Sunday, November 1, 2015

Michael Hudson on the American School of Political Economy

Too many liberals and progressives are stunningly ignorant of the war of ideas and ideologies hidden behind the staid mask of the academic discipline of economics. A common assumption is that the corporatist authoritarianism we must deal with today is a direct result of the structure of government established by the Constitution. Corporatism and exploitative financial capitalism were "baked into the cake," according to these people. A fairly typical statement: "The founders were focused almost exclusively on maintaining the status quo of property relations, which they already dominated."

I view the issue entirely differently: ever since the surrender of Cornwallis, the American republic has been under unceasing assault by its oligarchical enemies. The question to ask is: how was the American republic subverted and corrupted from within to erode its natural enmity to oligarchs and concentrations of  power - economic as well as political?

The past few years, Dr. Michael Hudson has provided a number of articles and interviews which comprise important parts of this story. He has explained how the economics profession protects the vested interests of rentier and finance capitalism by completely ignoring the concept of economic rent seeking behavior (i.e., pretending that all income is fairly earned, rather than recognizing that some income, such as from usury or speculation, is actually unearned and often quite harmful to the economy) here, and here. Last week, in How the U.S. Avoided Chronic Deflation by Relinquishing Monetary Control to Wall Street, Hudson discussed how the banksters of Wall Street shifted control over monetary policy from the Treasury Department, to the Federal Reserve. The post is important because it clashes with so much conventional wisdom; for example, Hudson explains that government surpluses drain the economy of liquidity, causing financial crashes. It is remarkable how much ground Hudson covers, including how the need to finance the Civil War led to the issuance of fiat currency (the "greenbacks" which the financial powers hated) and the National Bank Act which reestablished a national banking system.

What I think is particularly important is Hudson's brief discussion of the nineteenth century conflict over economic and monetary policies between the Democratic Party, and the Whigs, then later the new Republican Party. (Note that the Republican Party today has entirely repudiated the noble economic ideas of its founding, and now promotes and defends policies that early Republicans such as Abraham Lincoln devoted their lives to defeating.)

"Southern plantation owners," Hudson writes, "sought to support their slaves at a low enough cost to maintain the South’s dominant export position in cotton and tobacco. Creditors on the Northeast Seaboard also supported deflation. The result was a deflationary agrarianism aimed at countering the growth of northern industrial power."

Wow. These three sentences point to an issue of political economy on which the world literally turns. Unfortunately, it is an issue not many people are even aware of, because of how the economics profession has been used to defend the vested interests of rentier and finance capitalism. And it is an issue on which the left is dangerously vulnerable if it continues to believe that the establishment of the American republic, and the adoption of the Constitution, was merely an exercise in preserving the status quo, rather than the end result of the political and scientific Enlightenment finally defeating feudalism. In their 1937 book, The Power to Govern: The Constitution -- Then and Now, Walton H. Hamilton and Douglass Adair wrote,
The medieval world was, to the souls which tarried in it, a place of order. From pope to peasant every man had his place in the great Christian commonwealth, and was expected to live in accordance with the station in life to which God had appointed him. A hierarchy—ecclesiastic and feudal—offered regimentation to a placid society disturbed by the doughty deeds of a small privileged group…. But the intrusion of new devices, new ideas, and new values was too much for the ancient regime of fief and field, of vassal and lord, of mitre and surplice…. A newness had come into every domain of life to release creative energy—and to touch off conflict. A dogmatic learning had to make place for newly discovered facts. A revealed religion had to patch up a truce with individual freedom. Conduct directed by novel circumstance could no longer accord with accepted standards…. throughout Christendom the rightfulness of authority and the duty of obedience were unquestioned. This impulse toward authoritative control—an aspect of the common sense of the times—marked church and feudal system; it was taken for granted in the "self-government" of manor, guild, and voluntary association…. A struggle over policy was everywhere in evidence. It was concerned, not with the power of regulation—which was taken for granted—but with the objectives it should be made to serve. The gentry of England had once been of the land. The older foundations of public policy, far more deeply rooted in usage than in statute, had been rural. A general belief that land alone is the source of all wealth made common sense a defense of the agricultural interest.
Following this tumult of the passage from feudalism and ecclesiastical authoritarianism to the formation of the American republic and its Constitutional mandate to promote the General Welfare, three major economic philosophies were developed in the nineteenth century, and contended for domination. Dr. Hudson provides a spectacularly useful summary in a table in his 2010 book America’s Protectionist Takeoff: The Neglected American School of Political Economy:  (click table to enlarge).

Both British free market / free trade doctrine, and Marxism, are disastrous economic doctrines to pursue, and both are opposed by the one alternative that simply is not taught in USA economics departments. Nor, apparently, in History departments. Consider how ingrained in Americans’ minds is the idea of Manifest Destiny, and how much Dr. Hudson’s account below clashes with the accepted understanding of Manifest Destiny. As Hudson explains in his book:
….economic historians have treated ... the American School [as if it] never existed. The modern abhorrence of protectionism expunged from history the logic that guided U.S. industrialization under Republican leadership from 1860 through 1912. The American School’s trenchant critique of free trade and the theorizing of Ricardo, Malthus and other British writers caused a cognitive dissonance in the minds of professors eager to promote a view of American history driven by an inexorable drive for free trade and westward expansion as Manifest Destiny.

Actually, westward expansion was a Democratic Party policy to extend slavery and plantation agriculture. In an epoch when protective tariffs were the principal source of revenue for the federal government (that is, until the 16th Amendment created the federal income tax in 1913) the South based its cotton and tobacco production on foreign markets, seeking to feed its slaves with low-priced grain from the West. The Whig and Republican industrial program called for concentrating industry in the Eastern urban centers, whose population would be fed by farms that would find their major market at home, not abroad. But industrialization threatened to bid up food prices, eroding the competitiveness of plantation agriculture. This prompted the Democratic Party to urge free trade, small government and credit aimed mainly at export financing not industry. The slave states in particular decried industrialization and urbanization as culturally decadent rather than the key to economic progress. At issue was the kind of cultural, social and political structure America would develop and national trade policy would act to bring about.

….Indeed, what became known under the portmanteau term “tariff debate” was more accurately a debate as to the dynamics of economic growth itself. Its major issue was whether the nation should remain primarily agricultural or industrialize, whether the South should become the focal point of a westwards-expanding slave system, or the Northeastern and Middle Atlantic states become the focal point of an increasingly industrial national economy.
For those wondering: the shift of the Republican Party away from its American School policies began in the 1870s, as "hard money" advocates, railroad magnates, and trust builders such as Morgan literally bought increasing control of the Party - much as corporatist authoritarians are buying control of both parties today in the wake of the disastrous Citizens United Supreme Court decision. Rentier and financier control of the Republican Party was fully congealed by the 1896 election of McKinley (or, more accurately, Mark Hannah's management of McKinley's1896 election). Lawrence Goodwyn provided the best analysis of how this occurred, along with how the 1896 election also destroyed the populist movement, in Chapter 8 of his book The Populist Moment: A Short History of the Agrarian Revolt in America.

The grip of rentiers and banksters on the nation's political system was shattered by the Depression - and the exigencies of rebuilding industrial capacity to provide the combat material of World War 2. That was the basis of the historic opportunity Franklin Roosevelt seized to transform the political system in the United States by fully aligning the Democratic Party with the hopes and aspirations - and anger - of working and middle class Americans. This was, be it noted, the path to a full repudiation of what the Democratic Party had been, and done, during the Civil War and Reconstruction; a repudiation realized in the form of John Kennedy's and Lyndon Johnson's Civil Rights Act of 1964. Which, under the guidance of Nixon's Southern Strategy, further propelled the Republican Party on its rightward lurch toward "free market" theocratic authoritarianism. Basically, a return to feudalism: conservatives conserving tradition and heritage, indeed!

In Contrast to Roosevelt, Barack Obama has proven unwilling to seize the historical opportunity presented by the Great Recession to once again transform the political system in the United States by fully aligning the Democratic Party with the hopes, aspirations, and anger of working and middle class Americans. As a few predicted back in 2009 and 2010, Obama's refusal to repudiate neo-liberalism and its policies of allowing  rentiers and financiers to command the controlling heights of the economy, has led to a general discrediting of the left in USA, and allowed the right to hijack the populist anger against the machinations and greed of the coporatists and banksters. (So we are treated to the spectacles of Chris Christie boasting the he actually prosecuted miscreant pharmaceutical executives, and Carly Fiorina, Rand Paul and other Republican candidates expressing disgust that the too big to fail banks have become even bigger under Obama).  The resurgence of the right is discussed in Thomas Franks’ recent brilliant book, Pity the Billionaire: The Hard-Times Swindle and the Unlikely Comeback of the Right). But even Franks cannot identify the remedy, because he is apparently not familiar with the American School of political economy.

And that is the core of the problem with Obama, and Hillary Clinton, and many progressives and liberals. Is it actual malicious intent on their part to allow and enable the continued banksters' dictatorship, or "dictatorship of the properteriat" as Stirling Newberry memorably phrased it a few years ago? Or is just that they were never taught that there is an American School of political economy, an alternative to both Marxism and British free trade / free market neo-liberal economics?


  1. Work of this guy is pretty intriguing and interesting:
    I came accros his work occasionally. Stojan Nenadovic developed many good ideas on how to manage money supply way before many other notable economists such is Ellen Brown and similar monetary experts. He even wrote several letters to Milton Friedman, but all invain. Too bad he died unrecognized. I hope you will find his work usefull althought I'm sure you already know for many ideas he proposed.
    Regards and keep the good work

    1. We LOVE Ellen Brown around here, but she is hardly original. After all, her favorite institution in the Bank of North Dakota which was established in 1917—which in turn means that the idea for that bank were thought up at least two decades earlier.

      That's the best part about the economics folks like Ellen B and I espouse—we don't have to make up one thing—our ancestors had it figured out long ago. We just have to rediscover our roots.

  2. What are some other books and articles you would recommend that explain how the American System
    worked? Also, was Henry George considered part of the American System?

    1. Actually Tony is the expert of the American System. He has assembled his database from hundreds of sources. So I defer.

      About Henry George. He was typical of his generation in that he sought to answer big questions with large sweeping ideas. His question—What is common property in a society and how to we maintain it. He wanted a way to tax speculation, etc. In any case, he wasn't involved with the direction of USA industrialization which is what the American System is all about.

    2. The first section of Hudson's book, -America’s Protectionist Takeoff: The Neglected American School of Political Economy-, is "Review of Literature." And the first subsection is entitled, "The Reactionary Role Played by the Colleges in Forming Distinctly American Ideals." That pretty much summarizes the reception given the American School by most academics. Before Hudson's book, I am not aware of any decent treatment of the American School. The closest was the article by James Fallows in the December 1993 Atlantic Monthly, "How the World Works" which traces how the ideas of Henry Carey and others were transmitted to Japan, South Korea, and other countries, to form the basis of their industrialization. It was a quite controversial article at the time, and attracted much opprobrium from professional economists (screw them!).

      So, you have to read the original books by the American School economists themselves. I think the best work I read was Henry Carey's 1851 book -Harmony of Interests: Agricultural, Manufacturing, and Commercial. I uploaded some extensive excerpts in the mid-1990s, at one of the first internet historical collaborative efforts,

      American School economists and statesmen Hudson discusses in his book:

      Mathew Carey (father)

      Henry C. Carey (son)

      Henry Clay

      Friedrich List (generally credited with providing the economic philosophic basis of the industrialization of Germany)

      E. Peshine Smith (generally credited with providing the economic philosophic basis of the industrialization of Japan)

      Calvin Colton

      Simon Patten

      Horace Greeley

      There is a relatively shorty biography of Carey which looks decent: Kaplan, Abraham D. H. Henry Charles Carey: A Study in American Economic Thought, The Johns Hopkins Press, 1931.

      Finally, I highly recommend Gabor Boritt's Lincoln and the Economics of the American Dream (1978). It is the only sympathetic review of American School political economy I know of (other than Hudson's) but it is given only as background to Lincoln's own policies - which were firmly anchored in the American School. In his review of the literature, in the part where he discusses economic studies, Boritt writes "The notable fact about it is the absence of investigators."

      I will also mention, Frank Bourgin's remarkable book, THE GREAT CHALLENGE The Myth of Laissez-Faire in the Early Republic. It does not treat the American School directly, but certainly reflects it, and with fidelity. The story of how it was rescued from the oblivion the University of Chicago tried to consign it to, is an excellent introduction to how this particular war of ideas has played out.

      Finally, there are a number of other aticles by Hidson well worth reding:

      Veblen’s Institutionalist Elaboration of Rent Theory
      The Social Economics of Thorstein Veblen
      Also: Simon Patten on Public Infrastructure and Economic Rent Capture

      And here is NeoLiberalism and the Counter-Enlightenment, renamed The Counter-Enlightenment: Its Economic Program -- And the Classical Alternative

    3. The relatively shorty biography of Carey by Kaplan, Abraham D. H. Henry Charles Carey: A Study in American Economic Thought, The Johns Hopkins Press, 1931, is available in full as a pdf at:

      The Conclusion, which is only 2 pages, is well worth reading.

    4. Thank you very much for plentiful sources you provided to me.

      I'm trully honored by your extensive answer to my post. Actually, I'm a littlle bit pleasently surprised by your eagerness to introduce new people into the knowledge of alternative economic schools of thought.
      It is clear that you are the experts on the topics which deal with the ways on how to manage a prosperous economy. At least 90% names you enlisted here I didn't know of.
      It's the hallmark of the true facts they're often discovered by different people in different places and in different times in spite of the heavy academic censorship imposed by the powers that be.
      I'm relativelly new in this field (and it's not my proffesion - I'm just an amateur trying to understand how world around us works).
      I'll check out all of those sources as soon as possible. It seems really interesting and intelectually refreshing. Once more, thanks guys.

      All the best

    5. I'll definetely bookmark this page with the reading sources.

    6. Thank you for the work you are doing here. This has been one of my go to economics blogs since 2009 and it is always time well spent to be learning the various schools of thought within economics. After coming from a background in Austrian economics and seeing how none of their preferred policies rarely resulted in bringing the quality of life up in the nations that implemented them I became very skeptical of it all. After reading Ha Joon Ching's 23 Things They Don't Teach You About Capitalism I became more intrigued. Now as I'm reading more American history I'm seeing the POV espoused by a lot of right wing/libertarian-conservative writers is a lot of ideological skewing. I'll be bookmarking this page as well.

  3. Actually once upon a time there was an English Protectionist School equivalent to the American School beginning way back in the 14th century started by Edward III and Parliament. This led to the development of the worsted industry and formed a key driver for the Industrial Revolution:-

    “History of the Worsted Manufacture in England from the Earliest Times.” By John James FSA. Published 1857.

    Chapter III Page 46, Chapter IV pages 50 – 82. Especially pages 50, 51, 52, 53, 54, 55, 56*, 77, 78,

    Edward III’s reign was from 1327 to 1377.

    1. This does not surprise me at all. All societies that figured out advanced industrialization started out protectionist. It's sort of a requirement.