How Abraham Lincoln’s political economy ‘trumped the Free Trade British System’

I have written before on the oft-neglected American School of political economy, drawing on the work of Michael Hudson here and here.

Along the same vein, November’s issue of the Cambridge Journal of Economics features an article by Emir Phillips. It is included as the Editor’s Choice, so you can read it for free on the journal website or by downloading the pdf.

Here is the abstract:

The Whigs could legitimately emphasise what Hamilton’s Report had not touched upon: urban labourers made unemployed by import competition could not shift to ‘collateral employments’ with the presumptive ease asserted by Free Trader Democrats. More than anything, it was the structural cyclical instability (Minsky moments) that engendered a new party (Republican) to exert political pressures for government involvement in the management of the economy (mercantilism). Economic beliefs played the most fundamental role in Lincoln’s career, and his mercantilist views, in conformity with Hamilton, Clay and the economist Carey, were key determinants in effectuating the Industrial Revolution within the United States through tariffs, government-supported macro-projects and structurally stimulating aggregate demand through a national currency. Permeating Lincoln’s political economy was a fierce non-neutral view of money wherein banks created the funds to ignite the American System. Henry Clay, Henry Carey and Abraham Lincoln were seeking to supplant the Ricardo–Malthus long-term model of economic growth (emphasising distribution within a relatively stagnant economy) with one of expanding productive powers and rising wage levels. These interventionist issues are still quite relevant since US economics students are taught modernised versions of the doctrines of Ricardo and Malthus which were controverted more than a century ago by the American School, and more specifically by Abraham Lincoln.

The article tells the story of how 19th century Whig-Republicans, and Abraham Lincoln in particular, accelerated industrialisation in the US through government intervention in the economy, such that

Mercantilist nationalism (Republican Party of 1860) confronted both the Free Trader Jacksonian-Democrats and the US Constitution, and created a commercially linked Nation whose industrial productivity over the next 60 years (all US Presidents without exception were Republican until President Wilson) supplanted England as the world’s workshop (p.1455).

The policies used included a combination of tariffs to protect domestic industry from English manufactured exports and raise government revenue, investment in transport infrastructure, particularly railroads, and management of the national currency to sustain aggregate demand and investment in industry.

The American System or School saw capital and labour as potentially complements, in that investment in productive capacity in increasing returns industries, namely manufacturing, would stimulate rising productivity and output. This would enable both profits and wages to rise, so that both capitalists and workers would benefit from economic development, resulting in some form of social harmony and supporting national democracy. Thus

[b]y 1845, Lincoln perceived these United States as entirely dependent upon certain economic activities subject to increasing returns, with each regional section being a synergetic phenomena built upon a mutual dependency created by finely knit and interlocking network of rail, divisions of labour and raw inputs into a manufacturing Northeast. Within this matrix, social mobility (‘equal opportunity for the pursuit of happiness’) was enchained to industrial productivity to the benefit of all Americans. The increasing returns found in Northern manufacturing created the synergetic element that made the United States greater than its parts (the States). The Republicans were then the National Capitalist Party, with wealth creation and not Constitutional adherence as its abiding precept (p.1455-6).

Indonesia’s State-Led Development: Custodian of the National Interest, or Boondoggle? — Developing Economics

Nobel Laureate Esther Duflo once likened the work of economists to that of plumbers – tinkering and adjusting as necessary as they engage with the details of economic policy-making. The implication in this comparison is that economists generally understand economic systems and behaviour – how the pipes come together – and that the main work […]

via Indonesia’s State-Led Development: Custodian of the National Interest, or Boondoggle? — Developing Economics

What sort of big government? Corporate welfare versus the common good in the US

For me, the argument is over. Big government is all-pervasive and inevitable in today’s democratic capitalism. Markets and states are or should be complements, not alternatives, in any society which is both wealthy and continuing to develop and improve the lives of its citizens in the widest possible sense.

This is not an argument for socialism, although there are some on the right who see big government as an evil leading inevitably to a totalitarian and repressive state. This remains a possibility, but it was big government that saved a system on the edge of collapse during the financial crisis, however imperfectly. Crises may be inevitable under capitalism, but it remains the job of government to improve economic and social performance by harnessing the dynamic potential of markets so as to serve the common good.

In today’s US, an unlikely president is unashamedly trying to subvert and dominate the system for his own ends. The process may seem incoherent, but perhaps it mostly boils down to serving a thirst for power and attempting to fill what some have called an ’emptiness’ at the heart of the man.

If one takes Trump’s recent State of the Union address as an accurate description of his political achievements and the state of the US, rather than analysing what he has actually done, one could be forgiven for thinking that all is well there. It is not.

This post is not an analysis of Trump’s achievements in office, rather a discussion based on three books which take a critical view of US capitalism and society, reaching beyond the current political cycle. Although each takes a slightly different perspective and more or less covers a different period in US history, the thread which links them is the idea that its economy and society are being held back by an excessive concentration of power. Continue reading

Globalisation, Brexit and Rodrik’s political trilemma

From Brexit to trade wars, the advance of globalisation has not had a great few years. Hoping for a bit of enlightenment to counter the political rhetoric we are so often exposed to, I thought I would turn to Dani Rodrik’s 2011 book The Globalisation Paradox: why global markets, states and democracy can’t coexist.

At the core of Rodrik’s theoretical contribution in the book is what he calls his ‘political trilemma’ in relation to globalisation and politics: the impossibility of combining hyperglobalisation, democratic politics and the nation state or national sovereignty. In this reading, one country can combine any two of the three, but not all three at once.

Thus, under the postwar Bretton Woods compromise, countries were able to combine democracy and national sovereignty with moderate globalisation. Trade in goods between the richer capitalist nations became gradually more free during the 1950s and 60s, while there were restrictions on global capital flows and fixed but adjustable exchange rates, freeing up monetary policy to target growth in aggregate demand to support full employment. Continue reading

Digits won’t replace states — Emergent Economics

I’m all for new technologies that subvert convention — but i’m cautiously sceptical about this piece on new multilateralism from Anne-Marie Slaughter in the Financial Times. I love the sentence “while antediluvian men strut back and forth on the world stage beating their chests, a different kind of multilateralism may be on the horizon.” Slaughter […]

via Digits won’t replace states — Emergent Economics

Mark Blyth – the top five books on how the world’s political economy works

Here is a compelling interview with political economist Mark Blyth, author of Austerity: the History of a Dangerous Idea, discussing his top five books on how the world’s political economy works. He includes works by Keynes, Polanyi, Hirschman and Moore.

I admit that of the five I have only read Keynes’ General Theory. I have also dipped into some of Albert Hirschman’s writings, though not these two. Even if you don’t plan to read them, the interview with Blyth is worth a look, as he summarises what he sees as the key insights from each of the five books.

Below is an excerpt from the beginning of the interview:

“Well…[the world’s political economy]…doesn’t work according to the textbooks. If you look at economic textbooks, the whole world is meant to work according to the logic of differential calculus; there are these reciprocal relationships – one side goes up and one side goes down. But deep within it there’s a paradox. On the one side you have Adam Smith, where everyone is pursuing their own self-interest leading to an outcome which is better than any of them could have intended. On the other, you have John Maynard Keynes. Today Keynes is thought of as someone who just talks about deficit spending and so on, but that’s just complete rubbish. Keynes’s central message is that individual rational action can be collectively disastrous. So, if you have a series of economic models in a text book where everything balances out, it’s much more attuned to the world working the way that Smith would like to tell us.”

For the least developed countries, revitalising multilateralism is life or death — Emergent Economics blog

By Daniel Gay and Kevin Gallagher

Few would deny that the international system governing the environment and economy is under pressure. Globalisation itself is wobbling, to the chagrin of governments in rich and emerging economies. What’s less talked about is the effect on the world’s 47 least […]

via For the least developed countries, revitalising multilateralism is life or death — Emergent Economics