Published (abridged) in The Independent (NZ), p.11, 16 August 1996, under the title:
"List overrated in looking to past for today's economic truth".

The response to Chris Trotter's piece (Who's Winston's Economic Guru? 26 July, 1996) on Friedrich List - the early 19th century German political economist - suggests that List might not be as little known or as little rated as has been suggested. List is in fact one of those political economists, like Adam Smith, whose place in history is distorted by bumper-sticker misunderstandings about what he was really arguing.

Perhaps 99% percent of all texts on political economy from the 17th to the 19th century could be classed as nationalist, in that they sought policy changes that would improve the economic performances of the writers' nations. List was certainly no exception. Having said that, List was in essence an economic liberal and a free trader, both in public life and in his writings. While he was no supporter of laissez-faire, he was by no means a spokesperson for the collectivist left, nor a precursor of fascism. He believed that governments had a positive role to play in improving the efficacy of markets.

In the early 19th century, German governments were much less protectionist than were British governments. Furthermore, Palmerstonian nationalism in 1830s' to 1860s' Britain was no less vehement with the introduction of free trade in the 1840s. Politicians such as Disraeli and economists such as Cairnes continued to talk about "tribute" as the purpose of empire. As late as the 1900s, the world's most eminent economist - Alfred Marshall - was asked to give policy recommendations about how a commercial policy could be designed so as to get foreigners to pay an increased share of British taxes. The political commitment to British commercial interests on a world stage, while not a "conspiracy", was real.

As Trotter noted, List's nationalism was accentuated during his time in America. In Philadelphia in the 1820s, the main influences on List were the late Alexander Hamilton, who as Federal Treasurer in the 1790s became the focus of American support for manufacturing development, and the more radical Daniel Raymond, whom some say List plagiarised. Hamilton's two main influences were Adam Smith and an anti-physiocratic banker from Geneva, Jacques Necker, who had two stints as French finance minister in the 1770s and 1780s. Necker was in power at the time of the storming of the Bastille, but was not regarded as an enemy of the revolution and was never threatened with the guillotine.

Indirectly - ie through Hamilton - Smith was a major influence on List. It was a long serving Edinburgh economics professor - J.S. Nicholson, an unreserved fan of Adam Smith - who noted as much when in the 1900s he wrote a forward to a reprint of List's National System of Political Economy. The main weakness of List's book was seen by Nicholson as its anti-Smith rhetoric, suggesting that many of List's statements about Smith reflected popular interpretations rather than careful study. Indeed, most people today who have strong views about Smith have not read his Wealth of Nations, let alone his equally important Theory of Moral Sentiments. It was the physiocratic elements of Smith, portraying agriculture as the backbone of the national economy, that List, like Hamilton before him, disagreed with.

Nicholson made other key points about List. List's most important contribution to economic thought was his emphasis on the importance of "intangible capital" to modern economic growth. Indeed, it is only in the 1980s and 1990s that modern economics is coming to appreciate the contribution of intangibles to GDP. At a political level, List's text could give no support whatsoever for British protectionist opinion. In the 1900s the Tory party was advocating retaliatory protective tariffs as a means by which Britain might retain its economic lead over Germany and the USA. It was only because the political left strongly supported free trade that Britain was able to fend off protectionism until the collapse of the Labour Government in 1931.

List was what would be called today a 'development economist'. He argued that both undeveloped and industrialised countries would be best served by a free trade policy, regardless of the policies of other countries. But he also argued that newly industrialising countries, having commenced a process of development under free trade, would need to go through a period of national 'producer sovereignty' (to pick up on a term used by Owen McShane [August 2]) if they were to complete the transition to large scale industrialisation. List accepted that the process would involve efficiency losses, but believed that dynamic gains would offset those losses.

List, like Smith, Marx and many others, offered a 'stage theory' of economic history. His theory advocated commercial policies appropriate to each stage of development; List was a 'relativist' in that he believed a nation's policies should reflect its circumstances.

History has largely proved List right, in that all bar none of today's major industrial powers followed protectionist policies during their critical 'take-off' stages. It is a moot point whether List is relevant to New Zealand today, however, depending on one's view of our present stage of development and our place as a very small country in a big world.

List was regarded by the most eminent of the early neoclassical economists as an important advocate of what would become American institutionalism. Marshall respected List's views. Marshall's successor as Cambridge economics professor, Pigou, stated in the 1900s: "Of the formal validity of List's arguments there is no longer any dispute among economists".

List lived in an era of nascent national empires. Today's international economy is different. All nations are seeing their sovereignty challenged by international forces that are little understood. National governments are increasingly prepared to pay homage to international markets as a de facto sovereign. Under these circumstances, it is perhaps another, more recent, German economist who we should be looking to for guidance: Rudolf Hilferding who published Finance Capital in 1910.

While there is nothing wrong with looking to specific economists of the past for inspiration and understanding, we should also seek new understandings of new situations. We should seek to address today's burning issue, the determination of economic sovereignty, in a disinterested way, through scholarship and informal public debate. Unfortunately, it is very difficult for people to present or even listen to arguments that undermine their immediate interests, especially within an adversarial culture such as our own which equates concession in argument with weakness.

Economics is controversial for one basic reason: economic debate is not simply academic, participants and audiences have interests to protect. For example, today's executives on very high salaries do have an interest in stifling debate about why 1990s' markets deliver them incomes vastly in excess of normal market remuneration. Historically, private economic rents are evidence of protected markets, of producer sovereignty, of insider coalitions. While today's successful distributional coalitions differ from those of List's day, it remains true that markets are more healthy when economic surpluses are more evenly distributed.

© 1996

Rankin File