Review: The National System of Political Economy, by Friedrich List

Originally published on RARITANIA, MAY 21, 2018.

Friedrich List's The National System of Political Economy, like Alexander Hamilton's "Report on Manufactures," is both a classic of heterodox and development economics, and a piece of economic history in its having been penned not merely by a theorist but a practitioner playing a part in one of the great economic success stories of modern times. Just as Hamilton's essay called for the United States to develop a manufacturing base behind a screen of protection from English industrial supremacy, so did List's book call for an emerging Germany to do the same. Along with the fact that List's later book was inspired by Hamilton's ideas, and perhaps more powerfully by its practical legacy (National System does not even mention Hamilton by name, but makes numerous references to American developments), it seems worth contrasting as well as comparing the two works. The most obvious difference is length, List penning a large book in place of a brief essay, and the way in which List uses that larger space, providing a much broader and deeper grounding for his ideas. His book, in fact, opens with a systematic and critical survey of Western economic history—the rise and fall of the great economic powers of the past. Later it proceeds to a survey of the corpus of orthodox economic theory (the work of the Physiocrats, Adam Smith, Jean-Baptiste Say) in similarly critical fashion.

In the process List identifies numerous weaknesses in the case for free trade—among them the theory's failure to recognize the possibility of differences between what is good for an individual and what is good for society; between what is good in the short term and in the long; between different kinds of goods (agriculture and manufactures), to which the theory might not be equally applicable; between the complex inequalities of economic activity. In particular he takes the free-traders to task for overlooking the fact that wealth is not simply a matter of "value" but of "productive power"; that while the world is in an important sense a single productive unit, day-to-day behavior has to take into account the reality that humanity remains politically divided into nations separated by borders and with differing interests; that the benefits of the "division of labor" accrue not only among individuals or between countries but within countries as well. Indeed, List points out time and again that writers like Adam Smith time and again ignore or distort contradictions in their arguments, and problematic historical facts, in their insistence on their orthodoxy, with their insistence that government can never be helpful, or their dismissal of such concepts as the "balance of trade," tying them up in absurdities.

However, List was not simply a surveyor and debunker, but advancing a positive program. In his view manufacturing has a special role to play within the development of a country. This is not simply the matter of developing a sector directly generating a given quantity of income above and beyond what existed without it, but the way in which it can contribute to its broader economic life. Successful manufacturing requires a changed attitude toward economic life—a premium on enterprise, efficiency and innovation, which can also make other sectors more efficient, turning a stagnant, static rural life toward commercially-oriented, scientific farming and commensurately higher agricultural yields. Manufactured goods, because of their reliance on trade, are a significant boost to and justification for the development of national infrastructure and shipping, while also generating a demand for raw materials that might otherwise be without value, from all of which sectors like farming or mining might benefit. The same goes for its spur to foreign trade, long-distance as well as short (because it has something to trade), while enabling it to pay its way in the world (the balance of trade does matter), and stabilize credit and prices in a way impossible for countries that are mere (he had the concept but not the term) "commodity exporters," again, benefiting not just a few factory owners, but everyone. Indeed, at the end of all this the manufacturer, the shipper apart, a landowner might find the value of his property multiplied ten, even twenty-fold in the process, while his purchasing power rose still more markedly because of how much more cheaply he can acquire manufactured goods (List contrasting England with Poland in this respect). And besides raising incomes and living standards, this more dynamic economic life with its educational and other demands, and this enlarged communication within the country and with other countries, have a host of beneficial cultural and political effects—urban life and new forms of consumption softening barbaric ways and elevating the intellect and the spirit; and enlarging the appetite for liberty, personal and national, while making them more attainable.

Achieving a solid manufacturing sector, and all the benefits that it brings, in List's view justified and required government intervention within a nation's economic life, extending beyond such relatively inoffensive measures as the establishment of modern infrastructure (like railroads) to the more controversial activity of "picking winners" and backing them up with outright protectionism. Where the most undeveloped countries are concerned, he firmly advocates free trade—virtually any trade with more advanced countries beneficial at this stage. Only in the case of countries fitted by geography and other conditions to undertake a program of deep industrial development does he advocate protectionist measures, and even then within clear bounds. He opposes any restriction on the import of raw materials or food, and even where manufactures are concerned, anything so extreme as outright prohibition. Indeed, tariffs are to be restricted to the level necessary to protect an infant industry, with that duty relaxed as the infant industry plausibly becomes competitive within the international market—which competition is essential to keep it from getting stagnant.

Still, if this intervention is selective, it is not a minor task. List is emphatic about how much a strong manufacturing sector is an intricately interconnected system of different kinds of manufacturing business, some of which are particularly foundational (the machinery/capital goods sector he refers to as the "manufactories of manufactories"), all of which are apt to rise and fall together. He is emphatic, too, about how temporary disruptions of business can erase the good accomplished by a lengthy effort to build up such a sector, and how long it might take an industry to become genuinely competitive—English textiles requiring centuries to accomplish the feat, and even in his more rapidly moving age an "infant industry" phase apt to last decades rather than years. Moreover, even where the advanced industrial country is concerned, government can never afford to be passive—that way lying the decline of many of the once-triumphant industrial powers of yesteryear.1 In expounding this idea List was arguing not for the desirability of such programs in general, but for a specific, practical program to be implemented in Germany—what was to become the Zollverein that did so much for German unification and industrialization.

As might be expected in a work not only penned two centuries ago, but so strongly devoted to addressing the immediate situation, there is much that has become dated, not only rhetoric but substantively. Certainly List was a man of the nineteenth century, and even by its standards, far from radical, with all this might be expected to imply for his prejudices. In hindsight, at least, it is surprising that he could more easily imagine that one day a technology based on new energy sources might enable such cheap and easy generation of heat as to free cold countries from the weather's constraint on their agriculture, than the industrial development of the tropical regions, and sees in Asia only Oriental decadence, ripe for the "uplift" of Western colonization, when scarcely a generation later Japan began its ambitious program of industrialization.

Still, the more basic of his arguments about industrialization have withstood the test of time. More recent writers like Ha-Joon Chang and James K. Galbraith present them in more refined form, on the basis of a larger body of observation more exactingly conducted and studied with the aid of new tools and concepts—but the essential argument recognizable the same nonetheless. It is noteworthy, too, that while List was a nationalist selling a "National System," taking imperial competition and "cultural racism" rather for granted, and even inclined toward a line of geopolitical thinking that had some very unhappy consequences in the following century, List saw nations and nationalism as a station along the road toward a genuinely unified world economy and polity.2 Two centuries on we have ample cause to think very hard about that road he took equally for granted, and where we stand on it.

1. Then as now the case of Switzerland as a model of industrial development under free trade was touted by orthodoxy's defenders, and List debunked it lengthily, citing the numerous special circumstances of the case, and the limits of the Swiss achievement.
2. In his casual Pan-Germanism (taking for granted that the Low Countries and Switzerland ought to be part of a unified Germany), his portrait of a united Germany organizing a continental European bloc against Britain, and that bloc's later drawing in Britain for a geopolitical face-off with America, one can see a foreshadowing of thinking that led to two world wars.