Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.—John Maynard Keynes
For over a century now, professional economists have taught that the ideas on which the USA economy was built were those of Adam Smith.
I am going to debunk that, and I expect it will cause some people to freak out. For some reason there are many educated people in USA who take it as a personal affront to attack Adam Smith. It's not that hard to understand—they have had "successful" (read: well remunerated) professional careers based on the fundamentals they were "taught" (read: indoctrinated with) in collage. Adam Smith as the
Brahma of modern "scientific" economics is one of those fundamentals. So allow me to begin by presenting what one of the recognized giants of professional economics thought about Adam Smith.
Joseph Schumpeter, one of the most influential economists of the twentieth century, in his last book (which was never finished)
History of Economic Analysis (pdf), conceded the importance of Smith's work, while also eviscerating it (pages 171-184). Schumpeter basically damned Smith's actual ideas with faint praise, while acknowledging that Smith obtained enormous influence as a peddler of specific economic doctrines. Much like
Milton Friedman and his neoliberal Freedom to Choose of our current national nightmare.
Schumpeter begins his evaluation of Smith by noting that
Sir James Steuart's
An Inquiry into the Principles of Political Economy (1767) had "more originality and deeper thought than does the
Wealth of Nations." So, why do we remember Smith today, and not Steuart? Schumpeter concluded that Steuart "was never much of a success in England," as a result of the elite disfavor Steuart faced for being a
Jacobite adherent of restoring the Catholic Stuarts to the throne of the United Kingdom. In fact, Steuart was forced to live in exile from 1745 to 1763.
Schumpeter then noted that Adam Smith's greatest contemporaneous academic achievement was not
Wealth of Nations, but
A Dissertation on the Origin of Languages, which was appended to the 1767 third edition of the
Theory of Moral Sentiments. "Moreover," wrote Schumpeter, "Smith’s philosophy of riches and of economic activity is there and not in the
Wealth of Nations.... the
Wealth of Nations contained no really novel ideas and... it cannot rank with Newton’s
Principia or Darwin’s
Origin as an intellectual achievement..."
Schumpeter concluded that Adam Smith's undeniable success in Great Britain was due to English elites' favor for "the policies he advocated—free trade,
laissez-faire, colonial policy, and so on." In other words, Adam Smith was crowned with success for being a prominent apologist for the exploitative brutality of the British empire:
....it was Adam Smith’s good fortune that he was thoroughly in sympathy with the humors of his time. He advocated the things that were in the offing, and he made his analysis serve them. Needless to insist on what this meant both for performance and success: where would the Wealth of Nations be without free trade and laissez-faire? Also, the ‘unfeeling’ or ‘slothful’ landlords who reap where they have not sown, the employers whose every meeting issues in conspiracy, the merchants who enjoy themselves and let their clerks and accountants do the work, and the poor laborers who support the rest of society in luxury—these are all important parts of the show. It has been held that A.Smith, far ahead of his time, braved unpopularity by giving expression to his social sympathies. This is not so. His sincerity I do not for a moment call into question. But those views were not unpopular. They were in fashion.
In fact, as Smith biographer Salim Rushid details, Adam Smith very carefully and deliberately went about
currying favor with Scottish and English ruling elites. Rushid writes"
Smith’s involvement in politics was neither marginal nor ineffective. Strange as it may sound, in today’s parlance he would have been called “street-smart.” He was considered a good judge of what would sell.... Despite the radicalism of his personal sympathies, Smith tailored his views and his life to be acceptable to the established order. There is little surprise in finding that this cultivation bore fruit and that Smith’s ideas proved serviceable in the defense of conservatism.
Elsewhere, Rushid writes, that during his time "Adam Smith was not hailed as a new prophet except by some few, but very influential, persons such as Lord Shelburne and William Pitt." Adam Smith was merely a paid apologist for the ruin and misery Great Britain imposed on millions of colonial people in Ireland, Africa, China, India, and elsewhere. As Philippine economic historian
Erle Frayne Argonza wrote in September 2008:
To continue on the theme of laissez faire, a doctrine started by the French physiocrats and systematized further by the Scots, let it be known that the principle of ‘free trade’ generated by physiocracy was largely a doctrinal defense of slave trade.... Adam Smith was an ‘intellectual prostitute’ whose services were procured by the British East India Company, precisely for the purpose of crafting in theoretical form the ‘free trade’ doctrine that was to justify, though subtly, the slave trade of that historic juncture.
Schumpeter also very briefly, and very significantly, noted "that which I cannot help considering relevant, not for his pure economics of course, but all the more for his understanding of human nature—that no woman, excepting his mother, ever played a role in his existence..." In 2012, Katrine Marçal, lead editorial writer for the Swedish newspaper
Aftonbladet, published
Who Cooked Adam Smith’s Dinner? (English translation: Pegasus Books, 2016), based on one of the most famous sentences in
Wealth of Nations: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." One reviewer, Ed Walker, Assistant Attorney General of Tennessee for consumer protection and securities, explained how the question posed by Marçal devastated Adam Smith's economic ideas, and all systems of economics based on them.
But the butcher, the brewer and the baker did not cook for Smith. That job went to his mother, Margaret Douglas, later joined by his cousin, Jane Dauglas. These women took care of Smith’s household until they died. Smith never mentions their labor.
Marçal explores the impact of Smith’s omission on the study of economics. One thread is the feminist story: much of the crucial work of care is provided through benevolence, not for money, and so is not considered part of the economy or part of the field studied by economists. Marçal points out that when an economist marries his housekeeper, the GDP goes down.
Smith’s omission makes it possible to make “markets” the center of the study of economics. Eventually theorists dreamed up the silly story of Homo Economicus with his rational calculation of individual advantage as the essential human characteristic. We identify that rationality as masculine as opposed to feminine in the context of male-centered history and culture. In feminist terms, homo economicus is ungendered and dominant; women are the other in every way.
Instead of this stunted theory, Marçal shows that the economy isn’t just about the production of things for the market. A huge part of the work of any society is care for one another. We care for children, for the aged, the sick, the abandoned, the orphan and the widow, those injured in war and those injured in mind. We care for our planet, our air, our parks and our public spaces, our cities, our lakes and rivers. Much of that care has nothing to do with markets. We do it solely out of benevolence, in direct contradiction to Smith.
If economists are ignoring the importance of care in the functioning of an economy, what are they doing? They tell us that they study the allocation of scarce resources.... Care for the vulnerable must not involve a scarce resource under this definition, probably because everyone blithely assumes that women will do it for free, and there are plenty of women. Importantly, care isn’t controlled by the demands of efficiency. If the baby cries, what does it even mean to talk about efficiency? We do whatever it takes and for as long as it takes. So taking care of each other is excluded from the study of [Smithian] economics from the outset....
Pick up almost any introductory economics textbook today, and you will find, somewhere near the beginning, a sentence like this: "Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people." (
Economics, by Samuelson and Nordhaus, 18th edition, 2005)
But the great contribution of the industrial revolution, was the overcoming of scarcity, including of food, clothing, and shelter. One of the few economists to ignore the Smithian focus on scarcity is Thorstein Veblen, who recognized the essential difference between business—which focused on making
profits and accumulating wealth—and industry—which focused on making
products and marshaling resources and machine capacity to do so. Business, Veblen observed, most often involves the predatory characteristics of "
pecuniary culture": chicanery, deceit, and fraud. By contrast, industry requires both an individual
instinct of workmanship, and a high level of social cooperation and collective action. Moreover, Veblen noted, the need for collective cooperation in industry mitigated the predatory characteristics of finance and business inculcated into individuals.
Veblen noted that, rather than scarcity, the major problem faced by modern industrial society was overproduction. In
The Engineers and the Price System (B. W. Huebsch, 1921), Veblen wrote:
Without some salutary restraint in the way of sabotage on the productive use of the available industrial plant and workmen it is altogether unlikely that prices could be maintained at a reasonably profitable figure for any appreciable time. A businesslike control of the rate and volume of output is indispensable for keeping up a profitable market and a profitable market is the first and unremitting condition of prosperity in any community whose industry is owned and managed by business men. And the ways and means of this necessary control of the output of industry are always and necessarily something in the nature of sabotage; something in the way of retardation, restriction, withdrawal, unemployment, of plant and workmen, whereby production is kept short of productive capacity. The mechanical industry of the new order is inordinately productive. So the rate and volume of output have to be regulated with a view to what the traffic will bear; that is to say, what will yield the largest net return in terms of price to the business men who manage the country's industrial system. Otherwise there will be overproduction, business depression, and consequent hard times all around. Overproduction means production in excess of what the market will carry off at a sufficiently profitable price. (pp 7-8)
Adam Smith's ideas placed no value on industry, and it is therefore no real surprise that in those countries where Smith's ideas came to dominate—such as USA and United Kingdom in the 1980s—entire national economies were deindustrialized, the working class destroyed, and the financial systems allowed to be reshaped and dominated by waves of dirty money, transforming them into
crimonegnic environments.
Adam Smith was the voice of the British establishment and the newly minted British commercial oligarchy which vehemently opposed the idea that the United States should attempt to be anything other than producers and suppliers of basic agricultural commodities. According to Smith and his fellow apologists for British imperialism, any attempt to foster the growth of manufacturing industries and thus establish America’s economic independence from the powers and princes of Europe, was “unnatural”: a violation of the established order of Nature—and therefore a sinful exercise in economic inefficiency and waste of resources. The foremost manifestation of this "established order" in Smith's political economy was
equilibrium—which remains a key concept of mainstream economics today, revealing the profession's refusal to repudiate its heritage of British imperial economic theory.
In
Book II, Chapter V of Wealth of Nations, Smith wrote:
It has been the principal cause of the rapid progress of our American colonies towards wealth and greatness that almost their whole capitals have hitherto been employed in agriculture. They have no manufactures [and] The greater part both of the exportation and coasting trade of America is carried on by the capitals of merchants who reside in Great Britain.... Were the Americans, either by combination or by any other sort of violence, to stop the importation of European manufactures, and, by thus giving a monopoly to such of their own countrymen as could manufacture the like goods, divert any considerable part of their capital into this employment, they would retard instead of accelerating the further increase in the value of their annual produce, and would obstruct instead of promoting the progress of their country towards real wealth and greatness.
In other words, the British oligarchs, speaking through Smith, were declaring they could tolerate their former Atlantic colonies achieving political independence, so long as North America remained in economic bondage to Britain. This stratagem of economic warfare was the basis for Lord Sheffield's 1783
Observations on the Commerce of the American States, and was exposed by Thomas Paine in
A Supernumerary Crisis II. It was also repudiated by Assistant Secretary of the Treasury Tench Coxe in
A brief examination of Lord Sheffield's Observations on the commerce of the United States (M. Carey, 1791).
The historical record of what was actually taught in USA as political economy in the nineteenth century, shows that Adam Smith was rejected in favor of economic doctrines developed indigenously by Americans, especially in Pennsylvania and the northeast. In Origins of Academic Economics in the United States (Columbia University Press, 1944), Michael J.L. O’Connor notes that the first American edition of Smith’s Wealth of Nations did not appear until some years after the American Revolution. Jefferson termed it the best book on political economy in 1790, but by 1810 Jefferson was more impressed with the work of the Frenchmen Antoine Destutt de Tracy (who coined the term "ideology") and Jean B. Say. A third edition of Smith was published in Hartford in 1818. O’Conner observes that 53 years then passed before another edition was published in the United States. (Though O’Conner postulates that what demand there was in the US was met “by the numerous cheap foreign editions.”)
O’Conner found that in the late 1830s and afterwards, the most popular “principal text” used to teach economics in the USA was
Elements of Political Economy, by
Francis Wayland, pastor of Boston's First Baptist Church and later president of Brown University. While American publishers ignored Adam Smith entirely, editions of Wayland were published in 1837, 1838 (New York); 1840, 1841, 1843, 1846, 1848, 1849, 1850, 1851, 1852, 1853, 1854,1855, 1856, 1858, 1859, 1860, 1867, 1868, 1869, 1873 (Boston); and 1875 (New York). In 1878, Presbyterian minister Aaron L. Chapin, founder and president of Beloit College (the oldest continuously operated college in Wisconsin) extensively revised Wayland, and this new edition was published in 1878, 1879, 1880, 1882, 1883, 1884, 1885, and 1906. (O’Conner, page 174)
By comparison, O’Conner noted, after the Hartford 1818 edition, another edition of Adam Smith was not published until 1871.
In his article "Francis Wayland's 1830s Textbooks: Evangelical Ethics and Political Economy," (Journal of the History of Economic Thought, 2002), Donald E. Frey wrote, "A comparison of book sales to college enrollments suggests that Wayland's Political Economy served a greater proportion of the market of its day than Paul Samuelson's Economics did between 1948-1980."
In the excellent and highly readable study of Abraham Lincoln’s economic beliefs (Lincoln and the Economics of the American Dream, Memphis State University Press, 1978), Gabor Boritt noted that Lincoln’s Springfield law partner, William Herndon, recalled that Lincoln read Henry C. Carey and Francis Wayland (Elements of Political Economy). No mention was made of Adam Smith. As Boritt observed, “It is remarkable that in 1886 his former partner still remembered Lincoln’s special liking for this by then rather forgotten book.” (p122)
Simply put, Adam Smith was a factotum for the British oligarchy, and as such, was fundamentally hostile to the United States and its grand experiment in self-government and republicanism. This marks the cultural conflict with the continuing existence of monarchy and oligarchy in Britain.
In 1834, there was published in Boston a little book entitled Tracts on Sundry Topics of Political Economy, written by Oliver Putnam, a sickly but wealthy merchant of Newburyport, Massachusetts. To preserve his health, Putnam retired in his thirties, but busied himself with an intense study of political economy. Putnam's ideas were informed by his travels throughout the U.S. and Europe, travels he had undertaken in search of a cure for his ailments. The second part of the book is entitled "Observations on Smith's Wealth of Nations," and I venture to assert they were typical of American views of Smith, and British political economy in general, in the mid-1800s.
In the following remarks, the writer's aim has been briefly to expose the fallacy... of doctrines, which, he conceives, are of tendency injurious to the welfare of his country. Adam Smith has founded a school in political economy... too plausible in the defence and too zealous in the advancement of their favorite theory, not to have gained a host of proselytes. What influence they may obtain abroad, is of little consequence to us; or certain it is, rather, that the more influence they do exert in Europe, the better they will promote the interests of America. But it is time for us to be vigilant and circumspect, when men and men of letters among us, who deservedly possess great credit in the public mind, profess themselves emulous to pin their faith on the infallibility of Adam Smith. When this becomes apparent, it is evidently time to exhibit the proofs of his fallibility, and of the pernicious effects arising from injudicious application of his theories to practice. . . .
As Americans, also, we are all bound to take exception to his illiberal reflections on the dispute, which led to the revolutionary war, and on our causes of complaint against the mother country.— We have not been sufficiently awake to the mischievous effects of introducing many English writings into our seminaries of education, and of giving credence to their authors on subjects of political economy and politics. —It is a truism to say that our institutions are radically different from the English. Ours are throughout republican, theirs are substantially monarchical. Theirs are the oft-changed remnants of feudal barbarism; ours are a great political invention, which undergoes its first trial in this country.—And yet we have Blackstone and Paley for our text books in politics, who, whatever may be their excellencies on other accounts, are certainly the bigoted advocates, the courtly apologists, of whatever, in the system of the British government, is corrupt in itself, and most adverse to the genius and principles of our own government.
And so also we take Smith as our magnus Apollo in political economy, the basis of whose theory is, that the country gentlemen, that is, the landed aristocracy, of Britain, are the only class for whose benefit government is instituted, laws enacted, or who deserve the regard of the statesman, and that all the other productive classes, the mechanical, the manufacturing, the mercantile, are a set of sharpers, who have been constantly engaged, ever since the Conquest, in a conspiracy to defraud the simple, innocent, and defenceless country gentlemen, and to impoverish and ruin the country. These are strong terms, but they are not stronger than the text warrants. . . Surely it is not for our interest to allow the opinions of our national enemy to acquire a kind of prescriptive authority in the country.—It is not for our interest to place the writings of our national enemy in the hands of our youth, and thus administer, ourselves, poisoned aliment to the lips of the rising generation.
...Adam Smith... takes pains to ridicule our colonial legislatures as little knots of factious rebels... he sneers at the high minded men, who composed our continental congress, as being upstart shopkeepers and attorneys, animated only with the little pride of becoming provincial dukes and marquises... he stigmatises, with the grossest terms of opprobrium, the master spirits of seventy-six, Washington and Adams, Franklin and Jefferson and their compeers, whose glorious names are and will be the watchword of millions, who shall never dream of the learned Glasgow sage's existence. Americans may not be apprised of these things; but they ought to be, ere they determine to repose implicit reliance upon the opinions of Adam Smith.
The opinions of Adam Smith on this subject, are introduced here, not for the purpose of refuting them, for they do not deserve so much attention; but only to hold them up to the reprobation and indignation of an insulted people.
Let it be holden in remembrance then, that, in treating of colonies, he traduces, in good set phrases, the whole American people.
If not Adam Smith, then whose ideas provided the basis of the new USA economy?
The USA economy was built on the ideas of Alexander Hamilton, the first Secretary of the Treasury. Hamilton had served on Washington's headquarters staff during the Revolutionary War, and the historical evidence indicates that
Washington came to consider Hamilton almost like a son. Much of Washington's wartime and presidential correspondence was drafted by Hamilton for Washington's signature. During Washington's presidency, Hamilton acted much like a prime minister, being involved in a number of administration details beyond his duties as Treasury Secretary. For example, Washington's Farewell Address was largely written by Hamilton. In the 1879 book,
The Life of Albert Gallatin, a biography of the fourth, and longest serving Treasury Secretary, Henry Adams wrote:
In governments, as in households, he who holds the purse holds the power. The Treasury is the natural point of control to be occupied by any statesman who aims at organization or reform, and conversely no organization or reform is likely to succeed that does not begin with and is not guided by the Treasury.... The vigor and capacity of Hamilton’s mind are seen at their best not in his organization of the Treasury Department, which was a task within the powers of a moderate intellect... The true ground of Hamilton’s great reputation is to be found in the mass and variety of legislation and organization which characterized the first Administration of Washington, and which were permeated and controlled by Hamilton’s spirit. That this work was not wholly his own is of small consequence. Whoever did it was acting under his leadership, was guided consciously or unconsciously by his influence, was inspired by the activity which centred in his department, and sooner or later the work was subject to his approval. The results—legislative and administrative—were stupendous and can never be repeated. A government is organized once for all, and until that of the United States fairly goes to pieces no man can do more than alter or improve the work accomplished by Hamilton and his party.
Hamilton's design for a national economy is thoroughly explained in the series of reports he submitted to Congress in 1790 and 1791:
- First Report on the Public Credit: Communicated to the House of Representatives, January 14, 1790.
- Operations of the Act Laying Duties on Imports: Communicated to the House of Representatives, April 23, 1790.
- Second Report on Public Credit: Report on a National Bank. Communicated to the House of Representatives, December 14, 1790.
- Report on the Establishment of a Mint: Communicated to the House of Representatives, January 28, 1791.
- Report on Manufactures: Communicated to the House of Representatives, December 5, 1791.
In addition, Hamilton wrote a report for President Washington on the
Constitutionality of the National Bank, dated February 15, 1791. Taken together these six are the foundational documents of the USA economy. And they largely repudiate the economic ideas of Adam Smith, especially the
Report on Manufactures.
In
European Origins of the Economic Ideas of Alexander Hamilton (Arno Press, New York, 1977), Robert James Parks argues that the
Report on Manufactures
...demonstrates even more conclusively that [Hamilton] was not Smith’s disciple…. Careful analysis of Hamilton’s Report reveals basic conflicts with Smith so deep that Hamilton had to dedicate a major portion of his Report to attacking the validity of Smith’s system for American use…. From the beginning Hamilton disagreed with Smith over the logical course for America to follow in her economic development.
In his Report on Manufactures, Hamilton paraphrased, then refuted, four major arguments Smith made in favor of free trade and laissez faire. If Hamilton had not succeeded in establishing a new national economy which included an activist role for government, it is likely the United States would never have emerged as a single, unified superpower, but probably would have broken up over a number of issues and crises which threatened the Union—even before the Civil War. It should also be noted that today conservatives and neo-liberals use Hamilton's paraphrasing of Adam Smith, not Hamilton's arguments refuting Smith, to promote the falsehood that the USA economy is based on the ideas of Adam Smith. The fact is that Hamilton paraphrased Smith not to agree with Smith, but to refute him.
First was Smith’s argument that agriculture provided higher returns to capital, because the puny efforts of man are assisted and magnified by the biological power of nature. (Smith, Wealth of Nations, ed. Edwin Cannan, Modern Library, New York, 1937, pp. 345, 639-641.) Hamilton merely pointed out that the art and skill applied by artisans, craftsmen, and workers to manufacturing activities often created much more value than the simple labor of man and nature in agriculture. Moreover, Hamilton pointed out, the aid of nature is widely applied to manufacturing activities through the use of water power. Hamilton also noted that the application of the power of nature to agriculture was seasonal, and occasioned periodic unemployment, while manufacturing remained steady all year round. (Parks, pp 123 ff.)
Second was Smith’s argument that agriculture yields revenue which manufacturing does not, namely, rent. (
Wealth of Nations, p 345.) It should be noted here that political economists, in the century after Smith and Hamilton, would greatly refine and change
the concept of economic rent. With that proviso, Parks explains that
Smith regarded rent as the surplus remaining from the labor of nature after the returns to man and capital had been deducted. Hamilton’s analysis used Smith’s division of returns into the profits on stock (capital) and rent to attack him. He reclassified land as a form of stock, argued that it earned profits, and held Smith's distinction as merely a verbal one. (Parks, pp 126-127.)
At first glance, you might wonder if this point is significant, or just a splitting of hairs. But arguing that land was as much a malleable "stock" as other factors of production, strikes at the heart of the British Smith-Malthus-Ricardo school which held that land was a fixed and finite resource, which could only be abandoned when its fertility was exhausted. In
America's Protectionist Takeoff 1815-1914: The Neglected American School of Political Economy (ISLET, 2010), Michael Hudson includes a fascinating chapter on the origins of the US Department of Agriculture. Pro-slavery Democrats in the 1840s and 1840s resisted the introduction and dissemination of the breakthroughs in agricultural chemistry and soil science made by European scientists
Justus von Liebig,
Albrecht Thaer, and
John Bennet Lawes. The very basis of soil science destroyed the Ricardo-Malthus model of diminishing returns which underlay British free trade doctrine. American System economists instead argued that industrialization—promoted by an activist national government—would create a home market for agricultural products: the "forge and anvil" would take their place next to the "farm and plow," "putting the consumer by the side of the producer" and cutting out the middlemen in the British system who enriched themselves by trading and transporting goods around the British Empire but added nothing of real value.
Hamilton's repudiation of Smith's argument that land was the primary source of wealth was essential for the creation of a new system of economics. This new system made zero-sum economics obsolete. Smith's economics were still shackled to feudal conceptions of wealth and property: a nation's stock of wealth is based on its land and the slaves and serfs who worked it, and whatever mass of precious metals and debentures it had accumulated. Growth of national wealth could only be achieved by 1) seizing other lands and peoples and imposing colonial status on them. or 2) gaining an advantage, usually unfair, over other countries in international trade. Smith wrote: "The colony of a civilized nation, which takes possession, either of a waste country, or of one so thinly inhabited, that the natives easily give place to new settlers, advances more rapidly to wealth and greatness than any other human society." (
Wealth of Nations (Oxford, 1976), II, 564)
Under Hamilton's economics, national wealth becomes primarily based on the scientific and technological achievements of a nation's people, and the consequent improvements in their ability to use machinery to increase the productive power of labor. Thus, Hamilton argued that Smith failed to account for the full value of the output of manufacturing:
The Artificer may be regarded as composed of three parts; one by which the provisions for his subsistence and the materials for his work are purchased of the farmer, one by which he supplies himself with manufactured necessaries, and a third which constitutes the profit on the Stock employed. The two last portions seem to have been overlooked in the system [of Smith], which represents manufacturing industry as barren and unproductive.
Not content to just explain how Adam Smith was incorrect to believe agriculture was inherently more productive than manufacturing, Hamilton also observed that the advantages of manufacturing would be squandered under a policy of free trade, since
manufacturing pursuits are susceptible in a greater degree of the application of machinery, than those of Agriculture... all the difference is lost to a community, which, instead of manufacturing for itself, procures the fabrics requisite to its supply from other Countries. The substitution of foreign for domestic manufactures is a transfer to foreign nations of the advantages accruing from the employment of Machinery, in the modes in which it is capable of being employed, with most utility and to the greatest extent.
Third was Smith’s argument for free trade, and its basis in the ideas that 1) nations were “naturally” specialized to produce only certain commodities and goods, and 2) nations would gain more economic benefit by focusing only on what they specialized in, and trading for what they did not. Smith wrote,
To give the monopoly of the home market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation.... The industry of the country, therefore, is thus turned away from a more to a less advantageous employment, and the exchangeable value of its annual produce, instead of being increased, according to the intention of the lawgiver, must necessarily be diminished by every such regulation. (Wealth of Nations, Vol. I, Book IV, Chapter II, 421-422)
Adam Smith believed and argued that America, with its vast and amazingly fertile unsettled lands, should specialize in agriculture and purchase all needed manufactured goods from overseas. Hamilton dismissed this idea as valid only in theory. The plain reality, Hamilton argued, was that the nations of Europe simply did not follow Smith’s theoretical principles of free trade, but continued to apply mercantilist policies of favoring and protecting certain economic interests. Hamilton stated emphatically that given the trade restrictions imposed by European nations, and their lack of reciprocity, it would be suicide, not just folly, for the United States to attempt to practice free trade.
Parks notes that this argument by Hamilton in 1791, is a repeat of the arguments Hamilton put forward his February, 1775 Revolutionary pamphlet, The Farmer Refuted. Parks also notes that within two years (1793), Thomas Jefferson, as Secretary of State, had swung around to a similar position on foreign trade. (Jefferson,
Report on the Privileges and Restrictions on the Commerce of the United States in Foreign Countries, December 1793.) Jefferson's presidency would later founder on his abandonment of a realistic Hamiltonian approach to foreign trade, and his attempt to bludgeon France and England into a reverse form of reciprocity: trade restrictions, and finally an all-out embargo.
The fourth point Hamilton refuted in the
Report on Manufactures, was Smith’s parroting of the physiocratic doctrine that industry should be neither encouraged nor discouraged to seek its most useful and profitable employment. This is based on the idea of a "natural" equilibrium in the economy, Smith's famous "invisible hand."
....every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. (Wealth of Nations, Vol. I, Book IV, Chapter II, 421)
Hamilton was laying the foundations for building a new nation, and his plan rejected Smith's "natural development" and instead deliberately and consciously promoted the nation's agriculture, science, industry, technology, commerce, and transportation. Hamilton lays out his vision for an active role by the national government in promoting technological and economic progress:
The remaining objections to a particular encouragement of manufactures in the United States now require to be examined.
One of these turns on the proposition, that Industry, if left to itself, will naturally find its way to the most useful and profitable employment: whence it is inferred, that manufactures without the aid of government will grow up as soon and as fast, as the natural state of things and the interest of the community may require....
Experience teaches, that men are often so much governed by what they are accustomed to see and practice, that the simplest and most obvious improvements, in the [most] ordinary occupations, are adopted with hesitation, reluctance and by slow gradations. The spontaneous transition to new pursuits, in a community long habituated to different ones, may be expected to be attended with proportionably greater difficulty. When former occupations ceased to yield a profit adequate to the subsistence of their followers, or when there was an absolute deficiency of employment in them, owing to the superabundance of hands, changes would ensue; but these changes would be likely to be more tardy than might consist with the interest either of individuals or of the Society. In many cases they would not happen, while a bare support could be ensured by an adherence to ancient courses; though a resort to a more profitable employment might be practicable. To produce the desireable changes, as early as may be expedient, may therefore require the incitement and patronage of government.
The apprehension of failing in new attempts is perhaps a more serious impediment. There are dispositions apt to be attracted by the mere novelty of an undertaking—but these are not always those best calculated to give it success. To this, it is of importance that the confidence of cautious sagacious capitalists both citizens and foreigners, should be excited. And to inspire this description of persons [TW: artificers, inventors, manufacturers, industrialists] with confidence, it is essential, that they should be made to see in any project, which is new, and for that reason alone, if, for no other, precarious, the prospect of such a degree of countenance and support from government, as may be capable of overcoming the obstacles, inseperable from first experiments.
We have here a very important, even, crucial, point: that the free enterprise system under
laissez faire is actually not that innovative and entrepreneurial without the support and nurturing of government.
The left usually misses this crucial point of what Hamilton designed. Rather than the Marxist model of the means of production determining the political superstructure, what actually happens under Hamilton's system is government support for new science and technology creates new means of production. The
machine tools and machining techniques developed at the Springfield Armory after the War of 1812, became the basis for the manufacture of interchangeable parts, laying the foundation for industrial mass production. In 1843, Congress
directly funded Samuel B. Morris's development opf the telegraph. Just before and during the Civil War, it was
Navy research that introduced the science of thermodynamics to steam engine design. In the 1930s, the Bonneville Power Authority and the Tennessee Valley Authority promoted rural electrification. C
omputers come entirely out of the USA government research during World War Two to create calculating machines for artillery and naval gunfire ballistics, cryptography and code breaking, flight simulation, the physics calculations of the Manhattan Project, and more. All the
underlying technologies of today's cell phone and smart phones were originally developed in government research programs. The three major developments in aerodynamics of the post war-period -- the area rule, supercritical wings, and winglets -- were
developed by a government scientist named Richard Whitcomb using the wind tunnels at the NASA Langley Research Center.
In his 1973 book,
The Foundations of American Economic Freedom: Government and Enterprise in the Age of Washington (University of Minnesota Press, 1973), E. A. J. Johnson writes:
...in the Hamiltonian program, government played a central role; as a consequence, Hamilton's basic doctrines were much more closely related to those of Malachy Postlethwayt and Sir James Steuart than the atomistic theory of Adam Smith. Like Postlethwayt, Hamilton was convinced that national economic vitality demanded planning on the part of businessmen, and like Steuart, he felt certain that such planning could not be systematic and truly purposeful unless it was coordinated by statesmen.
“There are a thousand hacking at the branches of evil for one who strikes at the root.”—Henry David Thoreau.
My intent is to strike at the root.
