The cover of the December 1993 issue of The Atlantic Monthly had a caricature of Adam Smith running away while being chased by a rain of rotten apples, stones and copies of a book with the name Friedrich List on their covers. The caption under the drawing said, “Move over Adam Smith. Some of the world’s strongest economies run on a different philosophy, and the United States had better take heed.” Inside, author James Fallows proceeded to explain “How the World Works.”
Mr. Fallows argued that the world economy does not work on the basis of the principles of free trade. Rather, all countries, great and small, operate their international economic relationships on the basis of managed trade. And if America is to match its competitors and be a winner in the global game of commerce and exchange, the United States should do the same. The guide for winning this game, we were told, is Friedrich List.
In the early 1820s, Friedrich List, a German journalist and former professor of political economy, came to America to avoid imprisonment for having criticized the government of the German principality of Wurtemberg. He took up farming near Harrisburg, Pennsylvania, and edited a German-language newspaper. Having arrived in the United States with letters of introduction from General Lafayette, he soon developed friendships with President Andrew Jackson, Henry Clay and James Madison. List returned to Germany in 1832 as American consul to the city of Hamburg. In 1841, he published a book entitled The National System of Political Economy . In 1846, while suffering from a painful and terminal illness, List committed suicide at the age of 57.
What was so special about this man? Friedrich List’s significance is that his book became one of the most important rationales for protectionism and government intervention during the remainder of the 19th century. Indeed, his arguments — and the arguments of those whom he inspired — were the basis for the rejection of free trade and for the revival of protectionism and interventionism in Imperial Germany during the second half of the last century.
Three premises were at the foundation of List’s protectionist system. First, the idea of “the infant industry.” List argued that a country entering the early stages of industrialization was at a disadvantage in relation to those nations that were already industrialized. The new, industrializing firms could not successfully compete against the established foreign industrial enterprises that had already incurred all the required start-up costs and that could sell their products at prices that reflected all the cost-efficiencies of mass production and an already existing highly skilled labor force. The government of an industrializing nation had to erect protectionist barriers to keep the prices of foreign manufactured goods as high as the costs of production of the new industrializing domestic enterprises. Only in this way would those domestic firms have a chance to survive in the market and establish themselves firmly enough to finally face the older foreign industrial enterprises on an open field of free trade at some point in the future.
Second, the idea of “forced capital investment.” List said that a nation that specialized in those lines of production dictated by the profitable opportunities offered by international commerce under free trade could find itself locked into low-income-earning activities, escape from which might be impossible. In his eyes, a nation that specialized primarily in agriculture or the selling of raw materials on the world market would never have the same income-earning capacity as those nations specializing in capital-intensive manufacturing. Thus, while protectionism might impose higher short-term costs on a nation’s consumers, in the long run, the manufacturing enterprises that were nurtured behind protectionist barriers would enable an industrializing country to have greater productive capability and create a higher standard of living for the people of that nation in the future. And these longer-term benefits would outweigh the short-term losses from paying higher prices for foreign and domestic consumer goods.
Third, the idea of “the national interest.” List accused Adam Smith and other free-trade economists of “cosmopolitanism.” Men were not a part of a global community, List argued, in which their interests harmonized in a network of international commerce and division of labor. Between man and humanity was the nation, List insisted. Each nation had its own history, culture, stage of development and position of power relative to other nations in the world. And the economic prosperity of each man was tied up with the success or failure of his own nation’s struggle for political and economic influence and control in the global competition between nation-states. This meant that for the nation’s prosperity and betterment, it was often necessary for the individual to sacrifice his private interest in the arena of trade and profit opportunities for the national interest of the country to which he belonged. Since other nation-states, in the real world, used political power to gain economic advantages for themselves in international trade, one’s own nation had to do the same; and to further that end, one’s own government had the right and responsibility to regulate and control the economic relations between its citizens and the peoples of other countries.
In his article in The Atlantic Monthly , Mr. Fallows insisted that it is the policies of Friedrich List that should explicitly replace the free-trade philosophy of Adam Smith in United States’ international economic relations. In fact, Friedrich List — the ghost of protectionism past — has been haunting the world throughout the last hundred years. His ideas and policies have inspired every proponent of state intervention in economic affairs, whether or not they have been aware of the spiritual ancestry of their ideas.
And since the 19th century, the advocates of economic liberty have found it necessary to try to exorcise his spirit from the political body. In 1899, for example, English economist Charles Bastable tried in his book The Commerce of Nations . Responding to List’s argument for the protection of infant industries and forced capital investment in manufacturing industries, Bastable explained:
The onus of proof rests with those who advocate [protectionism], and they are bound to show (1) that the industry to be favored will after a time be self-supporting, and (2) that the ultimate advantage will exceed the losses incurred during the process. A careful computation of the different elements involved — the loss in each year of protection, with interest on the losses during earlier years, the estimated amount of gain to accrue when time for independence [from protection] is reached — will, it appears, tend to the belief that protection as an agent for establishing new and profitable industries is not likely to prove satisfactory. When it is added that the complex and elaborate estimates, which are necessary for a right decision, will have to be made by a legislative body liable to be affected by the influence of interested producers, and at best imperfectly equipped for the task, the risk of trying to encourage by means of protection ought to be sufficiently clear. . . .
The free trade case . . . rests on the broad and well-established fact that the guidance of individual self-interest is, in purely industrial matters, much safer than the direction of even the best-informed Government. . . . All attainable evidence goes to show that where the ordinary conditions of social life are maintained, the care and interest of those concerned in the work of production are by far the best guarantees, for a beneficial employment of the productive resources available. That part of the argument which claims that the power of production is increased by protection . . . rests on the inadmissible assumption that the interest of the producers will not lead them to take up those industries in which productive power will increase most rapidly. The acquisition of industrial skill is quite as likely to advance under free-trade as under protection, though the lines which it takes will probably differ.
And as for the idea that “the national interest” must take precedent over individual, private interests for purposes of peace and prosperity, the Swiss economist William Rappard demonstrated in his 1936 Richard Cobden Lecture, “The Common Menace of Economic and Military Armaments,” that this is a policy that leads nowhere but to international conflict and political combat.
“By economic armaments,” Rappard explained:
we mean all those legislative and administrative devices intended to restrict imports and develop domestic production with a view of reducing international interdependence. Economic armaments are the tools of economic nationalism. . . . The primary source of economic and military armaments . . . we perceive in the doctrine of political nationalism. Political nationalism is the creed which places the national State at the top of the scale of human values, not only above the individual, but mankind itself. It is the creed which . . . leads nations to look upon their own State as a universe in itself and therefore to disregard the rights of all others.
“Economic and military armaments. . . have one common ancestor,” Rappard said. “That common ancestor is war. . . . Economic armaments, if persisted in, can make States less interdependent, still less prosperous, and still more antagonistic to each other.” Why? Because, “both military and economic armaments, when developed in one State, naturally lead to their development in all the neighboring States.”
“That dogmatic, aggressive and defiant [economic] nationalism should have given rise to international tension,” Rappard continued, “is shown by the professed ideals of its principal champions.” As a demonstration, he quoted from List’s The National System of Political Economy , in which List stated:
[A] war which promotes the transition from the purely agricultural to the mixed agricultural-manufacturing state is therefore a blessing for a nation. . . . Whereas a peace, which throws back into a purely agricultural condition a state destined to become industrialized, is a curse incomparably more harmful than a war.
If confronted with the response that his proposal for the conscious implementation of the ideology of Friedrich List may lead to war and greater international tension and conflict, James Fallows would probably reply that such a result is no part of his intentions. But ideologies and policies when consistently and persistently carried out contain within them their own logic and necessary conclusions.
A world in which one nation after another undertook to carry out the Listian ideal would be a world in which those various nations would sooner or later confront each other in their respective desires for domination of various state-supported and subsidized lines of manufacturing, “high-tech” production and service industries in the global market. And in the political battle for global market shares from production and the creation of types of employment preferred over others for their national work forces by governments, either one nation-state concedes and surrenders to the wishes and power of another nation-state or else economic and political warfare must determine the outcome.
Thus, while Mr. Fallows believes that he is being the “realist” in telling the American people about “how the world works,” in fact, for that world actually to work in a way leading to greater peace and prosperity, we must, once and for all, renounce the ideas and ideals of Friedrich List. Or as William Rappard expressed it towards the end of his 1936 lecture, “[T]he only hope of humanity therefore lies in a return to the Cobdenite ideals of individual freedom within each nation, and of economic cooperation, peace and goodwill among all nations.”