Friedrich List: The Un-Adam Smith

Here is something a little different.  My history of economic thought course has just finished up with John Stuart Mill and I will be moving into the socialist reaction to classical economic theory.  Most of us probably associate Marx and socialism with criticism of the classical school but there was also an early non-socialist reaction in the work of Friedrich List (1789-1846).   While the Classical School laid out a model of how the world should work, a German by the name of Friedrich List presented the world as it often worked when it came to economic policy, particularly commercial policy.

Friedrich List (1789-1846) was a critic of the Classical School and his most famous work is The National System of Political Economy (1841).   In particular, he assailed the classical school's view that free trade was a manner in which economic growth could be fostered.  While free trade was of some use during an early natural resource stage of development, it then had to give way to commercial restrictions to foster manufacturing.  He felt that universal free trade was an ideal that would only be achieved at some far future date when all nations had industrialized and reached a high level of economic growth and development.  During the development phase, each nation was better off fostering its own manufacturing development via import duties.  Undeveloped countries that engaged in free trade too early on risked never developing a diversified economy.  List's work is an early infant industry type argument, and his ideas were implemented by Germany, the United States and Japan. 

List felt that countries that moved to complete free trade without having a developed manufacturing sector was premature and would result in English economic dominance.  After all, prior to moving to unilateral free trade in 1846 with the final abolition of the Corn Laws, English trade and economic policy was also quite mercantilist.  He wrote:

“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.”

List referred to the Classical School and its prescriptions as “cosmopolitical economy” because it assumed a state of perpetual peace among nations and ignored the material self-interest of the nation state.  He wrote that cosmopolitical economy was:

“that science which teaches how the entire human race may attain prosperity; in opposition to political economy, or that science which limits its teaching to the inquiry how a given nation can obtain (under the existing conditions of the world) prosperity, civilization, and power, by means of agriculture, industry and commerce.”

The work of Friedrich List has never been a major feature of what can be termed the Anglo-American school of economics but his ideas have had exposure in continental Europe as well as Asia.  His focus on national economic power rather than maximizing individual welfare makes him a neo-mercantilist.  In terms of teaching your students about the history of economic theory and policy, his work is an example of how large the impact of non-mainstream economic theory is on economic policy and the importance of reading widely.  After all, your business competitors either have read Friedrich List or behave as if they have.

Comments

[Nathan Tankus]

While List was certainly important, his ideas were mostly associated with the first generation of the american school. the second generation (henry carey and erasmus peshine smith among others) went far beyond him.

"Smith complained (in Greeley’s New York Tribune, April 12, 1856) that the book was too historical and empirical. In terms of actual economic theory, “all he has done is to substitute the ‘Theory of Productive Force’ for that of Values.” To be sure, Smith granted, “He shows that the European Economists overlook the truth that ‘the power of creating wealth is vastly more important than wealth itself. . . . Their system ignores what may be called virtual or latent wealth, and treats nations as if they were actually exerting the whole productive power of which they are capable; and the only question was how their forces should be directed. The moment this idea is introduced, their theory explodes.”"

http://michael-hudson.com/1997/05/theories-of-economic-obsolescence-revisited/

read Erasmus Pehine Smith's manual of political economy. it's a great book.

[Bruce Bartlett]

List was first and foremost a German nationalist who wanted a unified Germany. His efforts succeeded in creating a free trade zone among the German states that eventually did lead to unification.

[Nick Rowe]

Interesting. Aside from the infant industry argument, do I detect the national defence argument too?

[Livio Di Matteo]

Nick:
Apparently Mr. List was also big on the need to acquire colonies and a fleet to protect them.

[Determinant]

That's German nationalism as it was during the 19th Century. National unification, national development, a big army, colonies and a navy.

The German nationalists achieved all of these things by 1914 and then the cataclysm came.

Though his ideas do fit current popular Chinese sentiment. China has always been one of the key centres of human civilization and activity. But by 1900 they had been overtaken by Europe.

The short story is that China entered a period of economic and cultural isolation around 1600 and this led to technological stagnation. Gunboat diplomacy and humiliating trade and legal concessions were the result of this.

So China's rise and the policies that fuel it are a reaction to this stagnation. "Make China Strong" sells in China.

[Lorenzo from Oz]

On a strong navy and colonies for Germany, the Second Reich's High Seas Fleet was possibly the most disastrous strategic investment in history. Not big enough to defeat the Royal Navy but large enough to turn Britain into an enemy. Prussian success had turned on British alliance (or at least neutrality) since the Seven Year's War. Taking on Anglo-America doomed Germany twice.

Of course, 1914 was a great year for strategic errors. Enver Pasha and the Young Turks declaring war on the British Empire which had guaranteed the Ottoman Empire's existence since 1798 was probably the largest unforced strategic error. But Austria-Hungary deciding to militarily crush Serbia, who promptly crushingly defeated the Austro-Hungarian invasion, was a bit of a failure too.

On List and China, Ha-Joon Chang would probably count as a modern equivalent to List. Making neo-mercantilism "work" seems to rely on exaggerating the importance of trade policy, ignoring large numbers of failures and misreading what was significant about the selected "successes". Having polities which were "commerce friendly" to extent of paying serious attention to what one's commercial sector wanted was sufficiently historically unusual to provide significant benefits even if some policies worked better than others.

[Wonks Anonymous]

The English did not embrace free-trade with the end of the Corn Laws, those were goods they had comparative advantage in and constituted a trivial portion of their tariff revenue. Read John Nye's "War, Wine and Taxes". Or watch this episode of bloggingheads:
http://bloggingheads.tv/diavlogs/7122

[Will]

My impression is that the ghost of Friedrich List is very much alive in his native Germany. Intriguingly, there is a reading of the imposition of Bavarian Beer Purity law on the rest of Germany following unification as a subtly protectionist measure. The beer market in the country still bears the marks of this policy: imports, even from nearby Belgium, are hard to come by. I blame List, fairly or not.

[Frederich List]

Re: English free trade.

Douglass Irwin takes Nye's argument to the chopping block.

England and Latin America were NOT protectionist in late 1800's: they raised tariffs on goods with a high inealasticity of demand such as imported liquor and tobacco products, as well as coffee and raw sugar in order to raise revenue. The goal of these tariffs was NOT to develop coffee plantations in Birmingham or vineyards in Scotland. They also sought to equalize excie duties across domestic and imported liquor: otherwise everyone would have dropped domestic liquor for imports and the government wouldn't have raised any revenue from its alcohol taxes.