Friedrich List on English Free Trade and the Colonisation of Germany

Friedrich List saw right through the English argument for free trade in Germany in his National System of Political Economy:

“In our days the English legislation not having separated German agriculture from the British manufactures, Germany, with a progress of twenty years in an industrial career achieved at immense sacrifices, would he blind to allow herself to be diverted by the repeal of the English laws from the great national object she is now pursuing. We have, indeed, a firm conviction that Germany, in that case, ought to increase her duties as compensation for the advantage which the repeal of the corn laws would give to the English over the German manufacturers. For a long time to come, Germany can adopt no other policy toward England than that of a manufacturing nation yet far behind, but exerting all her energy to overtake, if not surpass her rival. Any other policy would endanger German nationality. If the English need corn or timber from abroad, whether they import from Germany or any other country, Germany must not strive less to preserve the advantages which her industry has already obtained, and to secure a greater progress in time to come. If the English are unwilling to receive the wheat and the timber of Germany, so much the better; her industry, her shipping, her foreign trade will increase the faster, her system of internal communication will be improved the sooner, and the German nationality will acquire the more certainly its natural basis. It may be that corn and timber in the Baltic provinces of Prussia will not advance in price as promptly in this case as if the British markets were immediately opened; but the improvement of the means of communication at home, and the demand for agricultural products, created by home manufactures, will proceed with a degree of rapidity far from unsatisfactory, in a market established in the very centre of Germany, a market not only established, but made permanent forever no longer oscillating, as heretofore, from one decennial period to another, between famine and abundance. With respect to power, Prussia, in pursuing that policy, will gain a real influence in the interior of Germany, of an hundred times greater value than the sacrifices made in her Baltic provinces; but she will merely have made a loan to the future at a heavy interest.

It is obvious that by means of this report the English ministry meant to obtain admission into Germany for the common articles of wool and cotton, either by the suppression or the modification of our specific duties, or a diminution of the rates, or by the admission into the English market of German corn and timber; this would be making the first breach in the protective system of Germany. The articles of general consumption are, as we have shown, by far the most important: they constitute the basis of the national industry. With a duty of ten per cent. ad valorem, as demanded by England, and the undervaluations which always attend the ad valorem system, German industry would be almost wholly sacrificed to English competition, especially in times of commercial crisis, when the English manufacturers are obliged to dispose of their goods at almost any price. There is no exaggeration in averring that the propositions of England tend to nothing less than the overthrow of the whole system of German protection, with a view to reduce Germany to the condition of an agricultural colony of England.” (List 1856: 469–470).

Now it is true that tariff protectionism, while it was used in Germany in the early and middle 1800s, was used to a far lesser extent than in America, nevertheless German protectionism in the18th and 19th centuries that forced industrialisation was significant.

First, the foundation for German industry had been laid in the late 18th century by a Prussian program of creation of cartels and monopoly rights, export subsidies, bringing in of experts on industry as well as skilled labour, and the outright conquest of Silesia from Austria, a stronghold of industry (Chang 2002: 33). The Prussian state program of industrialisation was continued in the early 19th century, under the Minister of Mines Friedrich Wilhelm von Reden (1752–1815) and Christian Peter Wilhelm Friedrich Beuth (1781–1853) (Chang 2002: 34).

Even the Prussian-led Zollverein (1834–1919), although it created a free trade zone within the area that would become the German empire, had a distinctly protectionist phase in the 1840s and 1850s (Bairoch 1989: 30–31).

After the 1840s and the proclamation of the German empire in 1871, Prussia continued its program of industrial subsidies, promotion of cartels and a highly successful system of higher education focussed on the sciences and engineering (Chang 2002: 35).

Despite a free trade interlude between 1862 and 1878 (Henderson 1975: 213), it was actually the case that the new German empire increased tariffs from 1879 until 1885, especially on iron and steel (Skarstein 2007: 358, n. 11; Chang 2002: 33; Feldenkirchen 1999: 98–99), once these industries started to feel the effects of free trade.

Other notable policies were that, between 1879 and 1895, the Prussian state nationalised nearly all its railways, and nationalised railways existed in seven other German states (Henderson 1975: 210–212); the profits from nationalised railways were an important part of government revenue, and so of public investment.

BIBLIOGRAPHY
Bairoch, Paul. 1989. “European Trade Policy, 1815–1914,” in Peter Mathias and Sidney Pollard (eds.), The Cambridge Economic History of Europe. Volume VIII. The Industrial Economies: The Development of Economic and Social Policies. Cambridge University Press, Cambridge. 1–160.

Chang, Ha-Joon. 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective. Anthem Press, London.

Feldenkirchen, W. 1999. “Germany: The Invention of Interventionism,” in J. Foreman- Peck and G. Federico (eds.), European Industrial Policy: The Twentieth Century Experience. Oxford University Press, Oxford and New York. 98–123.

Henderson, William Otto. 1975. The Rise of German Industrial Power, 1834–1914. University of California Press, Berkeley.

List, Friedrich. 1856. National System of Political Economy. J. B. Lippincott & Co. Philadelphia.

Skarstein, Rune. 2007. “Free Trade: A Dead End for Underdeveloped Economies,” Review of Political Economy 19.3: 347–367.

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Those Corporate Welfare Bums

In one respect, it’s true there’s an awful lot of hypocrisy about welfare from big business, since wasteful corporate welfare is pervasive in our societies.

On the other hand, some aspects of business welfare are actually sensible and justifiable, even in a social democratic nation. E.g., agricultural protectionism.

It is well known that you simply cannot have a productive, stable agricultural sector in a true free market, because wild and violent swings in the prices of commodities destroy agriculture and send farmers bankrupt, a process which smashes up and ruins your agricultural sector and forces you to rely on imports.

The truth is: a real free market in agriculture for most nations is stark, raving mad – and everybody sensible knows this perfectly well (even conservatives).

So what you generally need for agriculture is: sensible protectionism (when needed), commodity stabilisation programs, and production quotas and so on, in order to stabilise markets, supply and profits. Perhaps even subsidies if things get bad for farmers.

Bottom line: not all business welfare is bad. Some of it is actually OK, e.g., like agricultural protection, certain industrial subsidies, and a large stock of government debt that is actually a good thing that stabilises the financial sector and provides a safe asset for banks and corporations to buy.

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Those Free Trading British Cotton Textile Manufacturers

Here is one called John Wright in 1785:

“The minister cannot be ignorant that an alleviation of duties on India muslins and callicos, or giving encouragement to them by laying a heavier tax upon the cotton goods of this country, especially upon the infant manufacture of muslins and fine callicos, must depress and discourage the industry and ingenuity of our manufacturers at home, and have the strongest tendency to promote the sale of such foreign fabrics, in preference to those of Britain; that such a preference must soon be attended with evident injury to the public interest, as well as to the private trader, is too conspicuous, to admit of the verbosity of ratiocination.” (Wright 1785: 9–10).

By the 1840s and 1850s, these British cotton textile manufacturers had become converted to the religion of free trade, under the influence of Classical Political Economy, and had forgotten that they or their ancestors had been vehement protectionists.

BIBLIOGRAPHY
Wright, John. 1785. An Address to the Members of Both Houses of Parliament on the Late Tax laid on Fustian and Other Goods. W. Eyres, Warrington, UK.

A Short Bibliography on Protectionism and Industrial Policy

The issue of protectionism – and the related issue of industrial policy – is back on the political agenda, mainly because of the current US election season.

Some very good books and articles relevant here are as follows:

Amsden, Alice. 1989. Asia’s Next Giant: South Korea and Late Industrialization. Oxford University Press, New York.

Amsden, Alice. 1990. “East Asia’s Challenge – to Standard Economics,” American Prospect 2 (Summer): 71–77.

Bairoch, Paul. 1993. Economics and World History: Myths and Paradoxes. Harvester Wheatsheaf, New York and London.

Chang, Ha-Joon. 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective. Anthem Press, London.

Chang, Ha-Joon (ed.). 2003. Rethinking Development Economics. Anthem Press, London.

Chang, Ha-Joon. 2005. The East Asian Development Experience: The Miracle, the Crisis and the Future. Zed, London.

Chang, Ha-Joon. 2008. Bad Samaritans: Rich Nations, Poor Policies, and the Threat to the Developing World. Random House Business, London.

Chang, Ha-Joon. 2011. 23 Things They Don’t Tell You about Capitalism. Bloomsbury Press, New York and London.

Chang, Ha-Joon. 2014. Economics: The User’s Guide. Bloomsbury Press, New York, NY.

Reinert, Erik S. 2007. How Rich Countries Got Rich, and Why Poor Countries Stay Poor. Carroll & Graf, New York.

Prestowitz, Clyde V. 2005. “China as No. 1,” American Prospect, February 21
http://www.prospect.org/cs/articles?article=china_as_no_1

Prestowitz, Clyde V. 2015. “Our Incoherent China Policy,” American Prospect Fall
http://prospect.org/article/our-incoherent-china-policy-fall-preview

Prestowitz, C. V. 2010. The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How we Must Compete in the Post-Dollar Era, Free Press, New York and London.

Galbraith, J. K. 2008. The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too. Free Press, New York.

Some interesting articles on the role of infant industry protectionism in the US in the early 19th century are as follows:

Bils, Mark. 1984. “Tariff Protection and Production in the Early U.S. Cotton Textile Industry,” The Journal of Economic History 44.4: 1033–1045.

Temin, Peter. 1988. “Product Quality and Vertical Integration in the Early Cotton Textile Industry,” The Journal of Economic History 48.4: 891–907.

Harley, C. K. 1992. “The Antebellum American Tariff: Food Exports and Manufacturing,” Explorations in Economic History 29: 375–400.

Irwin, Douglas A. and Peter Temin. 2001. “The Antebellum Tariff on Cotton Textiles Revisited,” Journal of Economic History 61: 777–805.

Protectionism and US Economic History

The case for selected protectionism and also “infant industry protectionism” is a strong one.

First, all the theoretical arguments in favour of complete free trade fail, and need not detain us.

Nor is the case for “infant industry protectionism” an endorsement of endless protectionism or tariffs on all goods, but the view that where domestic industries can be developed and generate positive externalities throughout an entire economy, through increasing returns to scale, synergies and cluster effects (Reinert 2007), they can be strongly aided in their early stages of development by selected tariffs on foreign imports.

The crucial point is that the creation of industries that gave increasing returns to scale (often in manufacturing), rather than dead-end “diminishing returns to scale,” is what marks successful economic development. Once the new manufacturing sectors become internationally competitive, it is possible to reduce or eliminate tariffs. Note also that this policy is perfectly compatible with the fact the other types of tariffs or poorly targeted tariffs can be harmful to economic development.

It is, above all, the structure of tariffs not average tariff rates that is the key to successful infant industry protectionism (Tena-Junguito 2009).

The US is a case in point. Protectionism as a modern economic theory was essentially born in the US in the thought of Alexander Hamilton and his Report on Manufactures (1791), although he drew on earlier mercantilist ideas (Bairoch 1993: 33).

Bairoch (1993: 34) sees US economic history as divided into these phases:

(1) 1816–1846
A very strong protectionist phase

(2) 1846–1861
A slightly reduced, but still moderately protectionist phase.

(3) 1861–1945
An era of strong protectionism.

The American Civil War saw the victory of the doctrine of protectionism after a somewhat more liberal era in the 1850s (Bairoch 1993: 35).

Although the average level of tariffs is not necessarily a guide to how effective and well targeted tariffs were in each country, nevertheless we can see the level of protectionism in the United States as compared with other Western nations in 1875 in the following data:

Average Level of Duties on Manufactured goods 1875
(1) United States | 40–50%

(2) Portugal | 20–25%

(3) Spain | 15–20%

(4) Russia | 15–20%

(5) Austro-Hungary | 15–20%

(6) Denmark | 15–20%

(7) France | 12–15%

(8) Belgium | 9–10%

(9) Italy | 8–10%

(10) Germany | 4–6%

(11) Switzerland | 4–6%

(12) Sweden | 3–4%

(13) Netherlands | 3–5%

(14) UK | 0%. (Bairoch 1993: 24, Table 2.2).

The US tariff regime aided manufacturing industries, and Bils (1984) shows how the US cotton textile industry would have been largely wiped out in the early 19th century if it had not been for protectionism.

BIBLIOGRAPHY
Bils, Mark. 1984. “Tariff Protection and Production in the Early U.S. Cotton Textile Industry,” Journal of Economic History 44: 1033–1045.

Bairoch, P. 1993. Economics and World History: Myths and Paradoxes. University of Chicago Press, Chicago.

Reinert, E. S. 2007. How Rich Countries got Rich, and Why Poor Countries Stay Poor. Carroll and Graf, New York.

Tena-Junguito, Antonio. 2009. “Bairoch Revisited: Tariff Structure and Growth in the Late 19th Century,” Economic History Working Papers, 121/09. Department of Economic History, London School of Economics and Political Science
http://eprints.lse.ac.uk/27869/

Michael Pettis on the History of the Chinese Growth Model

Michael Pettis has a fascinating post here on the nature and history of the growth model adopted by China over about the past 30 years:

Michael Pettis, “A Brief History of the Chinese Growth Model,” Michael Pettis’ China Financial Markets, February 21, 2013.

It should be read with the comments of Matias Vernengo here.

In short, Pettis points out the similarity of the Chinese growth model to that of America in the 18th and 19th centuries: the protectionist and interventionist model of Alexander Hamilton, Friedrich List, Henry Clay, Henry and Matthew Cary, and John Calhoun, what was at that time called the “American System.” It emphasised:

(1) infant industry protectionism and tariffs;

(2) internal development or what we now call public infrastructure, often through government investment, and

(3) a modern financial system.

I would depart from Pettis on point (3), in the sense that the US banking system in the 19th century was much more unstable and crisis-prone than other systems, and its more laissez faire nature imposed significant costs such as a bias towards debt deflationary dynamics in the 1870s and 1890s.

A very significant point is that 19th century Meiji regime in Japan used the services of the E. Pechine Smith and a stream of others – all the second generation proponents of the “American System” – as advisers in their industrial policy that sent Meiji Japan on the road to industrialisation.

The astute Japanese followed the successful model of state-led growth pioneered by the US (and to some extent late-19th-century Germany and other nations). That model was refined and developed after 1945 by Japan, South Korea, and Taiwan in the import-substitution industrialization (ISI) model, and now in a new form it has been continued by China.

Nor is China proof of the success of the orthodox policies of globalisation, because China simply did not, and does not, follow those orthodox policies. How can a country with capital controls, state-owned banks, a pegged, undervalued currency (as a mercantilist policy to boost exports), a large state-owned industrial sector, subsidies to key domestic industries, huge non-tariff barriers, and an activist industrial policy be an example of the success of globalisation? Nobody doubts that liberalised foreign direct investment and international trade have been major factors in the success of China, but one cannot look at these policies in isolation. One only needs to look at the use of industrial policy in China as noted, for example, by Clyde Prestowitz many years ago in some insightful work.

In general, a crucial difference between East Asian nations and the US is that East Asia turned towards export-led growth (outward-oriented ISI) as a fundamental driver of development. The downside is that this often leads to not enough domestic consumption and social services.

As far as I can see the United States pursued more balanced development, because by the late 19th and early 20th centuries it had turned away from the export-led growth model to much greater reliance on internal markets and domestic demand.


More Reading

Matias Vernengo, “Is China Buying the World?,” Naked Keynesianism, October 20, 2012.

Matias Vernengo, “On 'Free' and Managed Trade, Naked Keynesianism,” October 8, 2011.

Clyde Prestowitz, “China as No. 1,” American Prospect, February 21, 2005.