Michael Hudson on The American School of Political Economy

JisforJunkEconMore from iconoclast Professor Michael Hudson’s book J is for Junk Economics (p.30-32). For a more detailed account, I can recommend his book America’s Protectionist Takeoff 1815-1914, which I have posted on here.

“American School of Political Economy: The northern economists who focused on protective tariffs, infrastructure investment and a national bank to promote industrial and agricultural technology before and after the Civil War (1861-65). Mathew and Henry Carey, Henry Clay and William Seward among the Whigs and, after 1853, the Republicans, provided the economic policy that enabled America to industrialize and overtake England. They also emphasized the positive effect of rising wage levels and living standards on the productivity that made the American economic takeoff possible. Every major Northern politician and region was associated with a major economist: Alexander Everett for Daniel Webster and other Bostonians; Calvin Colton for Henry Clay; the Careys for Pennsylvania industrialists; and E. Peshine Smith for Seward and the Republicans. They developed the logic for tariff protection as opposed to Ricardian free-trade theory, and for government-sponsored internal improvements and a national bank to finance industry and achieve monetary independence from Britain.

It is testimony to the censorial power of subsequent free-trade ideology that these writers make no appearance in histories of economic thought. Historians have also ignored them, focusing on the Democratic Party (which meant mainly the South seeking to add slave states). At issue was whether the United States would suffer deflation and monetary and trade dependency on Britain, or would become independent. The American School opposed westward expansion and Manifest Destiny, and also opposed the Anglophilia of free traders and slave owners. The latter demanded monetary deflation to prevent industrialization so as to keep food prices low (and hence the cost of feeding slaves).

When the Civil War brought the Republicans to power, the American School found that the most prestigious colleges – founded originally to train the clergy – simply taught mainstream British free trade economics (largely because New England and southern seaboard schools favored free trade). The path of least intellectual resistance was to create a new set of schools – business schools and state land-grant colleges.

A central tenet of the American School was technological optimism in contrast to the Dismal Science of Ricardo and Malthus based on diminishing returns in agriculture and overpopulation leading to poverty. Also central was the Economy of High Wages doctrine: “It is not by reducing wages that America is making her conquests, but by her superior organization, greater efficiency of labor consequent upon the higher standard of living ruling in the country. High-priced labor countries are everywhere beating ‘pauper-labor’ countries.”

By the late 19th century nearly all the major American economists studied in Germany and followed the Historical School. Returning to America, they developed the Institutionalist School to explain why the United States should follow a different economic path from free-trade Britain. They continued to elaborate the logic for the protective tariffs that were nurturing American industry, as well as for public support for internal infrastructure improvements so as to create a low-cost competitive US economy. Most notable was Simon Patten, the first professor of economics at the Wharton School at the University of Pennsylvania. He taught protectionist trade theory and led economists into the discipline of sociology to analyze what he called the Economy of Abundance that resulted from the increasing returns in industry and agriculture.

When the United States achieved world industrial and financial dominance after World War I, it deterred other countries from protecting their own industry and agriculture – while continuing to protect its own. This about-face emulated British experience in urging free trade on other countries so as to make them dependent. This free-trade logic remains the buttress of today’s financial austerity and privatization policies imposed on debtor economies by the United States, the World Bank, and the International Monetary Fund. These policies are the opposite of America’s own protectionist takeoff, the Economy of High Wages Doctrine and the Economy of Abundance that powered its rise to global economic supremacy. The lessons of the American School of Political Economy provide a more realistic model for other countries to emulate.”

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