at the core of
economics and economic policy, both as a result and as a prerequisite. This was
one of his major criticisms of Adam Smith, who conveniently avoided this aspect in many of his
writings especially concerning trade arrangements, well aware, as he was that
the present power structure favoured
Power is of more importance than wealth because a nation, by means of power, is enabled not only to open up new productive sources, but to maintain itself in possession of former and of recently acquired wealth, and because the reverse of power -- namely, feebleness -- leads to the relinquishment of all that we possess, ... , as is abundantly attested by the history of the Italian republics, of the Hanseatic League, of the Belgians, the Dutch, the Spaniards, and the Portuguese. (* 1841, p.46)
List was a keen observer of the fact that markets have different characteristics and that therefore, in order to work properly they need to be treated in different ways through public legislature, and that this in particular pertains to public goods markets. They must be treated differentially not only in order to function themselves, but also in order to make other and perhaps many other markets function. List viewed economic affairs from a political point of view, i.e. he regarded himself as a student of political economy. This as opposed to his opponents, who in his view only paid lip service to this concept. In fact, it might be more correct to name his approach one of geo-political economy as he was deeply concerned, above all, with international political matters.
Inter-relationships between markets may be said to establish a variant of transaction costs. Actors in one market are in such cases more or less dependent upon other markets but have limited influence on these, or insufficient incentives to engage in these – when benefits are compared with related costs (this concerns the problem of public goods).
.. the success of one particular branch of industry depends on that of several other branches .. (* 1841, p.39)
The English have thus given a striking confirmation of the opinions which we in another place have propounded and explained -- that all individual branches of industry have the closest reciprocal effect on one another; that the perfecting of one branch prepares and promotes the perfecting of all others; that no one of them can be neglected without the effects of that neglect being felt by all; that, in short, the whole manufacturing power of a nation constitutes an inseparable whole. (* 1841, p.387 and see p. 39)
In a larger perspective, protection limited by time (and trade) may bee seen as contributing more to competition than immediately introducing free trade. Protection may be seen as a remedy to correct market imperfections where some actors have the upper hand. Indeed, this was List's opinion concerning the strong position of English producers at his time, and this way of interpreting List is not new. As J.S.Nicholson points out, in his Introductory Essay to the 1904 reprint of List's National System, Henry Sidgwick argued,
that ultimately the world at large might gain by the temporary protection of the constituent nations.
Temporary protection will eventually lead to fiercer competition and a more efficient economy at a later stage. List answered his critics precisely with this argument and claimed that foreign domination over domestic markets more than often consisted in a monopoly (* 1841, pp.169-171, 176-177). He saw no advantage in a foreign (British) monopoly over that of, not domestic monopoly, and instead favoured internal competition. (* 1841, pp.184, 189-193)
As noticed the character of some markets approaches the characteristics of public goods more than others (concentrated costs and dispersed benefits) and therefore deserves special attention. In particular he was observant of the basic functions of infrastructure including education; administration; security and communication. Concerning security, he knew, from mercantilist experience and literature, how monopoly power in "intelligence market", as well as in "the military and naval market" spilled over into other markets, i.e. by diplomatic cunning and brute force. List repeatedly discussed in detail and at length the strong historical experiences in this regard, especially concerning the Sea powers; the Venetians, the Dutch and the English, cf. the Act of Navigation example above (1841, Ch.4, p.46).
List repeatedly points out the contradiction between Smith's theoretical claims and British successful practice. Other authors have done likewise and pointed out the reason for British commercial and imperial success as being its stronger co-ordination and centralisation than its competitors (Hudson, 1992; Israel, 1992; L.Harper, 1939: Bairoch, 1983). List writes that,
Adam Smith allows in three cases the special protection of internal industry: firstly, as a measure of retaliation, ... defence ...[and] as a means of equalisation in case the products of foreigners are taxed lower than those of our home producers. (* 1841, Ch. 27)
In The Theory of Moral Sentiments Adam Smith praises government in general (Smith, 1759, Part VI, Chapter I and Part IV, Chapter I, § 11, and p. 185 in Liberty Classics’ edition) This was, however, before he went to France in 1765 to be taught about the French Physiocratic School by Smith's favourite Turgot,[iv] As a firm believer in the public good of defence and therefore an admirer of military activity, Smith later wrote that,
"The art of war is certainly the noblest of all arts." (Smith, 1776, Book V, Ch. II,
The same insight that List claimed, that power is more important than wealth, was also Smith's reason to hail the British Act of Navigation of 1651: Although it injured commerce (in the short term) it strengthened the navy.
the act of
navigation is, perhaps, the wisest of all commercial regulations of
Accordingly, Smith also promoted bounties on export of strategic materials, such as gunpowder, in order to promote the domestic productive power and thereby strengthen domestic military power. (Smith, 1776, Book IV, v.a.36)
List sums up a whole range of British state regulations on commerce and manufacturing intended to further these, (* 1841, pp.366-367) List then comments that,
These maxims were in former times plainly professed by all English ministers and parliamentary speakers. (* 1841, p.367)
List mocks academic economists, i.e. Smith such,
Under George I English statesmen had long ago clearly
perceived the grounds on which the greatness of the nation depends. ...
exportation of manufactured goods and the importation of foreign raw material.
...This for centuries had
been the ruling maxim of English commercial policy, as formerly it had been
that of the commercial policy of the
The latter comment is obviously parallel to comments to be read in
the press in 1998 concerning the crash of East Asian nations like
List advocated - in short - certain governmental interventions in order to develop any country,
Whoever is not yet convinced …
let him first study the history of English industry before he ventures to frame
theoretical systems, or to give counsel to practical statesmen to whose
hands is given the power of promoting the weal or the woe of nations. … The
fruits it has borne lie revealed to the eyes of the whole world. The theorists have since contended
ADAM SMITH and his disciples have repeatedly asserted that
Before the twelfth century
For other nations than Britain Smith advised otherwise, and this led economists of the American System and like-minded to assert that Smith's system was meant only for export.
The North American colonies were kept, in respect of trade and industry, in such complete thraldom by the mother country, that no sort of manufacture was permitted to them ... in 1770, the great Chatham, made uneasy by the first manufacturing attempts of the New Englanders, declared that the colonies should not be permitted to manufacture so much as a horseshoe nail.
To Adam Smith belongs the merit of having first pointed out the injustice of this policy. (* 1841, pp.94-95)
Concerning international relations, List regarded Smith’s mistake in trade theory as being a
rather calculated mistake, in order to confuse potential followers of
In Adam Smith's time, a new maxim was
for the first time added to those which we have above stated, namely, to conceal the true policy
It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitical doctrine of Adam Smith, and of the cosmopolitical tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations.
Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth.
William Pitt was the first English statesman who clearly perceived in what way the cosmopolitical theory of Adam Smith could be properly made use of,…
… By nature he said France was adapted for agriculture ... Not a word here of the old maxim of England ... This maxim was then, and has remained since, an English State secret; it was never again openly professed, but was all the more persistently followed. (* 1841, pp.368-9)
List also claimed, concerning A.Smith, that,
...his system, considered as a whole, is so confused and distracted, as if the principal aim of his books were not to enlighten nations, but to confuse them for the benefit of his own country. (* 1927-1936, Vol.2 1930, p.160, " Philadelphia Speech")
Concerning the more exact timing of the introduction of free trade a strategy of Britain, List writes concerning the Post-Napoleonic period that,
when increased facilities for the exportation
of English goods to the continents of
Commenting upon Dr.John Bowring's Report on the German Zollverein to Lord Viscount Palmerston, 1840, and the English proposals for a trade agreement with Germany List wrote:
It is therefore no exaggeration if we maintain that the tendency of the English
proposals aims at noting but the overthrow of the entire German protective
system, in order to reduce
Concerning the Germans
List claimed that
treated them worse than a subject people. (* 1841, p.398)
… people in
Elsewhere List comments the practicalities of this policy such,
We thus find that in all treaties of commerce concluded by the English, there is a tendency to extend the sale of their manufactures throughout all the countries with whom they negotiate, by offering them apparent advantages in respect of agricultural produce and raw materials. Everywhere their efforts are directed to ruining the native manufacturing power of those countries by means of cheaper goods and long credits. (* 1841, pp.66-67)
For his own time, List argued that,
English national economy has for its object to manufacture for the whole world, to monopolize all manufacturing power, even at the expense of the lives of its citizens, to keep the world and especially her colonies in a state of infancy and vassalage by political management as well as by the superiority of her capital, her skill and her navy. (* 1827 a, Letter II)
List was not at all
blind to the general beneficial results of
But ought we on that account also to wish that she may erect a universal dominion on the ruins of the other nationalities? Nothing but unfathomable cosmopolitanism or shopkeepers' narrow-mindedness can give an assenting answer to that question. (* 1841, p.366)
Joseph Chamberlain, former British Secretary of Trade, later Secretary of Colonial
Affairs and a crucial person in British strategical affairs at the turn of the
20th Century, later criticised this free trade policy of A.Smith and
later of Richard Cobden. He claimed it had tripped up
... told the people of his day that what he wanted to do was to keep
Concerning the interests of the European Continent List had writes that,
If we only consider the enormous interests which the nations of the Continent have in common, as opposed to the English maritime supremacy, we shall be led to the conviction that nothing is so necessary to these nations as union, and nothing is so ruinous to them as Continental wars. The history of the last century also teaches us that every war which the powers of the Continent have waged against one another has had for its invariable result to increase the industry, the wealth, the navigation, the colonial possessions, and the power of the insular supremacy. (* 1841, p.421)
All the Continental powers have especially a common interest
that neither of the two routes
Further, the Continental powers in general have a common interest with the
Some 70 years after List, the same problem of protecting ones own interests without unduly confronting the interests of other nations is discussed by Gustav Schmoller in the context of German unification through a customs union: The British foreign secretary,
this Zollverein to be a measure directed against
and after the British tariff debate in 1903,
... a brutal imperialism of conquests and alliances took the place of the conservative Chamberlainian imperialism with the solution: Germaniam esse delendam.[v] It is the Great British policy which had to lead to the world war in 1914. It is the retreat into mercantilist policy of violence of the 17. and 18. Century. One intends to remove the unpleasant competition by violence and destruction instead of through better ships and goods.
It is the politics which as
a consequence likewise has prevented the idea of a trade league in Middle-Europe, ... , a most mutually favouring customs union
which would reach from
This scheme of Schmoller resembles the basis of List's plan for the German Customs Union
from Ostende to
Present ignorance of the importance of a home market leads mainstream free traders to argue, that it is not advisable to subsidy one’s own industry – not even when it is faced with foreign subsidies of foreign produce. Then, the argument goes, one shall be thankful for the gifts the foreigners are stupid enough to give away for free. List comments,
Into what mistakes the prevailing economical school has fallen by judging conditions according to the mere theory of values which ought properly to be judged according to the theory of powers of production, may be seen very clearly by the judgment which J. B. Say passes upon the bounties which foreign countries sometimes offer in order to facilitate exportation; he maintains that 'these are presents made to our nation.' (*1841, p.145)
On trade wars, dumping and accompanying commercial crisis, List writes,
Since the time when the Trojans were 'presented' by the Greeks with a wooden horse, the acceptance of 'presents' from other nations has become for the nation which receives them a very questionable transaction. The English have given the Continent presents of immense value in the form of subsidies, but the Continental nations have paid for them dearly by the loss of power. ... their manufactories from time to time fall into the state which they call 'glut,' and which arises from what they call 'overtrading.' ...The English manufacturers suffer for the moment, but they are saved, and they compensate themselves later on by better prices. The German and American manufacturers receive the blows which were deserved by the English -- they are ruined. ... the intermediate merchants and dealers say, 'The crisis has done it all!' ... ought we not then to become very sceptical as to the propriety, of the commercial conditions of nations being regulated according to the mere theory of values and according to cosmopolitical principles? The prevailing economical school has never deemed it expedient to elucidate the causes and effects of such commercial crises. (*1841, pp.146-147. On dumping, see also p.299, quoted above)
This idea of a conscious British plot to undermine the wealth and
power not only of
...the Prussian bureaucracy long strove against the country's cry for help. They had become too strongly imbued with Adam Smith's theory at the universities to discern the want of the times with sufficient promptness. ... Meanwhile the nature of things here too proved a mightier force than the power of theories. ... the opinion spread at the time that the English Government were favouring in an unprecedented manner a scheme for glutting the markets on the Continent with manufactured goods in order to stifle the Continental manufactures in the cradle. This idea has been ridiculed, but it was natural enough that it should prevail, first, because this glutting really took place in such a manner as though it had been deliberately planned; and, secondly, because a celebrated member of Parliament, Mr Henry Brougham (afterwards Lord Brougham), had openly said, in 1815, 'that it was well worth while to incur a loss on the exportation of English manufactures in order to stifle in the cradle the foreign manufactures.'(2*) This idea of this lord, since so renowned as a philanthropist, cosmopolist, and Liberal, was repeated ten years later almost in the same words by Mr Hume, a member of Parliament not less distinguished for liberalism, when he expressed a wish that 'Continental manufactures might be nipped in the bud.' (* 1841, pp.86-87)
List comments the aftermath of a crisis in
An orator in Congress said afterwards of this crisis: 'We did buy, according to the advice of modem theorists, where we could buy cheapest, and our markets were flooded with foreign goods; English goods sold cheaper in our seaport towns than in Liverpool or London. Our manufacturers were being ruined; our merchants, even those who thought to enrich themselves by importation, became bankrupt; and all these causes together were so detrimental to agriculture, that landed property became very generally worthless, and consequently bankruptcy became general even among our landowners.' (*1841, p. 95)
List writes in his preface that,
I have been accused by the popular school, of merely seeking to revive the (so-called) ‘mercantile’ system. But those who read my book will see that I have adopted in my theory merely the valuable parts of that much-decried system, whilst I have rejected what is false in it; … (* 1841, p.xxx)
Of interest to the student of international law concerning international economic co-operation, List argued that a mutually beneficial policy of a harmony of interests had to be regulated on both the national and the international arenas. He differs between two types of economic policy historically before Smith; that of the mercantile system and that of the manufacturing system. He favours the latter. I might prefer to call the two systems variations within the mercantile system as this would be more consistent with historical practice. I would prefer to call these two variants Prosper They Neighbour Policy and Beggar Thy Neighbour Policy while admitting that there is no exact delineation between these.[vi] List may have a heuristic point, though, when singling out one "good" and one "bad" system, in naming these with entirely different names. List writes,
THE TWO FUNDAMENTAL principles of the mercantile system were that a country can prosper only at the expense of another country and that national wealth consists purely of precious metals. … This policy is derived from the myopic view of merchants …
It would be a mistake to confuse the "mercantile system" with the "manufacturing system" with the "manufacturing system" and to condemn them both in the same breath. The manufacturing system was described by certain writers before Colbert's day. It was first practised by the English government and was later copied by Colbert. The Italians called this system "Colbertism" and they differentiated between the "mercantile system" and the "manufacturing system". Supporters of the "manufacturing system" do not suggest that a country can prosper only at the expense of another country. Their object is to enrich all the citizens in a country … (* 1837 a, p.178)
However, List also describes what he calls Industrial System and now claims that it was NOT described before Steuart. Although List is not explicit about this, it is fairly clear that this is supposed to be the same as the Manufacturing System.
The Industrial System was not defined in writing, nor was it a
theory devised by authors, it was simply acted upon in practice, until the time of Stewart, who deduced it for the
most part from the actual English practice, just as Antonio Serra deduced his system from a
consideration of the circumstances of
List in fact criticised even the industrial system, and note in particular the final point 7 that concerns necessary future world government and universal free trade.
6. That in the exclusive pursuit of the political object, it ignores the cosmopolitical relations of all nations, the objects of the whole human race; and hence would mislead governments into a prohibitory system, where a protective one would amply suffice, or imposing duties which are practically prohibitory, when moderate protective duties would better answer the purpose.
7. That chiefly owing to his utterly ignoring the principle of cosmopolitanism, it does not recognise the future union of all nations, the establishment of perpetual peace, and of universal freedom of trade, as the goal towards which all nations have to strive, and more and more to approach. (* 1841, pp. 340-341)
Unquestionably the idea of a universal confederation and a perpetual peace is commended both by common sense and religion. … All examples which history can show are those in which the political union has led the way, and the commercial union has followed. (* 1841, p.123)
The unification of
The following quote shows quite clearly that although List was a believer in free trade, he was not naïve in this pursuit,
Thus history shows that restrictions are not so much the inventions of mere speculative minds, as the natural consequences of the diversity of interests, and of the strivings of nations after independence or overpowering ascendency, and thus of national emulation and wars, and therefore that they cannot be dispensed with until this conflict of national interests shall cease, in other words until all nations can be united under one and the same system of law. Thus the question as to whether, and how, the various nations can be brought into one united federation, and how the decisions of law can be invoked in the place of military force to determine the differences which arise between independent nations, has to be solved concurrently with the question how universal free trade can be established in the place of separate national commercial systems.
The attempts which have been made by single nations to introduce freedom of trade in face of a nation which is predominant in industry, wealth, and power, no less than distinguished for an exclusive tariff system -- as Portugal did in 1703, France in 1786, North America in 1786 and 1816, Russia from 1815 till 1821, and as Germany has done for centuries -- go to show us that in this way the prosperity of individual nations is sacrificed, without benefit to mankind in general, solely for the enrichment of the predominant manufacturing and commercial nation. (* 1841, p.114)
In order to allow freedom of trade to operate naturally, the less advanced nations must first be raised by artificial measures to that stage of cultivation to which the English nation has been artificially elevated. In order that, through that cosmopolitical tendency of the powers of production to which we have alluded, the more distant parts of the world may not be benefited and enriched before the neighbouring European countries, those nations which feel themselves to be capable, owing to their moral, intellectual, social, and political circumstances, of developing a manufacturing power of their own must adopt the system of protection as the most effectual means for this purpose. (* 1841, pp.131-132)
The intentions of List should be obvious from the chapter headings of the 1837 thesis called The Natural System of Political Economy:
7. The Common Interest of all Manufacturing States in Free Trade
Transition from the Policy of Protection to the Policy of as much Free Trade as
26. How best to introduce and foster Free Trade
As opposed to free trade revolutionaries or Cosmopolitans as List
called them, List was a
reformist in the matter of trade liberalisation. So was Smith, but without
acknowledging the overall implications of the infant industry argument
since Smith showed little
understanding of the immaterial factors of production and therefore of
both the importance and the fragility of know-how and learning. List called
himself an adherent of the national principle as opposed to the global
principle. But in my opinion his principle was more continental as with
The highest ultimate aim of rational politics is … ... the uniting of all nations under a common law of right ... is to be attained only through the greatest possible equalisation of the most important nations of the earth in civilisation, prosperity, industry and power, ... but the solution of this problem is a work of immensely long duration. (* 1841, p.410)
And actually, Smith would not have disagreed to the disastrous effects of sudden deregulation.
Changes of this kind should never be introduced suddenly, but slowly, gradually, and after a very long warning. (Smith, Book IV, Ch.II, p.44 - p.471 in Liberty Fund’s edition).
List defended a gradual approach taking due consideration to the different circumstances, and accordingly different policies needed, of the various nations. A radical free trade approach, consisting of a generalised deregulatory economic policy, does not consider the vastly different situations of the various nations. This policy will therefore always serve the established and strongest, List argued. Instead, a step-wise integration of the nations of the world, in line with the development of industry and trade guided by government policy, ought to be followed. He goes into detail of how to go about this in his Natural System (* 1837 a, especially Ch. 26: How best to introduce and foster Free Trade, * 1837 a, p.125, * 1841, p.410)
List argued that a universal union of nations should safeguard every nation's interests by legal provisions, but until this has been made a fact every nation must take its own legal precautions. (* 1841, p.181, see immediately below) and secure these national interest in the international community through law preceded by international trade congresses. Although List saw national protection as a crucial economic instrument for the individual national economy, it was still only an instrument in order to reach the ultimate goal of universal free trade. (1841, ch.11, p.126) The difference between him and Smith on the issue of trade therefore narrows down to taking the different circumstances of nations into consideration and these circumstances ultimately reflect different mental and socio-economical circumstances.
In the Natural System (*1837 a, pp.48-51) he defends the potential civilising effects of colonialism and calls for open co-operation of more advanced nations in this endeavour, for their own benefit as well.
Experience shows that the barbarous or semi-barbarous peoples of
The most advanced countries in
On the other hand nothing has proved to be a greater hindrance to the progress of civilisation in backward lands than the selfish and greedy policy pursued by various rival nations in different part of the world. ... all the advanced industrial countries in the world should adopt the principle of free trade and equal rights in South America, Asia, Africa, Portugal, Spain and the Two Sicilies. A liberal policy of this kind would strike at the very root of the evil of economic selfishness. ...
obvious that the
List says, concerning a universal confederation of nations, that a nation should not prematurely behave as if this confederation already existed and thus demolish its defences,
If we imagine, for instance, that all nations were united by means of a universal confederation, their individual independence and power would cease to be an object of regard. ...
In proportion, however, as the principle of a universal confederation of nations is reasonable, in just the same degree would a given nation act contrary to reason if, in anticipation of the great advantages to be expected from such a union, and from a state of universal and perpetual peace, it were to regulate the principles of its national policy as though this universal confederation of nations existed already. We ask, would not every sane person consider a government to be insane which, in consideration of the benefits and the reasonableness of a state of universal and perpetual peace, proposed to disband its armies, destroy its fleet, and demolish its fortresses? But such a government would be doing nothing different in principle from what the popular school requires from governments when, because of the advantages which would be derivable from general free trade, it urges that they should abandon the advantages derivable from protection. (* 1841, p.181)
List claims that the first to promote free trade were the Physiocrats of the early 18 Century with which the term “laissez faire” is associated. The term “laissez nous faire” (leave us alone - in doing our business) has, however, been attributed to the Dutch merchants in their heydays of the early 17 Century. List writes,
Quesnay (from whom the idea of universal free trade originated) was the first who extended his investigations to the whole human race, without taking into consideration the idea of the nation. He calls his work 'Physiocratie, ou du Gouvernement le plus avantageux au Genre Humain,' his demands being that we must imagine that the merchants of all nations formed one commercial republic. …
Adam Smith(1*) treats his doctrine in a similarly extended sense, .... He speaks of the various systems of Political economy in a separate part of his work solely for the purpose of demonstrating their non-efficiency, and of proving that 'political' or national economy must be replaced by cosmopolitical or world-wide economy.'...
J. B. Say openly demands that we should imagine the existence of a universal republic in order to comprehend the idea of general free trade. (1841, Ch.11, p. 119-120)
Wilhelm Roscher mentions Fourier and Robert Owen as other supporters of a “universal confederate republic” (Roscher, 1877, § LXVII). Steuart also touches upon the subject of a universal union, and List's debt to him is often overlooked, except by Kobayashi (Kobayashi, 1967). Steuart writes,
Laying, therefore, trade quite open would have this effect; it would
destroy, ... diminish consumption; ... circulating cash; consequently, ...
promote hoarding; and ... bring on poverty in all the states of
List claimed that the teachings of Smith's followers were more suitable for the internal affairs of a nation (seen as a universe by itself) than for international affairs,
On the hypothesis of a universal union, every restriction on the honest exchange of goods between various countries seems unreasonable and injurious. But so long as other nations subordinate the interests of the human race as a whole to their national interests, it is folly to speak of free competition among the individuals of various nations. The arguments of the school in favour of free competition are thus only applicable to the exchange between those who belong to one and the same nation. Every great nation, therefore, must endeavour to form an aggregate within itself, which will enter into commercial intercourse with other similar aggregates so far only as that intercourse is Suitable to the interests of its own special community. (* 1841, p.172)
List saw national protection as an instrument to reach the ultimate goal of universal free trade,
Only with the gradual formation of this union can free trade be developed, only as a result of this union can it confer on all nations the same great advantages which are now experienced by those provinces and states which are politically united. The system of protection, inasmuch as it forms the only means of placing those nations which are far behind in civilisation on equal terms with the one predominating nation (which, however, never received at the hands of Nature a perpetual right to a monopoly of manufacture, but which merely gained an advance over others in point of time), the system of protection regarded from this point of view appears to be the most efficient means of furthering the final union of nations, and hence also of promoting true freedom of trade. And national economy appears from this point of view to be that science which, correctly appreciating the existing interests and the individual circumstances of nations, teaches how every separate nation can be raised to that stage of industrial development in which union with other nations equally well developed, and consequently freedom of trade, can become possible and useful to it. (1841, p.126)
List argued that the various national oppositions, against the radical free traders' wish for rapid progress towards universal free trade, did not understand the benefits of balanced growth reminding us of later arguments of Ragnar Nurkse (Nurkse, 1933). They
… believe that humanity may make slower progress because of their protective commercial policies but they consider that their own economic advance will be more balanced than would otherwise be the case. The protection of national industries will enable states to preserve their freedom. The establishment of a universal republic will be much more likely if all the civilised countries in the world - followed in due course by nations which are at present relatively backward - were making uniform economic progress. This would be much better than a situation in which one country dominated all others in industrial and commercial power, because in that case a world trading monopoly and a universal despotism would have been established. (* 1837 a, p.188)
As noticed elsewhere, List here wishes for a "uniform economic progress", as this would ease the establishment of a universal republic. As we will get back to in the final chapter on criticism of List, this is not a realistic opinion on how economic and technical progress actually takes place.
List is explicit that immediate free trade would promote the interests of one nation in particular, the leader, reminding us of the unfortunate results of shock therapy liberalisation in Russia,
We would be prepared to agree with those economists if it were true that the nations
concerned had decided to seek salvation under the supremacy of
There are only two ways by which Free Trade can be introduced. The first is to set up a world state like the European empire that Napoleon tried to establish. The second is for countries to conclude commercial treaties. ... Commercial treaties must give equal advantages to all... (* 1837 a, p.125)
List attacks the popular school for its (alleged?) resistance to commercial treaties,
The school objects to these conventions as unnecessary and detrimental, whereas they appear to us as the most effective means of gradually diminishing the respective restrictions on trade, and of leading the nations of the world gradually to freedom of international intercourse. Of course, the specimens of such treaties which the world has hitherto seen, are not very encouraging for imitation. (*1841, p.323)
Here List is referring to the treatises set up between the English and their Continental counterparts.
In 1837, List argues as he did in his Vienna Memorandum (*1820, p.546) that a world trade congress should be called to promote the introduction of free trade, the lengthy quote is supplied in appendix II. In 1841 he writes,
We have previously explained that free trade in agricultural products and raw materials is useful to all nations at all stages of their industrial development;…
According to our former
deductions, protection is
only beneficial to the prosperity of the nation so far as it corresponds
with the degree of the nation's industrial development. Every exaggeration of protection is detrimental;
nations can only obtain a perfect manufacturing power by degrees. On that
account also, two nations
which stand at different stages of industrial cultivation, can with mutual benefit make
reciprocal concessions by treaty in respect to the exchange of their
various manufacturing products. ... Such treaties might be still more allowable and beneficial between nations
which stand at about the same degree of industrial development, ... This is the case with most of
the Continental nations. ... What they all have to fear at this time is solely the preponderating
Thus it appears also from this point of view, that the supremacy of that island in manufactures, in trade, in navigation, and in her colonial empire, constitutes the greatest existing impediment to all nations drawing nearer to one another; although it must be at the same time admitted that England, in striving for this supremacy, has immeasurably increased, and is still daily increasing, the productive power of the entire human race. (*1841, pp.324-325)
The Opposition of Countries to the Dominant
Nation in Industry, Commerce and Sea Power
AT ALL Times the weaker
An attempt to set up a new Continental System, however,
would endanger the prosperity not only of
Since we can hardly expect England of her own free will to make the concessions necessary to secure the establishment of a world customs union, it seems to us that the countries which have reached the second and third stage of industrialisation should form an association of their own to press for the establishment of world free trade which should be the common aim of all countries.
List argues that they, in their own interests, should take the lead in calling a world trade congress",
To pave the way for the conclusion of advantageous commercial treaties a world trade congress should be convened ... The deliberations of the congress would throw light on the following topics - the advantages of universal free trade in raw materials and agricultural products; the advantages to be secured by all industrialised countries by agreeing to the imposition of uniform[vii] import duties on manufactured goods; the advantages of establishing common measures to secure universal peace, public order, and security of persons and property. Above all a world trade congress would facilitate the establishment of the freedom of the seas since it would give the lesser mercantile countries an opportunity to appreciate their real interest in this matter. ...
He [List, my note] hopes that he has paid proper attention to all the points raised in the Academy's memorandum:
“Will it be possible to establish Free Trade in wartime as well as in peacetime by an international treaty which - however incomplete - could still be regarded as a great step forward in the progress of humanity?"
The great principle of "free ships, free goods" has already been enunciated by Catherine the Great of Russia and by George Washington. But so far it has not been possible to secure the universal acceptance of this principle. It is obvious- proof is hardly required - that the universal acceptance and strict observation of this principle of international law would remove most of the disastrous consequences that war brings to all branches of industry.
The author can see no way of achieving this aim unless the proposed doctrine of international law is universally accepted.
If, however, there came a time when the maritime powers of the
second and third rank were in a position to force
Even if the nineteenth century should pass without the doctrine free ships, free goods" being generally accepted, the twentieth century will surely see its adoption.
When that time comes
As noticed in the chapter The British strategy after Smith, with the experience gained the past 161 years, since List wrote this, he might be said to have had prophetic insight....
List's support of restrictions to national and international financial activity and support for naval construction, in addition to this support of trade restrictions, sought to remedy an inefficient monopoly situation where Britain had the upper hand. Britain could therefore enforce trade agreements more or less at its own will through debt & credit agreements and through naval force using blockades etc., to the detriment of its emerging competitors - precisely as the Phoenicians, Greeks, Norse, Venetians, Hanse and Dutch etc. had done before them.
Many would claim the Anglo-Americans are doing the same today through the international organisations they dominate under the UN umbrella (WTO, IMF, IBRD -The World Bank, etc.) - for instance claimed by the architect of the Russian shock therapy, Jeffrey Sachs (Sachs, 1998) and partly Paul Krugman (Krugman, 1998). - And when the Americans do not get their will they conveniently tend to ignore these organisations and their policy. For a long time the recognised goal of the free trade school has been to establish a world government, in order to secure global free trade. This was pointed out by List (* 1841, p.120ff) and Roscher (Roscher, 1877, § LXVII) concerning the explicit ideas of J.B.Say and Quesnay on a universal republic. List did not criticise this idea as such, but rather the method these economists envisaged for attaining this goal and the specific policy to be pursued.
List's empirically based realism is often expressed as here, where he emphasises the prevailing influence of the institution of nations on commercial relations.
The imports and exports of independent nations are regulated and controlled at present not by what the popular theory calls the natural course of things, but mostly by the commercial policy and the power of the nation, by the influence of these on the conditions of the world and on foreign countries and peoples, by colonial possessions and internal credit establishments, or by war and peace. Here, accordingly, all conditions shape themselves in an entirely different manner than between societies which are united by political, legal, and administrative bonds in a state of unbroken peace and of perfect unity of interests. (* 1841, p. 272)
However, List also had something to say about the domestic sides to the debt issue, which might be said with equally much weight today, concerning many indebted nations of the world,
With the establishment of the United Nations and the closely
related IMF, WTO and the World Bank, together establishing a universal although informal
credit cartel, the idea of a global government may have come through. At
least as a start so far, and to a large extent in the manner that List saw as
detrimental to world harmony and prosperity. What we seem to have, therefore,
is the accomplishment of a world government which List and Smith etc. could
have agreed to, BUT, dominated by the strongest nations, and the actual
establishment of this through an informal "union" of creditors. This
union has been using debt
as the leveller for
political concessions of breaking markets more open in the debtor countries,
for the creditor countries, a policy as old as the Phoenicians. As so many others
(Wallerstein, 1978, p.44; Marx, 1972, I, 4,1050; Braudel, 1985, p.241; Kennedy,
1989, p.89). Concerning
In the 1730s the philosopher George Berkeley described it as
'the chief advantage
Credit had been known to the Italians and the Netherlanders long before it became one of the instruments of English world supremacy. ... (Quigley, 1966, pp. 48-50).
It is the present view of some historians that it
List was well aware that credit and debt historically was a power-tool stronger than any. He therefore insisted that the only way to avoid an indebted situation and loss of sovereignty and welfare was to protect oneself through legislative actions into the realm of taxation, tariffs and finance in general (* 1841, ch.23: The Manufacturing Power and Circulation, especially p.280ff.). List criticised Smith's underestimation of the role of the balance of trade (a favourite theme of mercantilist writers) and argued that the alternative to industrialisation by way of a protective policy and thereby balance or even surplus in trade, would in the end mean that of becoming a colony of the dominant nation. (* 1837 a, p.188, quoted above) Today similar arrangements are suggested in the open, in e.g. the Wall Street Journal, that countries with weak currencies install a ("technical") currency board and attach themselves to the US dollar currency. This means abolishing the national monetary and industrial banking policy. An independent but non-industrialised nation, he argued, would be become indebted and then torn apart again and again by financial and commercial crises (* 1841, ch.23). This nation's independence would therefore be illusory, as would its welfare.
List was extremely aware of the national and the international financial markets and the danger free trade in the latter represented for the stability, sovereignty, and well being of the nation. In Chapter 23, Manufacturing Power and the Instruments of Circulation, he discussed this at length. He claimed that open international capital markets and exchange markets were a security threat to sovereign nations, especially small and underdeveloped nations. Such unregulated markets were more or less and invitation to destabilisation and then to be bought off cheaply as well as an invitation to foreign dictates of domestic economic policy. He was well aware of the destructive effects from rapid fluctuations in the financial markets, for production as well as for consumption. For all of these reasons, he accordingly called for regulation of these markets.
... as long as separate national interests exist, a wise State policy will advise every great nation to guard itself by its commercial system against extraordinary money fluctuations and revolutions in prices which overturn its whole internal economy, (* 1841, Ch.23, p.282)
The cause of the latest as well as of former American commercial crises, has been alleged to exist in the American banking and paper system. The truth is that the banks have helped to bring about these crises in the manner above named, but the main cause of their occurrence is that since the introduction of the 'compromise bill' the value of the English manufactured goods has far surpassed the value of the exported American products, and that thereby the United States have become indebted to the English. (* 1841, p.277)
A recent and ongoing incident that is strikingly similar is the,
largely US, buying frenzy in
The cause of the bankruptcy in
List blames this the highly disadvantageous commercial crises on financial indebtedness. This was due he claimed to the imbalance in payments resulting from poor exports in relation to imports. He criticises the orthodox school for its very conscious neglect of the balance of trade issue and its claim that this theme was a ridiculous fault in the theories of the Mercantilists. List claims that the English practice, even after Smith, proved otherwise.
What we deny is merely this: that a great and independent nation, as Adam Smith maintains at the conclusion of his chapter devoted to this subject, 'may continually import every year considerably larger values in products and fabrics than it exports; that the quantities of precious metals existing in such a nation may decrease considerably from year to year and be replaced by paper circulation in the interior; moreover, that such a nation may allow its indebtedness towards another nation continually to increase and expand, and at the same time nevertheless make progress from year to year in prosperity.' (Smith 1776, Book IV, Ch. iii, [List's note])
This opinion, expressed by Adam Smith and maintained since that time by his school, is alone that which we here characterise as one that has been contradicted a hundred times by experience, (* 1841, p.277)
List is here speaking of historical experience
up to his time. The practice of the post-1960s
The commercial conditions
(1) That a nation which is far behind the English in capital and manufacturing power cannot permit the English to obtain a predominating competition on its manufacturing market without becoming permanently indebted to them; without being rendered dependent on their money institutions, and drawn into the whirlpool of their agricultural, industrial, and commercial crises....
(2) That the English national bank is able by its operations to depress the prices of English manufactured goods in the American markets ....
(3) ... the Americans had to cover their deficit during several years by the exportation of stocks and State paper.
(5) That the fluctuations in the money market under all circumstances act on the economy of the nations in a highly disadvantageous manner, especially in countries where an extensive bank and paper-money system is based on the possession of certain quantities of the precious metals.
(6) That the fluctuations in the money market and the crises which result therefrom can only be prevented, and that a solid banking system can only be founded and maintained, if the imports of the country are placed on a footing of equality to the exports.
(7) That this equality can less easily be maintained in proportion as foreign manufactured goods can successfully compete in the home manufacturing markets, and in proportion as the exportation of native agricultural products is limited by foreign commercial restrictions; finally, that this equality can less easily be disturbed in proportion as the nation is independent of foreign nations for its supply of manufactured goods, and for the disposal of its own produce.
These doctrines are also confirmed by the
Experience has proved repeatedly (and especially in Russia and North America) that in agricultural nations, whose manufacturing market is exposed to the free competition of a nation which has attained manufacturing supremacy, the value of the importation of manufactured goods exceeds frequently to an enormous extent thevalue of the agricultural products which are exported, and that thereby at times suddenly an extraordinary exportation of precious metals is occasioned, whereby the economy of the agricultural nation, especially if its internal interchange is chiefly based on paper circulation, falls into confusion, and national calamities are the result.
The popular theory maintains that if we provide ourselves with the precious metals in the same manner as every other article, it is in the main indifferent whether large or small quantities of precious metals are in circulation, as it merely depends on the relation of the price of any article in exchange whether that article shall be cheap or dear; a derangement in the rate of exchange acts simply like a premium on a larger exportation of goods from that country, in favour of which it oscillates from time to time: consequently the stock of metallic money and the balance between the imports and exports, as well as all the other economical circumstances of the nation, would regulate themselves in the safest and best manner by the operation of the natural course of things. (* 1841, p.271)
List frequently refers to various barriers to free trade such as the
against Hamburg and Bremen (* 1841, p.389) in order to prove that without a navy there is no free
and stable trade for the merchant, no security nor prosperity for the citizens of
Germany. Of course, this kind of policy was old within the state mercantilist
tradition. Since other nations could not be trusted, the mother country and
colonies would form an autarchy. Colonies were part and parcel of this strategy
since these would supply the mother country with raw materials and markets for
manufactured products. Richelieu
and Colbert were feverish in their ambitions to construct fortified
ports, a French merchant fleet and above all a navy that could match the British,
as had been Charles V
"The only parallel, notes Professor Jones "is the similar work of Tirpitz in the years before 1914" - and the reaction on this side of the Channel was similar in both cases.[viii] (Kennedy, 1976, p.73)
By constructing a German
navy the "international security market” or “power market"
would become less
dominated by a monopolist,
the German protective system only accomplices its object in a very imperfect manner, so long as Germany does not spin for herself the cotton ... : so long as she possesses no perfect system of transport by river, canal, or railway: so long as the German Zollverein does not include all German maritime territories and also Holland and Belgium. (* 1841, p.426)
... As yet, the apportionment of territory to the European nations does not correspond to the nature of things. ... If every nation was already in possession of the territory which is necessary for its internal development, and for the maintenance of its political, industrial, and commercial independence, then every conquest of territory would be contrary to sound policy, ... A just and wise apportionment of territory is, however, at this day not to be thought of... (* 1841, p.410)
List's argument was that small nations can only manage well in periods of peace and as a
long as they do not threaten the interest of larger nations, i.e. they will
manage as long they serve as
client states of the larger nations. The only option for smaller
countries that wanted to defend their interests was therefore to change their
borders, in modern and more humane times this could be done by uniting
themselves by their own will. (* 1841, pp.175-177, see quote below) This has been happening all over the world,
most notably nowadays in
of the relation between the
A large population, and an extensive territory endowed with manifold national resources, are essential requirements of the normal nationality ... A nation restricted ... can only possess a crippled literature, crippled institutions for promoting art and science. A small state can never bring to complete perfection within its territory the various branches of production. In it all protection becomes mere private monopoly. Only through alliances with more powerful nations, by partly sacrificing the advantages of nationality, and by excessive energy, can it maintain with difficulty its independence.
A nation which possesses no coasts, mercantile marine, or naval power, or has not under its dominion and control the mouths of the rivers, is in its foreign commerce dependent on other countries; ...
Territorial deficiencies of the nation can be remedied either by means of hereditary succession ... purchase ... or by conquests ...
In modern times a fourth means has been adopted, which leads to this object in a manner much more in accordance with justice ..., namely, the union of the interests of various States by means of free conventions.
its Zollverein, the
German nation first obtained one of the important attributes of its
nationality. But this measure cannot be considered complete so long as it does
not extend over the whole
cost, from the mouth of the
Indeed, the extent
construction not only made a local economy function
more efficiently, it also would change the international market of efficient communication and
therefore of efficient military
mobility. Thereby land-powers would more strongly challenge the monopoly and upper hand sea-powers had so far. (*
1837 a, p.51; 1837 b, p.135, org.pag. 25) List's opinions in this matter, regarding the
changed position of Germany, from the battlefield of Europe to the fortress of
Europe, was later adopted
by one of his students, the central British geopolitician Halford Mackinder (Mackinder,
1904), regarding Britain's historical prime enemy,
Russia: Mackinder wrote on this theme the same year List was republished in
London, one year after the opening of the Trans-Siberian railroad. This construction was an
achievement of immense importance strategically, regarding trade and power, threatening British control
over Indian and Eurasian trade (Cf. the so-called Great Game between
Preceding the achievement
of the Trans-Siberian railroad (in principle invented
by List as a concept and constructed by his students) and of equal importance
in this correction of geo-political market failures, was the construction of
the American Trans-Continental
railways, achieved by List friends in the
The result was, according to fairly general opinion, WW I with WW II
as an appendix through the Treaty of Versailles. As a result of the grand
provocation these major advances represented to
Construction of a
Continental customs union, railroad construction, and
of a navy, was all part of
List’s strategy of developing
At all times
the weaker countries in
Since we can hardly expect
In the face of strengthened American economic power, List advises
An effective Continental system can only originate from the free union of the Continental powers, and can succeed only in case it has for its object (and also effects) an equal participation in the advantages ... Nevertheless, a glance into the future ought sufficiently to console the britons for these anticipated disadvantages. (* 1841, p.422-423)
It is therefore good for
With the experience gained the past 150-160 years
since List wrote this (mentioned also in 1837 quoted in the above chapter
Treaties and congresses on commerce and trade), he may be said to have had
In the face of strengthened American
economic power, List
However, regarding such an alliance between
favoured an alliance between
List often charged the cosmopolitan school after Adam Smith that they generalised too much. However, List himself was victim to this Ricardian vice of generalisation, especially in his earlier days. One instance is his Vienna Memorandum (* 1820) where he claimed that there was no opposition between the interests of the individual and the state. With time he moved away also from this Smithian position as with other opinions he held in his youth.
List's emphasis on industrialisation may be criticised today - at a time when we take all the benefits of industry as given, and at a time when agriculture has changed its character considerably. At List's time agriculture was simple, repetitive, traditional and presented no great challenges to skill and inventiveness. To List agriculture was "mind- paralysing" and gave little freedom of any kind to the individual. To List, this characteristic was strengthened by the relative emptiness of the countryside. The low population density of the countryside was directly counterproductive to the creation of new ideas. It was also indirectly counterproductive, because a popular force necessary to institute civic liberties or "democracy" (and a generally innovative culture) in face of an old traditional establishment was often lacking.
Today, however, agriculture has changed its face to an astonishing degree. That List noticed that this happened already in his time is evident from the following quote, taken from a long exposition of the differences between agriculture and manufactures,
It is true that agriculture at first had, by yielding rents of land, made it possible for men to devote themselves to science and art; but without manufactures they have always remained private treasures, and have only extended their beneficial effects in a very slight degree to the masses. In the manufacturing State the industry of the masses is enlightened by science, and the sciences and arts are supported by the industry of the masses. … The effects of these improvements are soon afterwards extended even to agriculture. Nowhere can more perfect agricultural machines and implements be found, nowhere is agriculture carried on with so much intelligence, as in countries where industry flourishes. Under the influence of manufactures, agriculture itself is raised to a skilled industry, an art, a science. (* 1841, p.200ff)
wonder to what degree he took the consequence of this insight. I would
argue that List often believed
too much in the chimera of free trade in the sense that his arguments
did not suffice. By opening the agricultural market to foreign competition, List
also invited a potential failure of domestic farming to compete against foreign
competition. This might have important consequences. First, List often pointed
out the necessity of being
self-sufficient in various kinds of production, for instance in case of
military wars or trade wars. Somehow this point was forgotten when it came to raw materials and agricultural
produce. That is he pointed it out when it came to the prerequisites of
an independent nation in general, but he seems to have forgotten self
sufficiency of commodities when it came to actual trade. Not mentioning this,
as far as I am able to see, he seems to have thought that this would take of
itself. This seems to be a flaw in his theories, which therefore, seem to be
more adapted to the prevailing situation of
A related point is the importance of the home market and the importance of a balanced fully developed market that List so often stressed in general theory. He seems to have forgotten the role of agriculture when it came to actual trade. Agriculture, as he pointed out, supplies industry with a home market for its products, where it may grow for future expansion. Thereby agriculture contributes to the necessary balance of production and consumption, to the general internal balance between branches of production, as well as to the development of a mature economy by developing all branches.
Another point regarding the overoptimistic views of List regarding free trade, was that he probably was thinking in a too static manner when he believed in universal free trade at a later historic point. At this point, all competing nations would have reached the same technological level and, therefore, according to List's theories they would compete on an equal basis. However, technological equality is certainly a pure chimera and the exception rather than the rule. Free trade, any economic equilibrium, as well as balance-of-powers as a political equilibrium, are also such chimeras. Since technological advance is always pursued in new areas in a very uneven fashion, there is bound to bee new leaders and new followers in a never ending continuous flow, as well as a continuous interchange of which nation belongs to which group. Also, an ever more complex society demands ever more co-ordination. Therefore the governmental role is likely not to diminish but to stay. Perhaps it will not grow forever, since this may be unproductive, but perhaps it may take new shapes instead, for instance establishing more indirect intervention.
Interventionism of a legal and regulatory nature is therefore not a thing of the past or something which belongs only to an initial phase of the industrialising process of a country but a more or less an eternal ongoing business, leaving old and entering new economic areas all the time.
For instance, infrastructure is not something that is established once and for all and only needs to be maintained. Infrastructure is subject to change as a result of changing technology, new products, markets, and trade routes. Therefore the role of government is likely to continue. The role of technology and knowledge in economic development, rather than that of natural resources, is likely to be accented with time. Since knowledge based activity demand far more attention, protection, fostering and care, the role of government probably needs to be strengthened in these respects regarding such public goods in particular. The increased complexity and the increased size of projects and the growing sums of investment necessary - from ancient canals to space shuttles - is and will be a major driving force behind the increased role of government. Anything else is likely to be destructive or at best promote stagnation, as far as I can see.
Manoïlescu was a writer who described List's ideas with more than usual acuteness,
[H]is system adopts the provisional (educational) Protection only for industries and for certain countries which are passing through a certain phase of their economic and social evolution. List’s system, far from strengthening the general system of protection, weakens it. He presents protection as the exception, and grants the character of general validity to the free trade system. (Manoïlescu, 1931, p.xxii, quoted in Irwin, 1996, p.164)
However, correct in general this description is, it is nevertheless not always totally correct, as the following quote would indicate,
Statistics and history, however, teach, on the contrary, that the necessity for the intervention of legislative power and administration is everywhere more apparent, the further the economy of the nation is developed. As individual liberty is in general a good thing so long only as it does not run counter to the interests of society, so is it reasonable to hold that private industry can only lay claim to unrestricted action so long as the latter consists with the well-being of the nation. But whenever the enterprise and activity of individuals does not suffice for this purpose, or in any case where these might become injurious to the nation, there does private industry rightly require support from the whole power of the nation, there ought it for the sake of its own interests to submit to legal restrictions. (* 1841, p.172)
Irwin’s conclusion is that Manoïlescu,
Took List severely to task for not putting protection on a proper theoretical basis.
(Irwin, 1996, p.164)
Irwin may be wrong: List was not formalistic about this, but that does not imply any lack of theoretical basis. Schumpeter has some of the same kind of criticism of List as a consequence of his admiration of formal mathematical "pure theory", or "analytical theory" (Schumpeter, History of Economic Analysis, 1954). List was in contrast a believer in the "synthetical theory" as were his followers in the historical school. As for instance Schmoller and Sombart, List believed in the integration of various branches of knowledge in a grand historical, comparative and non-formalistic synthesis. In this synthesis, the division of the formalists, between pure theory and practical theory, had no place.
Apart from repeating the abstract and introduction, I would like to give List the final word. In The Natural System of Political Economy, 1841, Friedrich List’s last and concluding section could be taken as a reminder for the rest of the world’s politicians concerning promotion of world transport and thereby general welfare. The end section reads,
As regards the establishment of a German transport system, and especially of a German system of railways, we beg to refer to a work of our own which specially treats of that subject. This great enterprise will pay for itself, and all that is required of the Governments can be expressed in one word, and that is -- ENERGY. (* 1841, p.435)
To prosper human kind needs will and wit to do so.
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1.. This is a superb piece of condensed knowledge - but may therefore be somewhat difficult to grasp for the reader unaccustomed to his ideas. This concerns, for instance, what is meant by certain terms that characterise the school of Adam Smith; like the Cosmopolitan School (i.e. radical market liberalism), the Exchange-value School (i.e. the kind of monetarism that in their economic analysis overlook factors which cannot be given a monetary value, in particular immaterial factors).
2.. These German authors all belong to the tradition of Natural (Rational) Law; Code of Law as opposed to Common Law, but to the idealist section that adheres to Thomas Aquinas verdict that the ultimate duty of Man is moral perfection. The opposed materialist section of this tradition of Natural Law, dominated by people such as Hugo Grotius, Thomas Hobbes and Samuel Pufendorf, saw biological survival as Man's ultimate duty. See for instance, Christian Wolff, 1749, Chapter 1 of the Duties of Nations to Themselves and the Rights Arising Therefrom", for instance: paragraph 35: "Of a nation's duty to perfect itself and its form of government." and paragraph 51: "How far this applies to the ruler of the state."
3..List writes: “It was here, that it first became clear to me, how the economy develops step by step.” However, it is evident that he did at least have some basic notion of a stage theory already around 1820 (*1820, p.539).
4.. Indicating his interests, in his 1774 essay Reflections on the Formation and Distribution of Wealth, Turgot mentions "transport" twice, "road", "canal" "rail" and "legal" not at all and "law" only 15 times. (Compared with List: 83/15/26/18/6/132) "This Essay May be Considered as the Germ of the Treatise on "The Wealth of Nations, Written by the Celebrated Smith" (from Condorcet's Life of Turgot).