America’s Protectionist Takeoff

Hudson America's Protectionist TakeoffUS industry was protected by tariffs for much of the 19th century and this helped establish it as the world’s leading economy. This is contrary to much reported history and to the current conventional wisdom regarding international trade and development.

This is the claim made by economist Michael Hudson in America’s Protectionist Takeoff 1815-1914. In this fascinating book, he tells the story of the neglected American School of Political Economy (ASPE), whose ideas and policies shaped the US economy, and its industrial sector in particular, for many years. Their economics ran against the ideas of the English classical political economists Ricardo and Malthus and was more like statecraft than pure economic theory.

The often anti-intellectual ASPE seems to have been airbrushed out of history, which makes Hudson’s book (originally published in the 1970s) all the more important to the undermining of the orthodoxy which global elites push on late developing nations which have yet to industrialise.

In fact, pretty much every single successful rich economy adopted protectionist policies while they were industrialising. Once they had become rich and their firms were sufficiently competitive, they started to push a free trade agenda on other nations, citing the theory of comparative advantage and its successors which have become part of neoclassical economics, the dominant school in current debates and academic teaching. Free trade has become an ideology, but it is one used by the richest and most powerful nations and firms to sustain their dominance of the globalization process.

The members of the ASPE thought that America, a relatively high wage nation in international terms at the beginning of the 19th century, needed to protect its domestic market and encourage industrialisation instead of remaining a predominantly agricultural economy. Instead of focussing on economic theories of static allocation, they saw the importance of what they called ‘productive powers’, or the potential for industry and its embodied technical progress to raise productivity in dynamic fashion, allowing both the profits of capitalists and the wages of workers to increase together. Contrary to their interpretation of European Marxism, the two classes therefore had a shared interest in rising productivity and output, rather than a conflicting one.

Improvements in industrial productivity and new technology made possible by a period of protection would make firms competitive internationally. Wages could rise, but if productivity rose at the same rate or even faster, unit labour costs would stay constant or fall, and firms’ output would then be able to displace imports and export abroad. In this way, the protection of infant industries would lead to international competitiveness and America’s exports would have an absolute cost advantage.

Protection from global competition would not prevent competition in America’s large and growing domestic market. Demand in the latter would also be stimulated by a growing population and rising wages. To coin Adam Smith, growth in output and productivity would be fuelled by growth in the ‘extent of the market’. High wages and improved worker training and education would also make for a more healthy, skilled and productive workforce, promoting a virtuous circle of growth in output and living standards.

The ASPE faced opposition from slave-owning and agricultural classes, who were benefitting from cheap manufactured imports from England, and the ability to export agricultural output in return. They argued that over the longer term, farmers specialising in the production of one export crop would deplete the soil and this would lead to declining productivity. America was rich with land, but with a growing population this would not last forever, and there was a need for new scientific ideas to be applied to agriculture, such as crop rotation and chemical fertilizers, which would sustain or increase productivity and prevent mineral depletion in the soil. Thus scientific ideas should be applied to agriculture as much as industry and would help to make the nation prosperous.

The ASPE found its voice in the 19th century Republican Party and was opposed by the Democrats of the time, who were apparently supported by the agricultural and slave-owning interests. This seems quite different to today’s crop of US politicians and policies. Having said that, when the situation demands it, politicians of any stripe will often play the nationalist card, and enact policies which they hope will promote the domestic economy.

These ideas are fascinating to me. I was aware of the extent of protection among the early industrialisers, as well as later ones such as South Korea and Taiwan. But this historical account of political economy in the US should be made more widely known to economists and policy-makers. Today’s late industrialisers need to be given the ‘space’ to encourage domestic infant industries until they have to some extent ‘caught up’ with the richer nations. Sadly this remains a minority opinion and the richest and most powerful leaders, from politics to business, will tend to find more appealing policies which promote and sustain their own interests. Today’s economics should be more contested than it is. It needs to reflect the real history of the rich nations which, once upon a time, not so long ago, were poor too and did something about it.

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12 thoughts on “America’s Protectionist Takeoff

    • You’re welcome, glad you found it useful. Economics has often changed to serve particular vested interests, which in some ways seems unfortunate, but for me it does make its subject matter more controversial and interesting.

  1. You write, “These ideas are fascinating to me.” Same here.

    I also agree with Perry Casilio; I like his idea “that economics is indeed a fluid discipline that ebbs + flows with the times.”

    Considering the amount of factors that go into an economic “landscape,” it is a miracle that we have any stable knowledge of it at all. Which insight itself poses an interesting challenge:

    in the presence of which criteria may we feel entitled to be reasonably sure about our economic knowledge?

    Thanks for another very inspiring post.

    • Glad you found it interesting. One factor that stood out for me in the book regarding this American School of Political Economy is their emphasis on context-specific theory in economics. So yes, we may need different theories for different nations at different stages of development and different kinds of institutions. This was I believe also what the Old Institutionalists like Veblen and Commons thought about theory and empirical evidence. Their analysis was more inductive rather than the deductivism of today’s mainstream, so it started from ‘stylised facts’ and empirics and sought to construct theory that fitted the facts. Some have argued that this meant too much historical data and not enough theory so I guess there is a careful balance to be made.

      Any theory or model requires simplification and leaving out information in order to make it tractable, but I think we should never lose sight of the facts and reality we are seeking to understand and influence in policy terms.

      • You write: “Their analysis was more inductive rather than the deductivism of today’s mainstream …”

        I think, you are right. And I feel that the institutionalists are very important, yet insufficiently appreciated. It’s worth reading them — one gets a good synopsis in Malcolm Rutherford’s superb

        “Institutions in Economics. The Old and the New Institutionalism”.

        Personally, I am particularly fond of Warren Samuels. Commons is very hard to read, but I did find his Legal Foundations of Capitalism very impressive:

        http://socserv2.socsci.mcmaster.ca/econ/ugcm/3ll3/commons/LegalFoundationsCapitalism.pdf

        Geoffrey Hodgson has great stuff as well: http://www.geoffrey-hodgson.info/

        Nonetheless, some institutionalist writers, like Samuels and Hodgson, who I consider admirable scholars, show a tendency to take default positions in favour of left groupthink, especially concerning topical issues.

        So many books still to read, I have never touched Veblen, nor JK Galbraith (“the younger”).

      • Thanks for the comments and links. I have read a little about the old institutionalists, but little directly. I have read some of Geoff Hodgson’s work, which I find interesting. I am sceptical of the ‘new’ institutionalism, which I think bases its theory on methodological individualism with institutions as responses to market imperfections. As I prefer more political economy-type approaches this seems to me rather narrow.

  2. Thanks for your reply, which I have discovered only now, days later. My comment seemed to have disappeared in nirvana owing to some glitch, I suppose. At any rate, I do share your misgivings and conflicting preferences concerning the new institutionalists.

    Warren Samuels’ “The Legal-Economic Nexus” is a great book along the lines that we tend to favour. I don’t know whether the long piece in that book with the eponymous title is available separately as a download from the internet. There are also lengthy parts in the (expensive) book that hold little interest, I suspect, to anyone who isn’t a specialised economic historian.

    I am working on a contrarian account of the nature of freedom in my own blog (“quaesivi”), where I stress that liberty is a highly political phenomenon, in contradistinction to the classical liberal/libertarian idea that freedom is a situation in which politics plays a diminishing and highly restricted role.

    The peculiar nature of politics in a society that is free by historical standards/compared to its more repressive predecessors makes a free society the most politicised order in human history, I contend.

    It is important to spell out this aspect in order to show just how immensely political the economy and other dimensions of social life really are – while libertarians falsely insinuate that the economy (“markets”) represent an alternative to politics – they do not, they are based on and permeated by politics.

    I am beginning to consolidate my thoughts on the political anthropology of freedom, which, I feel, ought to be taken into account in exploring the nature of politics in societies that support the kind of economy our diverse efforts at economic understanding (so inspiringly portrayed in your blog) try to come to grips with.

    We are by nature political animals.

    http://quaesivi.blogspot.de/2016/06/the-political-anthropology-of-freedom-2.html

    • Thanks for this. I think I agree that the freedom of society is highly politicised, and that without particular state functions this would be hard to achieve. Amartya Sen’s ideas of capabilities find a role here. I also find Berlin’s ‘Two Concepts of Liberty’ informative, which you may well be aware of: positive and negative freedom. Libertarians seem to focus only on one at the expense of the other and ignore the potential trade-offs.

      Thanks once again for your very positive and informative comments.

      • Libertarianism is, at core and principle, a highly evolved ethos. It does not disdain collective action as long as it is voluntary and not compelled or coerced. This ethos will eventually be the fulfillment of the golden rule to love one’s neighbor as oneself.

        Sadly, we’be always proceeded slowly down our evolutionary path….

  3. Nurturing protectionism is not the only dynamic at play here. I would argue it is secondary to the main reason – duties and imposts were the major source of funding for the federal government before the era of income taxation and the runaway growth of central authority, as it was in every other country too. Sadly it was only when large industrial combines felt secure in their markets that they then encouraged government transformation away from laisez faire and traditional avenues of revenue to greater regulation and income taxation as a way to strengthen their monopolies and hinder competition. Governments everywhere joined with Business because they anticipated the much richer revenue opportunities to grow their own power and influence. It’s the distorted situation we now find ourselves in today.

    • Thanks for your comment. One thing I would add is that revenue from tariffs was used to expand public infrastructure which also supported growth. Competition was stimulated in the domestic market but restrained internationally for many years. I wouldn’t exactly call this laissez faire. I suppose it is quite hard to prove that the tariff regime supported domestic transformation and growth but it doesn’t seem to have hindered it. I think almost any successful rich country has used some form of import controls to protect infant industries until they were internationally competitive. What the American School of Political Economy rejected was Ricardo’s theory of comparative costs in international trade.

  4. Pingback: Michael Hudson on Junk Economics | The Political Economy of Development

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