If this is the case, aren’t the developed countries, under the guise of recommending ‘good’ policies and institutions, actually making it difficult for the developing countries to use policies and institutions which they themselves had used in order to develop economically in earlier times? This is the question that this book hopes to address.
1.2. Some Methodological Issues: Drawing
Lessons from History
The nineteenth-century German economist Friedrich List (1789-1846) is commonly known as the father of the infant industry argument, namely, the view that in the presence of more developed countries, backward countries cannot develop new industries without state intervention, especially tariff protection. His masterpiece, The National System of Political Economy, was originally published in 1841.[5]
List starts the book with a lengthy historical discussion. In fact he devotes the first 115 pages of his 435-page text to a review of trade and industrial policies in the major countries of the western world up to his time. Included in his survey were the experiences of Venice (and other Italian states), the Hanseatic cities (led by Hamburg and Liibeck), the Netherlands, England, Spain and Portugal, France, Germany and the USA.
Many of these accounts go almost completely against what most of us know (or think we know) about the economic histories of these countries.[6] Particularly striking to the contemporary reader are List’s analyses of Britain and the USA – the supposed homes of liberal economic policy.
List argues that Britain was actually the first country to perfect the art of infant industry promotion, which in his view is the principle behind most countries’ journey to prosperity. He goes as far as saying that we should ‘let [whoever is not convinced of the infant industry argument] first study the history of English industry’.[7] His summary of the British road to industrial success is worth quoting at length.
[H]aving attained to a certain grade of development by means of free trade, the great monarchies [of Britain] perceived that the highest degree of civilisation, power, and wealth can only be attained by a combination of manufactures and commerce with agriculture. They perceived that their newly established native manufactures could never hope to succeed in free competition with the old and long-established manufactures of foreigners [the Italians, the Hansards, the Belgians, and the Dutch] ... Hence they sought, by a system of restrictions, privileges, and encouragements, to transplant on to their native soil the wealth, the talents, and the spirit of enterprise of foreigners.[8]
This is a characterization of British industrial development which is fundamentally at odds with the prevailing view of Britain as a valiant free-trade, free-market economy fighting against the dirigiste countries on the Continent, eventually proving the superiority of its policies with an industrial success unprecedented in human history.
List then goes on to argue that free trade is beneficial among countries at similar levels of industrial development (which is why he strongly advocated a customs union among the German states – Zollverein), but not between those at different levels of development. Like many of his contemporaries in countries that were trying to catch up with Britain, he argues that free trade benefits Britain but not the less developed economies. To be sure, he acknowledges that free trade benefits agricultural exporters in these economies, but this is to the detriment of their national manufacturers and thus of their national economic prosperity in the long run. To him, therefore, the preachings on the virtues of free trade by British politicians and economists of his time were done for nationalistic purposes, even though they were cast in the generalistic languages of what he calls ‘cosmopolitical doctrine’. He is worth quoting at length on this point:
It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitical doctrine of Adam Smith, and of the cosmopolitical tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations.
Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth. [my italics][9]
As for the USA, List points out that the country had previously been misjudged by the great economic theorists Adam Smith and Jean Baptiste Say as being ‘like Poland’, namely, destined to rely on agriculture.[10] Indeed, Adam Smith in his Wealth of Nations sternly warned the Americans against any attempt at infant industry promotion:
Were the Americans, either by combination or by any other sort of violence, to stop the importation of European manufactures, and, by thus giving a monopoly to such of their own countrymen as could manufacture the like goods, divert any considerable part of their capital into this employment, they would retard instead of accelerating the further increase in the value of their annual produce, and would obstruct instead of promoting the progress of their country towards real wealth and greatness.[11]
Two generations later, when List was writing his book, many Europeans still shared Smith’s view. Fortunately for them, List argues, the Americans firmly rejected Smith’s analysis in favour of ‘common sense’ and ‘the instinct of what was necessary for the nation’, proceeding to protect their infant industries with great success after 1816.[12]
List’s observation was more than vindicated subsequently, as the USA remained the most ardent practitioner – and the intellectual home - of protectionism for a century after he wrote those passages but also became the world’s industrial leader by the end of that period (see section 2.2.2 of Chapter 2). List was also proven right by subsequent historical events with regard to his comment on ‘kicking away the ladder’. When its industrial supremacy became absolutely clear after the Second World War, the USA was no different from nineteenth-century Britain in promoting free trade, despite the fact that it acquired such supremacy through the nationalistic use of heavy protectionism.
These are important historical facts that we will establish in greater detail in the next chapter. For the moment, however, I would like to draw the reader’s attention to List’s methodology, that is, his historical approach to economics.
5
The book was translated in the USA as early as 1856 (Henderson 1983, p. 214), reflecting the then close intellectual affinity between the USA and Germany as the two centres of ‘nationalistic’ economics (also see Dorfman 1955; Balabkins 1988; Hodgson 2001). However, its British translation, the version that I have used for this book, did not appear until 1885, reflecting the dominance of free trade doctrine in Britain during the middle of the nineteenth century.
6
They are also interesting for the amazing degree of sophistication in understanding the role of public policy and institutions in economic development. For example, List states: ‘However industrious, thrifty, inventive, and intelligent individual citizens might be, they could not make up for the lack of free institutions. History also teaches that individuals derive the greater part of their productive powers from the social institutions and conditions under which they are placed’ (p. 107).
8
He then goes on to argue: ‘This policy was pursued with greater or lesser, with speedier or more tardy success, just in proportion as the measures adopted were more or less judiciously adapted to the object in view, and applied and pursued with more or less energy and perseverance’ (p. 111).