Back to homepageFriedrich List (1789-1846)
by Arno Mong Daastøl
Department of Public Economics, University of Maastricht
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This entry article will be published in:
The Elgar Companion to Law and Economics,
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The Elgar Companion to Law and Economics,
London: Edward Elgar, 1999Edited by Jürgen G. Backhaus, Professor of Public Economics, Maastricht University, The Netherlands
‘A most valuable collection of papers serving to provide the reader both with an overview of some key areas in law and economics and with a biographical introduction to the work of some important, if also neglected, sources of scholarship in the discipline.’
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Friedrich List was one of the earliest and severest critics of the Classical School of Economics, the tradition from the Physiocrats and Adam Smith. His theoretical system is a very empirically oriented system, in the sense that he claimed it to be based on historical experience. It is non-the less logical and therefore coherent.
List is generally known as a proponent of a protective, nationalist economic policy and of railroad construction, in the early 19th 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.
List agreed with Smith on the desirability of global free trade. He claimed, however, that instant and radical free trade would lead to a monopoly under the strongest nation, technologically and economically. Other nations therefore had to be lifted up to the level of the leading nation. This had to be done gradually through legal and regulatory arrangements, involving among other instruments, limited and differentiated protection at home and international legal agreements.
List may be 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 is a matter of perspective, of time and of economic complexity, regarding for instance the inter relationship between markets. List would claim that Smith might be said to be a free trader only from a superficial, static short-term and relatively narrow-minded perspective concerning the interests of Britain only, and that this was the deliberate choice of Smith, List claims. List, like Smith, had a global perspective and a historical perspective. List, however, claimed to be and seems to have been more aware of deeply rooted international power relations.
List's basic argument against Smith was that his materialist, static and superficial generalisations hid the crucial differences that made different policies in different circumstances necessary (concerning goods, capital, markets, institutions, private versus public interest, and historical stage of development). In particular, this concerned the difference between private versus public interest, between commodities and refined goods and the level of development of a nation in all respects. 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 also argued that Smith and his followers confused causes and effects in their arguments by using non-historical static arguments (List, 1841, p.126, 135). This added to the tendency to disregard the need for legal and regulatory intervention in the economic sphere. As regards underdeveloped nations, in particular, this generally promoted merchant interests contrary to national interests, List charged.
List claimed that his economic strategy would also promote the basic and crucial non-monetary factors for economic development that Smith overlooked. His perspective did not only pay attention to material factors, as he claimed Smith did, 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 was, perhaps, too much of a free trader, often showing too much faith in the withering away of necessary public regulation, being at the bottom of his heart a liberalist emotionally and politically. Nevertheless, on other occasions he argued rationally for the continued role of government policies. 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)
Although development of human civilisation at large was indeed List's main preoccupation, his heart and activity 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 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. Therefore he emphasised the crucial roles of two (three) phenomena, all intimately related to legal arrangements, arranged here according to importance: political and religious freedom, security and morality. Although a primary goal by itself this also served the next point; arrangements to invoke incentives for and investments in education, science, research, communication, transport as well as in production in manufacturing and agriculture. This would also serve the former point. The next point was one instrument to achieve the present point; regulation of national trade. Differentiated protection outwards and liberalisation inwards, as well as voluntary customs unification to reap economics of scale benefits.List's relation to Law and Economics
The prime instrument in this strategy of List was the legal system. Changed legal regulations were to promote social progress, however much they had to be fought through in political and bureaucratic battles. Educated in law and having practised within the legal and parliamentary system this was logical to him. List's ideas, in spite of their close affinity to the law and economic approach, have nevertheless been little noticed among students of law and economics. I will try to show that his insights qualify List as an important forefather of the law and economics profession. List agues against a French colleague of A.Smith, J.B.Say,
"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. Although laws and public institutions do not produce immediate values, they nevertheless produce productive powers, and Say is mistaken if he maintains that nations have been enabled to become wealthy under all forms of government, and that by weans of laws no wealth can be created. The foreign trade of a nation must not be estimated in the way in which individual merchants judge it, solely and only according to the theory of values (i.e. by regarding merely the gain at any particular moment of some material advantage); the nation is bound to keep steadily in view all these conditions on which its present and future existence, prosperity, and power depend.
The nation must sacrifice and give up a measure of material property in order to gain culture, skill, and powers of united production; it must sacrifice some present advantages in order to insure to itself future ones." (List, 1841, p.144) The relation between law and economics is the practical core of his world of ideas and that economic efficiency is a goal for his efforts to reform the legal system. He says, "Every law, every public regulation has a strengthening or weakening effect on production or on consumption or on the productive forces." (Ibid. p.307) Nevertheless, the ultimate goal was of an immaterial and moral nature closely related to law as well. The prime instrument and crucial tool and lever of his plans for a more humane and efficient economic system was, in fact, law and regulation. He preferred, in many cases, to give law precedence over regulation because of the restrictive effect law has to potential excesses of the bureaucracy. For the same reason, he worked in favour of the jury system, "one jewel out of the treasure house of freedom" (Ibid. p.50), in order to correct the arbitrariness and inefficiency of the bureaucracy (as was Leibniz's leading idea in his work on legal issues: Anners, 1983, p.211). List was educated and practised primarily within the legal system (as a junior and later senior tax clerk as well as student and, later, professor) and within law making (as a Member of Parliament). He was throughout his life devoted to the issue of arranging, first of all, the national and international legal systems so as to serve economic efficiency, in the interest of the common good. He writes:
"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." (Ibid. p.114.)
National and international legal arrangements were also the main preoccupation of forerunners in Germany, like Cusa, Leibniz and Wolff. Legal reform was the essence of List's reform plans as a local civil servant in Würtemberg and the essence of his reform plans as a journalist, consultant and politician for a German, European and global legal and economic system. For List, there was not a great conflict between justice and efficiency since justice would serve efficiency, and vice versa. He argued that injustice was a major reason for existing economic problems, for instance regarding slavery in the southern states of the United States of America. In fact, looking at much of List's agenda; in opposition to the bureaucracy, freedom of expression, accountability, jury trial; he might be mistaken for a neo liberal. His opinions on the spiritual origin and character of wealth & prosperity and on the corresponding need for moderate and differentiated regulation make most of the difference. Precisely because he insisted on the important role of regulation, he had all the more reason to be critical of the behaviour of the bureaucracy. His personal experiences underlined this point.
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 of furthering communication through establishment of infrastructure in all ideal and material aspects was based on an idealistic image of Man, regarding the human spirit as the ultimate source of wealth and of power. Concerning economics of growth as well as law and economics, this gives List a lead, as he thoroughly discussed the incentive structure in many aspects, and regarded it as crucial for entrepreneurship.List's Background and His Bureaucratic and Academic Career
Friedrich was the son of a respected tanner in the Southwest German town of Reutlingen. After a short and uninspiring period in his father's business, he preferred to enter service in state administration as a clerk and, in 1811, he took up a position in the neighbouring, ancient university town of Tübingen. He studied law, part time, and gave up his position in 1813 in order to concentrate on his studies. He never sat for the final lawyer's examination, but instead passed the actuary examination in 1814. He re-entered the administration as an accountant and was promoted to Chief Examiner of Accounts (ministerial under-secretary) in 1816, under his mentor, Minister Von Wangenheim. One product of his studies in law was the treatise on Roman law (List, 1962). He damned the influence of this law (List, 1841, p.80).
Apart from numerous reports, List later wrote at length on the importance of agricultural reform for democratisation and industrialisation. A pioneer paper on land reform is Die Ackervervassung, die Zwergwirtschaft und die Auswanderung. (List, 1927-36, vol.5, pp. 418-547) (Meaning: agricultural constitution, small business and emigration). This is a layout of legal reforms in agriculture necessary for higher efficiency in agriculture, higher revenue and therefore surplus for investments in industrialisation. But the political aspect of the agricultural constitution was as important. The Japanese and Korean reforms are examples of industrialisation starting with land reform. In both countries, the works of List were well known.
In this comparative country study, List elaborates on the ideas of the Cameralist, Justus Möser. List spells out the necessary reforms in order to create the political preconditions for a modern representative parliamentary system. The civil liberties of this system were supposed to allow creation of an urbanised and industrial society. List advised a golden middle way, creating a class of independent middle-class farmers instead of the British capitalist large-scale type of agriculture.
This long ignored work is perhaps the first systematic work in the historical tradition (with its empirical methodology as opposed to the rationalist introspective methodology of the classical British school) and thereby set a standard for later method within the historical tradition of economic thought. Marx copied large portions from both this work and from "The National System" (Lenz, 1930, p.015)
List was an ardent supporter of the political liberal movement in the German idealistic tradition of Cusa, Leibniz and Wolff. As these he acted against the arbitrariness and inefficiency of the bureaucracy and also against the autocratic force of Austria in particular. He put forward numerous practical reports and suggestions for reform of the local inefficient administration and its legal system, some really manifestos for reform. This came to the attention of his superiors and made him the protégé of Wangenheim who had similar ideas and intentions but also brought him enemies, especially within the bureaucracy, to whom he became especially vulnerable after the resignation of Wangenheim. The time was not yet ripe for these liberal reforms, but whenever will time be ripe without the martyrdom of strong-minded and visionary forerunners? This outcome of List's reform efforts was to haunt him politically and financially the rest of his life.
He supported the establishment of a chair in economics at the local university of Tübingen. Although he was not appointed to this chair, he was appointed to the full-time chair of political administration ('Staatspraxis') in 1817, although his formal credentials for such a position were lacking. In fact, the chair was created for him personally. However, List was too energetic to keep away from life outside academiae and involved himself in the establishment and as a consular secretary of a new society for trade and manufacturing (the German Association of Trade and Commerce) in Stuttgart. This aimed at the abolishment of internal impediments to trade in Germany, acting against internal customs barriers and for the erection of barriers to foreign manufactured goods, that is for international customs barriers; a typical (state-) mercantilist programme. This provoked his opponents and gave them an excuse to demand his resignation, partly on the grounds that it was improper for a civil servant to hold political positions and partly because of his absenteeism. List withdrew from his chair in 1819, and thereafter his life was completely devoted to political and economic reform in the service of the common good. His financial position was to be, in consequence, correspondingly bad.Political struggle: Travel and public education
Descriptive of his life's work, as well as of the following persecution of which he was a victim, is List's claim that the content of his main book The National System (List, 1841), could summed up in two words: Freedom and national unity. One is tempted to add industrialisation, although he saw this as an instrument of the above. His main enemies throughout his life continued to be local public bureaucracy, the landed interest and parties of the international power game. These joined ranks to fight him, and did so successfully during his lifetime. Nevertheless, his ideas certainly did bear fruit after his time had passed, through his young disciples who eventually entered into positions of power in Germany and elsewhere, as in Sweden, Russia, Japan, the United States and China.
List travelled extensively on behalf of the Trade Association and, in 1819, the citizens of his hometown, Reutlingen, elected him their deputy to the state representative assembly of Würtemberg. He then took part in the fight for a constitution for Würtemberg. These reform activities brought him before the court, and he was tried and convicted for sedition in 1822. He escaped into exile the same year. He came back to Stuttgart in 1824, when he was imprisoned. In 1825, he was exiled and emigrated with his family to the United States following the advice of Lafayette. In the United States he travelled extensively, meeting with several leading political figures.
List wrote a series of letters that were published as Outlines of American Political Economy exposing its features and contrasting it with the extreme free-trade Elements of Political Economy by the southern secessionist Thomas Cooper. His work was hailed nationally as a textbook of the American System of Political Economy, as opposed to the British System (non-regulated free trade), and was in part responsible for the introduction of the protectionist United States tariff laws of 1828. The conflict between these two strategies was later to be the central reason behind the United States civil war, where the industrial North was protectionist and allied with Russia and Japan, and the agricultural South was free trade and allied with Britain.
List may therefore be described as an American economist as much as he may be described as a German economist. Until his death in 1846, he wrote extensively for several journals. He travelled widely and met many leading politicians and heads of state. Throughout he propagated the same ideas which had followed him from his youth, outlined already in 1816, those of political freedom, political unification and economic development, with railroad construction and protection of manufacture as some instruments among many, all in the tradition of the potential 'Harmony of Interests'.
In 1830, List visited Paris and returned to Germany in 1832. Back in Europe, he meets people in politics, science and the arts. In Paris, in 1837, he wrote two treatises for the French Academy of Sciences, The Natural System of Political Economy and The World Moves. . The National System of Political Economy was published in 1841.List's contribution to economics in general
List's contribution to economic theory may be shortly summarised: his ultimate goal was the moral elevation of global civilisation. This could only succeed through industrialisation and a corresponding refinement of the individual citizen. He saw the legal system as a lever for this development. He warned against the destabilising effects of a lack of industry (List, 1837 a, p.56) 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. High morality and skill 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, of productive powers, which he says he developed after his American Experience (List, 1827, 161), an industrialising country would have to go through a period of free trade and export of commodities and gradual introduction of industry, followed by a period of protective trade policy, in conjunction with the establishment of protective navigation laws and naval policy. Finally there would be a return to free trade when all economic sectors had been developed.Urbanisation and industrialisation for a more humane civilisation: individual freedom, democracy and rule of law.
Economic progress was in List's mind inseparable from progress in civilisation, which in List's opinion meant a liberal model according to the British experience (List, 1841, pp.48-52, 56, 130, p.139). His insistent and repeated criticism of cynical British power policies towards its emerging competitor states should not make us forget that Britain was his model country, both in its civilised liberal political regime at home and in its imperial strength. It was List's firm belief that religious and political freedom could only be attained through industrialisation and vice versa (Ibid. p.142). This had to be enacted through the legal system, establishing a rule of law, and of just and egalitarian law. This spirit runs throughout his writings.
"It has been the experience of all ages and of all countries that freedom and industrial progress are like siamese twins. (List, 1837 a, p.153)
"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. (List, 1841, Ch.17, p.200)
"The greater the advance in scientific knowledge, the more numerous will be the new inventions which save labour and raw materials and lead to new products and processes." (List, 1837 a, pp.66-67, see also pp.64, 67-69, 79)
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 social welfare and prosperity (List, 1841, ch.17, p.200). 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 Centuries, List argues for the humanistic and liberating benefits for the individual of the industrially based urban life-style (List, 1837 a, p.69). This urban oriented tradition is very strong throughout German history. We find the same ideas with Nicholas Cusa in the 15th Century, with Leibniz 150 years later, with Karl Bücher (1893) and Georg Simmel (1902).Similarities and differences of approach: List versus Law and Economics
Some characteristics of List's approach resemble modern law and economics analysis and some element distance him from this type of analysis. If analysed with modern economic language, there is a lot to be learned from List's insights for students of law and economics, as well as for students of history, development, communication and innovation. Distancing him from the pricing inclination of the law and economics tradition, would be his emphasis on the immaterial production factors and his corresponding contempt for the exchange school of Adam Smith working mainly with the monetary aspect of economics, that is to say with the trade aspect and far less with the productive and creative aspect. List criticised Smith explicitly and repeatedly on this point (for example List, 1841, ch.12: The Theory of the Powers of Production and the Theory of Value). List regarded the factors that cannot be priced on a market, in particular the immaterial aspects, as the most important factors for the generation of both prosperity and the elevation of culture (List, 1827 a, pp.59, 63,67, and 1841, ch. 12: The Manufacturing Power and the Personal, Social and Political Productive Powers of the Nation). To him market prices were only one practical instrument among many, as part of a larger plan concerning the ultimate goal, the elevation of human culture. List would therefore, most likely, have been critical of several characteristics of modern law and economics. This would therefore, most likely, have been that of pricing a legal arrangement, the reason being that he belonged to the code of law tradition of the Continent, where you do not bargain over (semi-religiously) given axioms. He would most probably also have been somewhat critical of the assumption of freedom of choice, since he was critically aware of the path dependencies created by historical power structures.
Nevertheless, the above characteristics, immaterialism and power also constitute factors which unite List with the law and economics tradition. Reminding us of the law and economics approach is List's emphasis on a policy which uses governmental regulation and lawmaking concerning, for example, competition, privileges, taxation and subsidies to promote long-term efficiency in the legal system, and also within the economic system.List's criticism of short-sightedness and beggar thy neighbour policy
List's criticism of the one-eyed exchange value approach ('monetarism') of Smith's followers (List, 1841, pp.133ff.) did not prevent List from using relative prices as a part of his own analysis of economics. Nevertheless, it might be argued, he saw this in a wider perspective. One example is his analysis of the position of the landed class. List's criticism was generally directed against short-term and narrow-mindedness in economic affairs, and it had four principal targets; landed interests (particularly England) merchant interests (particularly Holland and Britain), governmental regulation (in general both the lack of it and its excesses) and international politics (particularly England).
In all these cases, List pointed out the international aspect of the problems. In addition, in all these cases he insisted that the actors who were his targets 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 interests. His suggestions for remedying this was, in part through legal and regulatory arrangements as well as education and moral enlightenment.
Mental capital as basis for entrepreneurship and innovation
'Mental capital' was in List's opinion the core of the productive powers (List, 1827, pp.57-67, List, 1841, pp.49, 140, 159 plus Ch. 12). He claimed that "Mental work is in the social economy what the soul is to the body." (List, 1927-36, vol.5 1930, p.42). By basing their method on the erroneous labour theory of value once established by Aristotle, both Smith and Marx focused on matter instead of mind. List mocked those who do not distinguish between the potential productivity of a Kepler and that of a donkey (List, 1841, pp.142ff. cf. p.159). He maintained that Smith overdid his focus on exchange (monetary) value. List claimed that he ignored the intellectual, moral and religious activity behind the productive forces and thence behind exchange value:
"It follows that certain conditions must be fulfilled before men's productive powers, and their intellectual and physical labours, can be successfully applied to the production of material goods that have an exchange value. There must be good laws, effectively enforced. Persons and property must enjoy the maximum security. … high moral and religious standards … a good system of education. Science and the arts …… adequate protection. … 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." (List, 1837 a, pp.184-186)
List was deeply engaged in what is today normally termed 'liberal' or even neo liberal causes such as freedom of the press and criticism of bureaucratic excess and arbitrariness. He did not see any contradiction between justice and economic efficiency 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 (List, 1827, Letter VI, pp.86-7; 1837 a, p.184; 1841, pp.200, 416). List's stress on the universality of law (jury trial) and 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. List intended to establish an efficient market for ideas, for innovation and for entrepreneurial activity, through implementing his liberal ideas. His work for security of property and for protection of investments can likewise be seen as intended to establish a market for innovation and for entrepreneurial activity, whatever the field, and all intended to secure an efficient working economy, to the benefit of general welfare.
"In order duly to estimate the influence which liberty of thought and conscience has on the productive forces of nations, we need only read the history of England and then that of Spain.
The publicity of the administration of justice, trial by jury, parliamentary legislation, public control of State administration, self-administration of the commonalties and municipalities, liberty of the press, liberty of association for useful purposes, impart to the citizens of constitutional states, as also to their public functionaries, a degree of energy and power which can hardly be produced by other means. We can scarcely conceive of any law or any public legal decision which would not exercise a greater or smaller influence on the increase or decrease of the productive power of the nation. [Footnote on J.B.Say] If we consider merely bodily labour as the cause of wealth, how can we then explain why modern nations are incomparably richer, more populous, more powerful, and prosperous than the nations of ancient times?" (List, 1841, p.139)
List paid much attention to the role of incentives in economics and how these could be promoted by regulative and legal arrangements. He devoted a whole chapter to this in his National System (The Manufacturing Power and the Incentives to Production and Consumption) (List, 1841, ch. 25, pp.303 ff.). Patents laws were one legal measure for promoting the mental powers of production (List, 1841, pp.56, 307). For other measures, see the section on tariffs below. In fact, since List regarded the mental powers (creativity and morality) as the bedrock of development, this makes the legal system even more crucial for development in his scheme than it could ever be in the so-called 'classical' ('orthodox') and 'neo classical' economic tradition. This is so because List emphasised the mental and therefore the entrepreneurial aspect to which the legal system is crucial.
Law and economics deals specifically with the possibility of changing the incentives structure, but mainly within the standard economic image of man as self-interested. List's idealistic approach deals more than anything with the incentives structure, but from a wider image of Man or conception of man, where Man is considered to be fundamentally also rational and moral in combination, in addition to self-interested. This implies that standard economics has a narrower and more unrealistic conception of Man and therefore of reality, to which also normal law and economics is prone. List's conception is therefore more realistic but less easy to formalise.Inventions, change, power: The obligation of law and economics
"Every new invention has some inconvenience for a number of individuals, and is nevertheless a public blessing." (List, 1827 a, Letter VI, pp.86-87) As hinted to above, List was a keen observer of power and of social structures, and therefore also of the implications of entrepreneurship for power. Inventions are a critical threat to many parts of an establishment, since power is ultimately based on control of some resource whether material or mental / ideal or whether on a local scale as well as on a global scale. Technological and economic growth imply change, and therefore a restructuring of the power base, sometimes on a vast and global scale. Although possibly beneficial for the majority of a society, such change may be detrimental to an establishment which, in consequence will try to use its dominant position to block change before it is too late, thereby cementing the structure of society and the economy, resulting in stagnation, eventual decline, sudden revulsion and upheavals. Hegel and Marx have described in a similar way the dynamics of social life. It is thus of crucial importance for survival of a community and eventually of a civilisation, that such static digressive behaviour is prevented and that a dynamic flow of change is permitted to take place. This line of reasoning applies on the local national level as well as to the international community. This problem, in particular, makes law and economics a crucial field of study and its students here have a crucial obligation.
Externalities like vested interests and power structures create transaction costs that render markets inefficient. This is a central theme of law and economics, which gives us yet another reason to claim that List indeed should be regarded as one of the important forerunners of law and economics. For List, power was at the core of economics and economic policy, both as a result and as a prerequisite. This was the source of one of his major criticisms of Adam Smith, who conveniently avoided this aspect in most of his writings, well aware as he was that the current power structure favoured Britain. Adding to this point is the fact that Smith sometimes, contradicting other statements of his, was an ardent supporter of governmental intervention (Smith, 1759, part VI, ch. I) and supporter of military activity, being the latter's firm admirer, "The art of war is certainly the noblest of all arts." (Smith, 1776, b. V, ch. ii, part i) This insight was also Smith's reason for applauding the British Act of Navigation 1651, since it injured commerce (in the short term) but strengthened the navy (Smith, 1776, b. IV, ch. ii).Smith's generalisations obscure the conflict between private versus community interest
A key to understand List's theoretical criticism of A.Smith and his followers is to observe how he criticised the strategy of Smith as being too generalising, disregarding the empirical and historical particulars of each practical phenomenon that (List 1841, pp.171, 224ff 316). For a further discussion of this read the section in the introduction above. List often criticised the radical market school for their extreme and anti-social individualism, which he claimed would be destructive to communities; in opposition to his own socially oriented individualism (Ibid. pp.169-71). List's criticism of Smith's confusion of private versus national economic characteristics and interests is almost endless (for example: List, 1827, Letter 5, p.75, List, 1841, p.172). Hildegard Schwab-Felisch has edited a collection of List's writings devoted to this issue (List, 191?), Staatsinteresse und Privatwirtschaft).
This difference between private and public interests is the basis for differentiating between private and public goods. Public goods have in common the feature of concentrated costs and dispersed benefits, there tends to be structural under investment in these areas. This might not be a major problem if it had not been for the fact that these areas function as a carpet and a productivity-enhancing locomotive for all other economic activity, in practically speaking any society. For List, these activities were related to innovation and communication, and to the former belonged education, science, arts and also machine tool industry (List, 1841, p.314). Public goods activities are therefore a prime target of governmental regulation and law making. List never used the phrase 'public goods' nor did he explain their basic characteristics; concentrated costs and dispersed benefits (as opposed to those of rent seeking: concentrated benefits and dispersed costs). Nevertheless, his criticism of Smith does in practice take the difference between private and public interests, and thereby the difference between private and public goods, as a crucial and given point of departure (List, 1827, Letter 5, p.75, List, 1841, ch.14: Private and National Economy). List claims, that as a consequence of denying the sometimes existent fact of a conflict of interests between private and community interest, Smith, makes the logical mistake of playing down the necessity for organised action, through the institution of the nation (List, 1841, Ch.14: Private and National Economy, p.163). H also claims that Smith's and Cooper's conscious confusion of private and public interests is a reason for their downplaying of the role of public regulation and therefore the role of the nation (List, 1827, Letter VI, p.87, cf. List, 1841, p.166).
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, (List, 1827 a, Letter VI, pp.86-7).Tariffs shall promote skill and liberty
List elaborated on the system of differentiating and temporary protective tariffs regarding different questions: incentives and security for the investor (List, 1837 a, p.89, List, 1841, pp.167-8); need for uninterrupted production and stability (Ibid. p.298); protection and importance of the home market (Ibid. pp.24, 186-187, 191); trade war and dumping (Ibid. p.95, 299); differentiated tariffs according to skill, experience, machinery, capital involved (List, 1837 a, p.145, List, 1841, pp.178-9); according to necessity of life (Ibid. p.311); according to time, i.e. a bell shape of tariffs along time axis (List, 1837 a, p.145, List, 1841, p.314); special key branches like machine tool industry (Ibid. p.314); historical setting (List, 1837 a, p.145, 1841, p.115, 130, 314, 329); fiscal side secondary (List, 1837 a, p.36); necessity of averting inefficient monopolies (Ibid. p.81, List, 1841, pp.81, 169-71); necessity of state credit and interest free loans as a kind of subsidy or negative tariff (Ibid. pp.296, 300, 315); state investments into infant industry, preferential interests rates to the investors; temporary subsidies to promote infant industry (Ibid. p.315).
The German term for infant industry tariff was Erziehungszoll or education tariff as opposed to Schützzoll; or protection tariff; of 'grandfather industry'. The fiscal side to his proposals were, however, totally secondary in importance (List, 1837 a, p.36). The economic activities to be protected more than any other, were knowledge intensive activities, since these activities had most to give at a later stage through raising 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 similar British practice repeatedly (List, 1841, p.39, cf. p.111). He criticised excessive protection that did not conform to the promoting principles of awaking and sharpening the productive powers of the nation but instead stupefied and blunted them (Ibid. pp.309-11).Customs unions avert monopolies and inefficiency
List repeatedly claimed that protection might be damaging in a small nation, as it was likely to establish an inefficient monopoly. Small nations would have to co-operate through customs unions, arranged by means of international legal agreements. There would be no internal barriers to trade, so that trade was made efficient by internal competition, a classic mercantilist strategy. In order to facilitate efficiency, competition ought to be furthered through the following factors: education, innovation, division of labour, economics of scale, transfer of technology, and other cultural achievements, technical standardisation and the infrastructural grid, including of course the legal framework. He criticised Smith for his theory of (exchange) value as an expression of narrow-minded merchant interests (List, 1837 a, p.102). For List, protection should offer no eternal privilege to any individual who is willing to risk his capital for the public good, but should be limited to the period during which 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 (Ibid. ch.15: Does the Protection of Industry by a Tariff give Manufacturers a Monopoly prejudicial to the Consumers of the Goods they make?).
Inter-relationships of markets & protection for long-term efficiency
A variant of transaction costs is interrelationships between markets. This occurs when actors in one market are dependent upon other markets but have limited influence on them or insufficient incentives to engage in them, even though this malaise might affect all the actors. In neo-classical terms this lack of joint action might cause market imperfections. List was a keen observer of the interrelationship between different markets, how the way markets functioned was crucially shaping, connected to and reliant upon how other markets functioned (List, 1841, p.39, 387). The character of some markets approaches the characteristics of public goods more than others (concentrated costs and dispersed benefits) and therefore this deserves special attention. Concerning education, administration and communication, List knew the basic and crucial function these constituted as a carpet and locomotive for other activities. He was therefore on the alert to make these basic markets fulfil their functions by shaping the constitutional, legislative and regulative system with this in mind.
Furthermore, he was a keen observer of the fact that markets have different characteristics and came to the conclusion 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. In a larger perspective, protection limited by time (and trade) may be 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 in his day, 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 with precisely this argument and claimed that foreign domination of domestic markets often consisted in a monopoly (List, 1841, pp.169-71, 176-7). He saw no advantage in a foreign (British) monopoly over that of, not domestic monopoly, but internal competition (Ibid. pp.184, 189-93). He therefore set out to establish domestic production and competition. Establishing infrastructure was one important element of making this come about.Thus, List's fight for the employment of legal arrangements for protection perfectly matches the agenda of law and economics, seen from a larger perspective.
Endnotes:
1.. 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, ch. 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.'
2.. The title first intended seems to have been The American Economist.
3.. The subtitle of List's treatise was Et la patrie, et l`humanité. List's work was rediscovered in 1925 and published two years later in French and German. The question posed by the French Academy of Moral and Economic Sciences was: 'If a country proposes to introduce free trade or to modify its tariff, what factors should be taken into account so as to reconcile in the fairest manner the interests of producers with those of consumers.' No contester was awarded, but List's work was among the three mentioned as ouvrages remarquables.
4.. The subtitle of this treatise was On the Effects of Steam Power and the new Means of Transportation. Erroneously this treatise was thought lost, for instance by Henderson (1983).
5.. Since Britain was the most powerful and influential nation at that time. He mentions the Hanse, Venice and Holland as historical examples, and the US as a likely future example.
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