Friday, August 31, 2007

A Korean Economist Misreads Adam Smith, as did Alexander Hamilton (and Frederic List)

Ha-Joon Chang’s new book, ‘Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism’ (Random House, UK; to be published in the US in December) is reviewed in The Economist (UK), and as is usual with the Economist, the review is written anonymously under the heading: ‘Pistols at dawn’.

It’s opening paragraph reveals the kind of misunderstanding that dog modern authors (and a few 19th century authors, such as Frederic List) about British national trade policy and the writings of Adam Smith.

In [Alexander Hamilton’s] 1791 “Report on the Subject of Manufactures”, he quarrelled with the free-trade doctrines of Adam Smith and other liberal economists. He believed the government should shelter and nurse American industry through its infancy until it was strong enough to stand against Britain's manufacturing might. Critics of free trade have reached for this “infant industry” argument ever since.’

The German, Frederic List, like South Korean, Ha-Joon Chang, have confused what Adam Smith advocated in his critique of mercantile political economy with what British mercantile governments were doing in that period before the mid-19th century years.

Alexander Hamilton was clear that Adam Smith’s advocacy of ‘free trade’ had been, was, and continued to be, largely ignored by British governments for all kinds of reasons. Convincing a Prime Minister of the potential benefits of free trade was not the same by a long way of convincing the legislature (upon which prime ministers relied for their parliamentary majorities), which was largely in thrall to the ‘sophistry’ of ‘merchants and manufacturers’ and the larger power base of the farming interests.

Hamilton’s call in 1791 (Smith had died the previous year) to stand against ‘Britain's manufacturing might’ was not an appropriate description of British manufacturing strength so much as a description of Britain’s long held (since the 15th century) mercantile policy that had dominated its American colonies through an imposed monopoly of American trade.

The colonies were not permitted to develop local manufacturing activities and had to import everything of that nature from England (and after 1707, from Britain) and had to export everything it produced to Britain, which would re-export some of it to Europe. From an American point of view, it is no wonder that people like Hamilton confused the doctrine of Adam Smith, which were not pursued by British governments in practice, and the mercantile policies of monopolies, trade restrictions and colonies that were.

Ha-Joon Chang appears to have confused actual history with the myths of that history as taught in US (and presumably Korean) universities. Like List before him, Chang develops a hostile political economy in the mercantile tradition. List, a German nationalist, had visited America in the 1830, and was much influenced by Alexander Hamilton’s 1791 paper and the policies that followed from it.

List’s main work, A National System of Political Economy (1857) is a critique of Adam Smith’s Wealth Of Nations mixed with a critique of British national economic policy, as if the two were synonymous. They were not, and still are not.
Smith favoured unilateral tariff reduction and their eventual abolition to undo the mercantile distortions imposed on the British economy, largely at the expense of growth and the continuation of the poverty of the British poorer majority. He saw growth as the route to opulence for the poorer majority through employment and rising incomes. His unilateral policy was constrained by the necessity to unpick the mercantile monopolies to minimise further suffering of those least able to adjust quickly. But the goal was clear enough.

Those readers of Wealth Of Nations today will know of his sympathy with the British colonists in America who wanted to be independent, because the ending of British rule over North America would force the British economy to re-adjust it economy to domestic economic development, unprotected by mercantile colonial monopolies. However, that was not to be because further distortions in British domestic growth continued, first in the long wars with France and the continuation of the abomination of the East India Company, which led to imperialism and further colonies. Like the first Empire, the second Empire wasted much blood and treasure on the same fantasy as the first, for no gainful ends.

To lay all these errors, and deceit, at Adam Smith’s door is an even worse error, as it traduces a writer who saw clearly what was needed for balanced economic development, but who was in fact hardly listened to in the form of the adoption of his free trade policies.

There is an omnious linkage from Alexander Hamilton to Frederic List and now to Ha-Joon Chang. All represent a retrograde step in trade policy and development. The British experience under nationalist mercantile policies, and its human cost, let alone its economic cost, does not suggest it is worth following.

Adam Smith did not advocate that Britain should do so; I doubt if we should welcome a Korean version.

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