The Nineteenth-Century Rules for Growth

Based on Songho Ha, The Rise and Fall of the American System (Routledge, 2016); David Levi-Faur, “Friedrich List and the Political Economy of the Nation-State,” Review of International Political Economy (1997); W. O. Henderson, Friedrich List: Economist and Visionary (Frank Cass, 1983).

The Industrial Revolution made Britain a commercial superpower. If free trade were to prevail, as Adam Smith had advised, no country would be able to match Britain’s scale of production or its prices. Other countries would be able to sustain some industry, producing goods that had high transportation costs or were of only local interest, but by and large, they would become part of Britain’s hinterland. A number of countries, including many of Britain’s traditional rivals,  were unwilling to accept this outcome. They adopted policies that allowed their industry to prosper despite Britain’s enormous first-mover advantage. These policies encompassed both protectionist trade policies and interventionist governments.

The American System

The American System was a vision of the future as much as it was an economic policy. In 1787 Alexander Hamilton imagined a country able to “dictate the terms of the connection between the old and the new world.”1 In 1817 Thomas Jefferson wrote,

I hope that twenty years more will place the American hemisphere under a system of its own, essentially peaceable and industrious, and not needing to extract its comforts out of the external fires raging in the old world.2

Henry Clay, speaking in the House of Representatives in 1820, said,

Let us break these [European] commercial and political fetters; let us no longer watch the nod of any European politician; let us become real and true Americans, and place ourselves at the head of the American System.3

This system would stretch beyond the borders of the United States: the Monroe Doctrine declared South and Central America to be within its sphere of influence, and warned European countries to make no further attempts to colonize them.

For this imagined world to come into being, the United States would have to be unified, self-sufficient in strategic and defensive materials, and not dependent upon the vagaries of export markets for its prosperity. The economic policy known as the American System were intended to bring about these ends. Its immediate objectives were the protection of industry, the creation of a large domestic market, and the establishment of a uniform and stable domestic currency.

Protectionism

Adam Smith believed that governments should not interfere in the allocation of capital. Alexander Hamilton, in his Report on Manufactures (1791), acknowledged that this principle is generally correct.

It can hardly ever be wise in a government, to attempt to give a direction to the industry of its citizens. This under the quicksighted guidance of private interest, will, if left to itself, infallibly find its own way to the most profitable employment: and ’tis by such employment that the public prosperity will be most effectually promoted.4

But, he said, the United States is an exception. There, labour and capital are so scarce, and undeveloped land so ample, that most of the nation’s resources would be drawn into agriculture:

The prospect of a successful competition with the manufactures of Europe must be regarded as little less than desperate.

Hamilton offered a number of reasons why this outcome would not be the best one.

One reason appears to anticipate what modern economists call the participation externality. There are benefits that accrue to a group of entrepreneurs when they choose to engage in manufacturing, that do not accrue to a single entrepreneur when he alone chooses to engage in manufacturing. Since each entrepreneur must make his decision independently, these benefits don’t enter into his decision-making. By contrast, the government’s policies affect entrepreneurs as a group, so the government should take these benefits into account when formulating its policies. If the government recognizes benefits that individual entrepreneurs do not, it will choose a greater degree of industrialization than that chosen by the entrepreneurs themselves.

What are the benefits of a large industrial sector? Hamilton identifies greater division of labour, greater use of machinery, and the acquisition of technical skills.

Another of Hamilton’s reasons corresponds to what is now known as the infant industry argument. Europe did not necessarily have an intrinsic advantage in manufacturing, but it certainly had a head start that made it difficult for American manufacturers to be competitive.

To maintain between the recent establishments of one country and the long matured establishments of another country, a competition upon equal terms, both as to quality and price, is in most cases impracticable. The disparity in the one, or in the other, or in both, must necessarily be so considerable as to forbid a successful rivalship, without the extraordinary aid and protection of government.

Hamilton coupled this argument with the observation that in many instances, American protectionism would simply be levelling the playing field.

It is well known…that certain nations grant bounties on the exportation of particular commodities, to enable their own workmen to undersell and supplant all competitors, in the countries to which those commodities are sent. Hence the undertakers of a new manufacture have to contend not only with the natural disadvantages of a new undertaking, but with the gratuities and remunerations which other governments bestow. To be enabled to contend with success, it is evident that the interference and aid of their own government are indispensable.

Hamilton further argued that an active manufacturing sector would encourage emigration. Hamilton said this of emigrant labourers:

Whoever inspects, with a careful eye, the composition of our towns will be made sensible to what an extent this resource may be relied upon. This exhibits a large proportion of ingenious and valuable workmen, in different arts and trades, who, by expatriating from Europe, have improved their own condition, and added to the industry and wealth of the United States. It is a natural inference from the experience we have already had, that as soon as the United States shall present the countenance of a serious prosecution of Manufactures — as soon as foreign artists shall be made sensible that the state of things here affords a moral certainty of employment and encouragement — competent numbers of European workmen will transplant themselves.

As well, Hamilton argued that manufacturing was essential if the United States was to escape from the European orbit:

The independence and security of a country appear to be materially connected with the prosperity of manufactures. Every nation, with a view to those great objects, ought to endeavour to possess within itself all the essentials of national supply. These comprise the means of subsistence, habitation, clothing, and defence.

For these reasons Hamilton advocated government support of manufacturing. Tariffs would quickly became the dominant form of American protectionism.

The Domestic Market

During his presidency, George Washington advocated the development of an integrated domestic market. The agricultural South and the industrial North would gain from trade with each other, as would the less settled West and the more settled East. Commercial integration would, he believed, give all the parts of the country “greater security from external danger, a less frequent interruption of their peace by foreign nations.”5 This view would be reiterated by other American statesmen.

Hamilton, in his Report on Manufactures, had observed that America’s undeveloped lands were rapidly being settled, and that their settlement would hugely increase the flow of agricultural goods in need of a market.

To secure such a market, there is no other expedient than to promote manufacturing establishments. Manufacturers who constitute the most numerous class, after the cultivators of land, are for that reason the principal consumers of the surplus of [cultivators’] labour.

That is, a policy that promoted manufacturing would indirectly benefit agriculture as well. Henry Clay, who would become Secretary of State under John Quincy Adams, likewise argued for the domestic market had to be expanded and integrated because foreign markets were too easily upended by wars or political intrigues. For both Hamilton and Clay, a tariff policy that supported manufacturing could be justified by its impact on the size of the domestic market.

A large domestic market could only occur if there were better balance between manufacturing and agriculture, but this balance was not the only requirement. Goods could only be traded if they could be moved from one place to another, something that was not easily done during the early years of the United States. Roads and canals had to be built, and rivers made navigable. American statesmen called these things “internal improvements,” and their facilitation was also part of the American system.

A Uniform Currency

Internal trade would also be encouraged by the development of a stable currency system. The early banks were state banks. They held reserves of gold and silver, and made loans by issuing notes drawn on the bank. There were two problems with this system. The first was that the farther one was from the issuing banks, the less recognizable were its notes and the less certainty there was that they would be redeemed. State bank notes tended to trade a discount to their face value, reflecting the degree of uncertainty attached to them. The second problem was that banks, in their pursuit of profit, sometimes issued too many notes. If too many people tried to redeem their notes at once, the bank would experience a loss of reserves that threatened its solvency. Banks would sometimes suspend redemptions to avoid losing reserves, undermining belief in their own notes.

Implementing the American System

The proponents of the system knew what they wanted to achieve, but they faced both practical and constitutional barriers. They had significant early successes, but by the time of Andrew Jackson’s presidency, their policies had become divisive and largely ineffective.

The first of these barriers was the debt incurred during the American Revolution. Tariff rates that were high enough to protect industry would cause tariff revenue to decline, forcing the government to choose between revenue and protection. Although commercial interests frequently lobbied for tariff protection on infant industry grounds, the government’s priority was debt reduction, for which tariff revenue was essential. From 1789 to 1812, tariffs were kept relatively low (tariffs of about 10% were common). The government’s focus on revenue was sometimes explicit:

The Tariff Act of 26 March 1804 increased the average ad valorem rate from 12 1⁄2 to 15 per cent. The purpose of the increased tariff rates was to finance the war against the Barbary powers of the Mediterranean Sea, who had plundered American merchant ships. So the fund from the increased rate was dubbed the ‘Mediterranean Fund’ and put into a separate account. The Congress doubled duties on all products in the tariff act of 1 July 1812 from the average ad valorem rate of 15 to 30 per cent to finance the War of 1812…The additional duty was to continue only for one year after the conclusion of a peace treaty.6

Tariff policy did not shift toward protectionism until 1816.

Internal improvements — especially canals and navigable rivers — became a priority during Thomas Jefferson’s presidency (1801-1808). The scope of the necessary projects was so great that federal action seemed appropriate. There were, however, questions about whether the federal government had the constitutional right to undertake these projects. Albert Gallatin, as Treasury Secretary, argued that a project could not proceed without the involvement of the state governments along a proposed route. Even this concession did not quell concern about the projects’ constitutionality, because any one project favoured some states over others. One option that seemed to offer an end run around the constitutional issue was setting up a private company to undertake the improvements, with the government providing financing through the purchase of newly issued stock.

The American system was more fully implemented after the War of 1812. The embargo of British goods during the war had created a captive market for domestic manufacturers, and they had rapidly expanded. After the war, British goods began to move back into the American market. American imports, only $13 million in 1813, were $151 million in 1816.7 The influx of relatively cheap foreign (primarily British) goods made the protection of domestic industry a priority. The tariff bill of 1816 proposed that all internal tariffs be eliminated (to consolidate the domestic market) and that the average external tariff be set at 33%. Revenue was still uppermost in the minds of many legislators: it was imagined that the higher external tariffs would offset the revenue lost on internal tariffs. The bill as actually passed, called for average external tariffs of only 25%, to mollify the agriculturalists.

A tariff policy that expanded the domestic market had been expected to appeal to both manufacturers and agriculturalists. It would, in the words of John Calhoun, “increase our mutual dependence and intercourse.” But the tangible and immediate benefits of such a policy accrued to manufacturers, while agriculturalists only saw the prices of their inputs driven upwards. Tariff policy inevitably divided the industrial North from the agricultural South.

The year 1816 also saw the creation of the Second Bank of the United States, which was an expanded version of the First Bank of the United States. The charter of the First Bank had not been renewed in 1811, when there had been controversy over its constitutionality; but financial difficulties during the War of 1812 led to the establishment of the Second Bank. One of its roles was to stabilize the currency. John Calhoun, speaking in the House of Representatives, had complained, “We have, in lieu of gold and silver, a paper medium, unequally but generally depreciated.” The problem was that there were few constraints on the ability of the state banks to issue their own notes. The Second Bank ameliorated this problem by replacing notes issued by state banks with its own notes, and then demanding that the state banks redeem their own notes in gold and silver. The state banks, fearful of losing reserves in this fashion, were forced to be more careful about the quantity of notes that they issued.

Internal improvements continued to lag. James Madison vetoed a bill for internal improvements on constitutional grounds. When James Monroe became president in 1817, he commissioned John Calhoun (then the Secretary of War) to report on the need for internal improvements and to identify constitutional means of carrying them out. Calhoun believed that the federal government’s responsibility for defence gave it the right, perhaps even the responsibility, to undertake internal improvements:

A judicious system of roads and canals, constructed for the convenience of commerce, and the transportation of the mail only, without any reference to military operations, is itself among the most efficient means for the more complete defence of the United States.8

Better infrastructure would make the United States more prosperous, so that it would be better able to undertake a war if necessary. Calhoun laid out an ambitious infrastructure plan that incorporated defensive measures on three frontiers, but it would never be implemented.

The belief that Americans had common interests underlay both protectionism and the drive for internal improvements. This belief was overturned by the Missouri Crisis of 1819-21. When Missouri applied for statehood, slavery became the central issue. Northerners wanted an end to slavery, and some congressmen wanted to make Missouri’s admission to the union contingent on it becoming a “free state.” Southerners believed that the cotton trade was dependent upon slavery, and feared that if Congress could eliminate slavery in new states, it would soon attempt to do so in established states. A political compromise was eventually worked out, but the compromise did nothing to assuage the fears of the Southerners. Slavery dominated national politics from that point onward, and any hope for unity was lost.

The Tariff Bill of 1816 was soon deemed to be insufficiently protective. The Tariff Bill of 1820 would have brought about a broad increase in the tariff rate, but strong Southern opposition prevented its passage. The Survey Bill of 1824 authorized a general survey of roads and canals, with the object of further expanding the system. It passed, but it had to overcome strong Southern opposition. The South opposed the Survey Bill in part because the benefits disproportionately accrued to the West. Perhaps more importantly, the South feared that a federal government that had the constitutional right to undertake internal improvements anywhere would also have the constitutional right to emancipate slaves everywhere. The debate over the Tariff Bill of 1824 likewise revolved around constitutional issues. James Monroe favoured higher tariffs, arguing that they would help to develop a national market that would benefit both agriculture and manufacturing. However, the South argued that the federal government’s right to impose taxes extended only to revenue generation, and that a tax levied to support industry exceeded its constitutional authority. The Bill’s supporters argued that Congress had the power to regulate commerce with foreign nations, which is fundamentally what a tariff did. The Bill passed, making the United States a highly protectionist country.

John Quincy Adams became president in 1825. He was a strong supporter of internal improvements, and was willing to override constitutional concerns to implement them:

While foreign nations…are advancing with gigantic strides in the career of public improvement, were we to slumber in indolence or fold up our arms and proclaim to the world that we are palsied by the will of our constituents, would it not be to cast away the bounties of Providence and doom ourselves to perpetual inferiority?9

For the South, constitutional issues were the only issues. In 1826 a resolution in the Virginia General Assembly stated that “the appropriation of money by the Congress of the United States, to construct roads and canals in the States, is a violation of the Constitution.” In 1827 the legislature of Georgia resolved “to oppose, in every possible shape, the exercise of the power, on the part of the General Government, to encourage domestic manufactures or to promote internal improvement.” In 1825 the legislature of South Carolina declared that “Congress does not possess the power, under the constitution, to adopt a general system of internal improvement as a national measure.”10

Adams persevered despite Southern opposition, and was more successful than any of his predecessors in pushing internal improvements forward. The table below shows average annual federal government spending on internal improvements for each president.11

The state rights issue was frequently finessed by having the federal government purchase stock in state-chartered improvement companies. During Adam’s presidency, over half of all spending on internal improvements took this form.

In 1828 tariffs again split the South from the North. The constitutional issue was again debated, but as well, southerners were beginning to fear that the tariff wall would impact their livelihoods. Thomas Cooper, the author of Lectures on the Elements of Political Economy (1826) and a person of considerable influence in South Carolina, claimed that the effect of the tariff was

…to sacrifice the south to the north, by converting us into colonies and tributaries — to tax us for their own emolument — to claim the right of disposing of our honest earnings — to forbid us to buy from our most valuable customers — to irritate into retaliation our foreign purchasers, and thus to confine our raw materials to the home market — in short to impoverish the planter, and to stretch the purse of the manufacturer.12

He concluded that the “fast approaching” choice was between submission and separation. The Tariff Bill of 1828 passed despite ferocious opposition from the South. Its passage was the high-water mark of the American system.

Andrew Jackson became president in 1829. He had received solid support from the South, while Adams, his opponent, had been supported by the New England states.

Jackson’s encouragement of “Indian removal” from the undeveloped lands of the Southwest helped to reinforce the South’s conviction that it had no common interest with the rest of the country. The cotton industry expanded into the emptied lands, making slaves still more instrumental to the South’s economy. Furthermore, the South’s biggest customer was Britain: the explosive growth of its cotton textiles industry made it a huge importer of raw cotton. While the Northwest and Northeast were increasingly bound by trade ties, the South shaped its own destiny.

Jackson also presided over the undoing of the major elements of the American system.

In 1829 Jackson vetoed a federal subscription to the stock of the Maysville Road Company, which had been formed to expand the road system. He officially supported internal improvements, but believed the stock subscriptions to be unconstitutional, and claimed that a constitutional amendment would be required before the government could undertake these projects. Congress still voted in support of individual projects, but it stopped thinking about systematic improvement.

Jackson likewise claimed that the Second Bank of the United States was unconstitutional, and also that it had failed in its mission to establish a sound currency. In 1832 he vetoed a bill to renew the bank’s charter. The disappearance of the Second Bank opened the way to an expansion of state banking. There would be no new national bank until the Civil War.

The Tariff Act of 1832 angered the South. After its passage, South Carolina passed the Ordinance of Nullification declaring the tariffs to be void within its borders. Jackson threatened military action, but eventually passed the Compromise Tariff Act of 1833 to calm the situation. This bill called for a gradual reduction of tariffs over the next decade. Its passage signalled that protectionism was no longer American policy.

It is possible, though, that the tariffs had already done their job. The United States was on its way to becoming a powerful industrial economy. The benefits foreseen by Hamilton — division of labour, heavy mechanization, and the adoption of advanced technologies — would all be realized. The need for government-led internal improvements was also greatly diminished, particularly in the Northwest and Northeast. Between the early nineteenth century and the Civil War, the unit cost of both land and water transportation fell by about 95%. Transportation was also faster. Delivering goods from Cincinnati to New York took 50 days or more in 1817; by the early 1850s, the same trip took 28 days by steamboat, 18 days by canal, 6-8 days by rail.13

The Political Economy of Friedrich List

The proponents of the American system did not imagine themselves to be overthrowing Adam Smith’s free trade doctrine. They believed conditions in the United States to be exceptional, justifying an exemption from Smith’s generally valid prescription. Instead, it was a German, Friedrich List, who argued that most developing countries should adopt protectionist trade policies.

Friedrich List (1789-1846) became a Professor of Administration at the University of Tübingen in 1817, and was elected to the lower chamber of the Württemberg Diet shortly thereafter. He was removed from both positions for political reasons; and in 1822, he was imprisoned for speaking too freely in a state that did not value free speech. He was eventually released from prison on the condition that he emigrate to the United States, where he lived from 1825 to 1830. He then made his way back to Germany.

Stamp commerorating the life of Friedrich List
Stamp commemorating the life of Friedrich List

List was an unorthodox economist even before he reached the United States. In particular, he believed that free trade was generally harmful to developing countries:

However much the world may owe to this economist [Adam Smith] in other respects, all his services cannot make amends for the enormous harm that he has done by persuading some of our capricious doctrinaires to accept the doctrine of so-called free trade. Adam Smith’s fundamental error is that he ascribes to capital alone a productive power which, in fact, can be created only by labour in association with a large or a small amount of capital.14

In his view, the American system was wise policy, and he wrote extensively about the American economy during his time in the United States. List also drew inspiration from history. He believed that, over and over again, national histories showed the benefits of interventionist governments and protectionist policies. However, List was not just an empiricist. He constructed logical foundations for his policy recommendations, and when he published The National System of Political Economy in 1841, the idea of “productive power” was its foundation.

List’s contention was that Smith had created a “cosmopolitan economy” built upon the unstated assumption of a peaceful and harmonious world. In such a world the maximization of exchange value would be the key consideration, leading Smith to policy recommendations like this one:

It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor. The farmer attempts to make neither the one nor the other, but employs those different artificers…What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.15

List’s own “political economy” was based on the recognition that the dominant actors in the world were nations that were competitive and self-interested to the point of war-making. He argued that in such a world, what a nation could make mattered more than what it consumed. Government intervention that enhanced productive power was often justified, even if it temporarily made the citizens worse off. The American exchange of raw cotton for British manufactures was one such instance. Cotton growers had relatively few opportunities to develop their skills, while manufacturers were ceaselessly learning new techniques of production. This trade allows Britain’s productive powers to grow while America’s productive powers stagnate, expanding Britain’s economic and military advantage over the United States. The protectionism envisioned by the American system was justified because it would forestall this outcome.

For List, productive power was simply the ability to produce valuable goods. It consisted of the capital of nature (such as natural resources), the capital of matter (such as physical capital) and the capital of the mind. This last category included skills and training, virtues such as industry and enterprise, and strong institutions. Constitutional government was essential:

The publicity [openness] of the administration of justice, trial by jury, parliamentary legislation, public control of state administration, self-administration of the commonalties and municipalities, liberty of the press, liberty of association for useful purposes, import to the citizens of constitutional states — as also to their public functionaries — a degree of energy and power which can hardly be produced by other means.16

Military forces that were well-organized and constitutionally constrained were also an institutional requirement. List believed that the capital of the mind, in all of its forms, was primarily responsible for economic development.

Smith argued that the accumulation of physical capital and greater division of labour would lead to greater prosperity. By contrast, List believed that the accumulation of mental capital brought prosperity: accumulation of physical capital and an increasing division of labour were part of the process of economic development but they were not its cause.

List believed that government action could accelerate the accumulation of mental capital and therefore the nation’s economic development.

The lessons of history justify our opposition to the assertion that states reach economic maturity most rapidly if left to their own devices. A study of the origin of various branches of manufacture reveals that industrial growth may often have been due to chance. It may be chance that leads certain individuals to a particular place to foster the expansion of an industry that was once small and insignificant — just as seeds blown by chance by the wind may sometimes grow into big trees. But the growth of industries is a process that may take hundreds of years to complete and one should not ascribe to sheer chance what a nation has achieved through its laws and institutions. In England Edward III created the manufacture of woolen cloth and Elizabeth founded the mercantile marine and foreign trade. In France Colbert was responsible for all that a great power needs to develop its economy. Following these examples every responsible government should strive to remove those obstacles that hinder the progress of civilization and should stimulate the growth of those economic forces that a nation carries in its bosom.17

The government can enhance mental capital in many ways: expand the school system, encourage technical training, develop and maintain favourable civil institutions, create a patent system to protect inventors, enhance communications and transportation networks to expand the domestic market, eliminate internal tariffs to the same end, ensure that credit is available for entrepreneurs, develop a navy to protect the country’s international trade. But for some countries, List believed that the government’s most powerful instrument was the protective tariff.

List divided economic development into three stages. The first stage was the agricultural economy, containing only the simplest of industries. It had minimal mental capital, existing in a state of “caprice and slavery, superstition and ignorance.” The second stage was marked by the development of more complex and extensive industry, which in turn led to the development of the country’s civil institutions, along with science and the arts. The final phase was the fully developed manufacturing economy.

In the first stage, we see Spain, Portugal, and the Kingdom of Naples; in the second, Germany and the United States of North America; France apparently stands close upon the boundary line of the last stage; but Great Britain alone at the present time has actually reached it.18

Only in the second stage were protective tariffs justified.

In the first stage they must adopt free trade with the more advanced nations as a means of raising themselves from a state of barbarism and of making advances in agriculture. In the second stage they must resort to commercial restrictions to promote the growth of manufactures, fisheries, navigation, and foreign trade. In the last stage, after reaching the highest degree of wealth and power, they must gradually revert to the principle of free trade and of unrestricted competition in the home as well as in foreign markets, so that their agriculturists, manufacturers, and merchants may be preserved from indolence and stimulated to retain the supremacy which they have acquired.19

Not all nations were capable to full development. The ideal candidate for development would be large and populous, endowed with ample natural resources, have access to the seas, and possess an economy that balanced agriculture, commerce and manufacturing. It would possess a large army and a large navy, both to maintain its sovereignty and to protect its commerce. In The National System of Political Economy, written in German for Germans, List declared that Germany met these conditions and more.

If any nation…is qualified for the establishment of a national manufacturing power, it is Germany; by the high rank which she maintains in science and art, in literature and education, in public administration and in institutions of public utility; by her morality and religious character, her industry and domestic economy; by her perseverance and steadfastness in business occupations; as also by her spirit of invention, by the number and vigour of her population; by the extent and nature of her territory and especially by her highly advanced agriculture, and her physical, social and mental resources.20

Nationalism permeates List’s political economy. There is an explicit role for a national government in economic development, including protective tariffs, the development of infrastructure, and the expansion of education. The national government must also foster and maintain appropriate civil institutions, such as representative government and the rule of law. These institutions have a cultural foundation, and they are uniform within the country’s borders, so they unite culture and territoriality. They are the foundation of national identity.

Economic development reinforces national identity. Development leads to greater division of labour, and division of labour necessarily implies

…a confederation or union of various energies, intelligences, and powers on behalf of a common production. The cause of the productiveness of these operation is not merely that division, but essentially the union.21

Each worker’s labour is worthless without the labour of his co-workers. As production becomes an increasingly cooperative activity, work itself becomes a unifying force.

This national identity could be crucial for economic development. List, unlike Smith, believed that the interests of the state can diverge from the interests of the citizens. For example, the government might choose to prohibit the slave trade, even though this trade is in the interests of some citizens. List also emphasized the long-term nature of development. Industrialization might require a protective tariff to be in place for decades, during which time consumers are forced to pay higher prices for the goods that they import. Furthermore, development requires the government to favour some sectors over others, most especially, the manufacturing sector over the agricultural sector. In all three cases, economic development imposes harm on some citizens in the present time. They will be more willing to accept this harm if they identity themselves with the nation.

List’s ideas were controversial in Germany in his own time, but Germany developed in the way that List had hoped. The National System of Political Economy gained popularity in Germany in the late nineteenth century. Bismarck adopted many of the policies that List had advocated, although the extent of List’s influence is unclear. Sergei Witte, Russia’s finance minister in the late nineteenth century, was deeply influenced by List and adopted List-inspired policies in his attempts to accelerate Russia’s development. List’s writings have also been influential in a number of other late-developing countries, including Japan, India, Korea, and China.


  1. Alexander Hamilton, Federalist Papers #11.
  2. Quoted by Ha, The Rise and Fall of the American System, p. 2.
  3. Quoted by Ha, The Rise and Fall of the American System, p. 3.
  4. All of the quotes in this subsection are from Hamilton’s Report on Manufactures.
  5. George Washington, Farewell Address (1796).
  6. Ha, The Rise and Fall of the American System, p. 20.
  7. Quoted by Ha, The Rise and Fall of the American System, p. 46.
  8. Quoted by Ha, The Rise and Fall of the American System, p. 56.
  9. Quoted by Ha, The Rise and Fall of the American System, p. 94.
  10. Ha, The Rise and Fall of the American System, pp. 95-6.
  11. Data taken from Ha, The Rise and Fall of the American System, Table 3.2 on p. 96.
  12. Quoted by Ha, The Rise and Fall of the American System, p. 103.
  13. Ha, The Rise and Fall of the American System, p. 115.
  14. Quoted by Henderson, Friedrich List: Economist and Visionary, p. 144.
  15. Adam Smith, The Wealth of Nations, Book 4, Chapter 2. 
  16. List, The National System of Political Economy, ch. 12.
  17. List, The National System of Political Economy, ch. 5.
  18. List, The National System of Political Economy, ch. 10.
  19. List, The National System of Political Economy, ch. 10.
  20. List, The National System of Political Economy, ch. 36.
  21. List, The National System of Political Economy, ch. 8.