I am always careful to stay out of arguments with professional economists because my economic knowledge is back-of-an-envelope stuff and comes unstuck when folks get technical. Still, the general principles are important. Adam Smith’s free markets have served us well for 250 years and were (mostly) the basis of the Industrial Revolution; Karl Marx’s economic principles have been a disaster wherever they have been tried and Maynard Keynes’s formulations are so attractive to bureaucrats that whenever possible they use them to distort well-functioning economies, awarding themselves more power. Then there is a fourth economic system, mostly used in German-speaking countries: that of Friedrich List. In today’s world, List’s views may well be optimal.
Dealing with the three better-known economists in chronological order: Adam Smith made more rigorous the free-market thinking of Sir William Petty, Sir Dudley North and Richard Cantillon that was already widely promulgated before his time. His economic model works best when all countries are automatically friendly with each other, or where one country is imposingly economically dominant (the latter being true of Britain in Smith’s time and for 70-80 years afterwards).
The defects of his model are greater when those conditions are absent, as we have seen recently in the difficulties following the “outsourcing” mania of 1990-2015, which has left the United States dangerously dependent on raw materials and some consumer goods whose production is controlled by potentially hostile powers. The model also does not work when the market is disrupted, as Charles Jenkinson first Earl of Liverpool, then President of the Board of Trade, noted after a famine in 1800:
“In time of distress the Seller becomes Master of the Market and it then becomes absurd to rest one’s confidence in Adam Smith, who has Pushed his Principles to an extravagant Length, and in some respects, has erred.”
Thus, in today’s world, the Smith model works only if the world is completely “flat” in the Thomas Friedman sense, and has a Gold Standard or a single currency, so that governments cannot steal advantages through monetary shenanigans.
Marx, who began his career in the 1840s, when Smith’s model had produced an Industrial Revolution that immensely improved the living standards of most people while immiserating those left behind, notably in Marx’s own Trier before the 1833 Zollverein, abandoned the market altogether. Instead, he promulgated two principles: one of class struggle and the second of collective worker ownership of the means of production (yes, I KNOW this is a gross oversimplification!) Marxism appeared to offer a means whereby the intellectuals and manual workers could combine to form a more perfect society. In the many cases in which this has been attempted, the intellectuals have been as unfeeling and incompetent as you would expect, and the result has been universal immiseration and tyranny. We can surely agree today that this is not the way forward, yet it remains supported by a substantial proportion of young college-educated idealists, for whom bitterly held ideology has yet to be overruled by practical experience of its folly.
Maynard Keynes began his economics career when the free-market Industrial Revolution, having lifted living standards immeasurably, had slowed in Britain (largely due to its policy of unilateral free trade) and had then run into the immeasurable catastrophe of the First World War. In addition, bureaucracies worldwide had been bloated by the war and by the first unemployment insurance and social security schemes and were itching for something more to do. There was thus a teeming intellectual market for a new heterodoxy and that is what Keynes provided, first with “The Economic Consequences of the Peace” which mixed justified criticisms of the inept Versailles Treaty with statist notions of what to do next. The Great Depression was another enormous stroke of luck for him; while caused largely by an incompetent Fed and foolish meddling by the Hoover administration, it suggested wrongly that the original Smithian model did not work. Hence his 1936 “The General Theory of Employment, Interest and Money” while understood by few, met with an enthusiastic reception for its nostrums of money printing and bloated state spending unmatched by revenue.
All three theories have now run their intellectual course. The precondition for Adam Smith, either a wholly predominant hegemon or an atomized but universally friendly global structure, is no longer valid. Marx is surely a busted flush except in the sillier reaches of academia. Keynes has been destruction-tested over the last few decades and is producing increasingly inferior results and signs of dangerous instability. So, a new paradigm is needed – which is where List comes in.
Friedrich List (1789-1846) admired Adam Smith, but felt his paradigm was unsuited to a world in which tariffs were still high and national prejudices strong (his early work was done in the immediate aftermath of the Napoleonic Wars). He was a supporter of the German Zollverein customs union, recommending it to the Confederation Diet in 1819, remarking that customs barriers between the small German states
“produce much the same effect as ligatures preventing the circulation of the blood.”
Unlike Smith, Marx and Keynes, whose activities were largely restricted to writing, professorship and advice, List participated actively in business, moving to the United States with the Marquis de Lafayette’s tour in 1824-25, then settling in Pennsylvania, buying some coal deposits and in 1829 forming the “Little Schuylkill Navigation, Railroad and Coal Company” with capital of $700,000. When this railroad opened in 1831 it appeared initially to have made List rich, but alas he had made a wrong technological guess by building it with wood rails, more easily available than iron in Pennsylvania but only viable for horse-drawn traffic and unsuitable for the locomotives used from 1833. List therefore returned to Germany and resumed his career as an academic economist.
Much of late 19th century U.S. academia was built on the foundation of German intellectual achievement, boring students to tears with immensely complex theoretical constructs but building a massive multi-collegiate superstructure of ideas. In List’s case, the intellectual flow ran the other way. He had been very impressed with the protectionist and developmental “American System” of John Quincy Adams’ 1825-29 Administration, which itself was built on the intellectual foundation of Alexander Hamilton’s 1791 “Report on Manufactures.”
List’s first publication on returning home was his 1833 “About a Saxon railway system as the basis of a general German railway system and especially about the routing of a railway from Leipzig to Dresden,” published before a mile of German track had been laid but including a detailed map of the proposed future German railway system. Work was quickly begun on the Leipzig-Dresden line, with money raised at the Leipzig Easter Fair of 1835 and List’s rather ineffectual assistance. However, the most remarkable feature of this publication is that the German railway system, when completed around 1860, almost exactly resembled this map. Thus, either List was such an economic genius that he predicted accurately where railways would run, 10-20 years in advance, OR the German railway engineers, being methodical people, took a copy of List’s handbook with them round the future Germany, muttering “Herr Professor Doktor List says we should have a railway from Bremen to Magdeburg, so let us build one.” I am inclined to the latter explanation, in which case List did not just forecast the German railway system, he designed it!
In 1841, List published his masterwork “The National System of Political Economy.” He believed that free trade, especially unilateral free trade, was suited only to a world in which all natural boundaries had been removed, or to states without significant manufacturing, which could benefit from cheap imports.
“Gradually, I satisfied myself that the whole doctrine was applicable and sound only when adopted by all nations. Thus, I was led to the idea of nationality; I found that the theorists kept always in view mankind and man, never separate nations.”
In practice, governments should construct tariff systems according to their own needs, varying those systems as needs changed. Thus, the United States of List’s time was doomed if it adopted Andrew Jackson’s free trade principles; to prosper it must return to the protective tariff of Adams (who in office had favored the 1828 “Tariff of Abominations”). As for Germany, it must guard against superior British technology and in particular British “smuggling” which had put many noble German artisans out of business.
List’s economic plan was designed for a single national economy faced with dangerous competitors, not all of which were entirely well-intentioned – the world the United States lives in today. He assumed a monetary system based on gold or silver; to his prescriptions we should thus add the monetary maxims of the Austrian economic school, the founders of which were well familiar with his work. As for other economists, Smith should be honored and held as a model for a perfect but alas non-existent world, while those leaders who follow Marx and Keynes should be condemned in Keynes’ own words:
“Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)