Industrial Policy and the Forgotten Side of Alexander Hamilton

27:22Underneath that, though, was also a very material concern with what it would mean for the slave South were the North, where there was at this point, you know, at the end of the revolution, slavery has been outlawed in Massachusetts. It's been outlawed in Vermont, which is not yet actually a state. It's on the way to being outlawed in Pennsylvania and New York. that'll take a couple more decades. But the Southern elite can see the writing on the wall, that their system is unpopular. And if the North becomes more populous and wealthier, then it would dominate the federal government. This was their fear.

27:59And then perhaps come after their property. And that is indeed what happened. And part of what drove that Northern hostility to slavery was humanitarian. It was like a religious kind of humanitarian sensibility. But there was also an element of self-interest. Northern farmers were really worried that this system would crowd them out of Western lands and that it might extend to the North. They did not think, oh, slavery is naturally limited to agrarian work on cotton and tobacco in the South. They were worried that the workers of the North could also be enslaved. That's just sort of just emerging at the time of the revolution.

28:37So anyway, so that's part of what is motivating Jefferson's hostility initially to manufacturing and this romanticization of the agrarian character. It's also that they don't want the northern states to get too powerful. And so the Constitution actually involves all sorts of compromises to compensate for the fact that that's very likely to happen. The Senate being one of those important compromises where every state gets two senators. and the Southern elites dominated the Senate for a very long time. And it should be said up until the Civil War, the richest people in the country were always Southern elites, even though the South was generally impoverished.

29:18And even to this day, the Southeast of the U.S. bears the marks of underdevelopment in terms of numerous indicators of well-being, rates of interpersonal violence, early death, all this kind of stuff. What did industrial policy, which again, I know they didn't call it that at the time, but like to Hamilton, what did it look like specifically? What should the federal government be empowered to do? How should it make those decisions? Like, okay, it's all philosophically, he criticized Adam Smith. He saw reasons on the ground why there needed to be a strong state to develop that. What does that look like in practice in terms of actual policy choices made by the government to foster these industries?

29:56Well, all that is laid out in the report on the subject of manufacturers. And he calls the things that the federal government should do the means proper. It should also be said that the report on manufacturers is the first time the word capitalist is used in the English language. I was amazed to read that. So you said the first published mention of the word capitalist. As far as I can tell. Yeah. It had been used in French earlier, but that was the first time it's in English. So the means proper for Hamilton involve tariffs, prohibitive taxes on imports so as to defend infant industries, as they would later be called.

30:34Hamilton calls them infant manufacturers. but also drawbacks from those tariffs, subsidies for specific firms that need help, bans on exports of strategic raw materials, investment in physical infrastructure, investment in planning and R &D, research and development and general education. and ultimately he wanted to have a planning board, something like the Japanese Ministry of Industry and Technology. That never came to fruition, but he lays out in tremendous detail basically the means proper, this toolbox for economic planning. And the standard story is that it was shot down. He even opens the door to the idea of public ownership.

31:21He also, more well-known, of course, and before pitching the manufacturing plan, he creates the credit system, right? He creates the First Bank of the United States. And the standard story is that, well, it came to nothing, but actually a bunch of it was passed. And over time, more and more of what Hamilton outlined in the report on manufacturers is implemented. And it's often implemented in moments of crises, because frequently what happens is the free marketeers win the argument there isn't sufficient taxation, there isn't sufficient regulation, and then there's an economic crash and a crisis in which planning is sort of spontaneously summoned in to clean up the mess.

32:03So in the long run, the report on the subject of manufacturers really does triumph and does guide American industrialization, and was also very influential on other industrialization processes.

32:31We'll see you next time.

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33:31Maybe you already know about naked short selling. Maybe you've personally shorted stocks yourself, but do you know about the time short sellers ruined a Super Bowl, basically? For me, I was a little late, but red flags went up like, what is going on? This is really scary. At Planet Money, we get the story behind the money to explain how money works. Listen on the NPR app or wherever you get your podcasts. Can you talk about the relationship between Hamilton's vision of industrial policy? And again, he doesn't use that term, but the means proper. And I guess how it's financed. because he seems to make, and obviously this is where I think a lot of what we're seeing from the Biden administration now tends to get a little bit controversial because people say like, oh, well, we're building all this stuff, but also the public debt has absolutely exploded.

34:24What did Hamilton say about that aspect of it? And one thing that I was kind of thinking is he talks or he seems to talk a lot about external financing, so building up state credibility in order to convince creditors to give you money so that you could fund all these projects. And when I think about that, in addition to some of the tariffs and bounties and subsidies that he was talking about, I don't want to say beggar thy neighbor policies, but you start to think about, well, why would these other countries fund American development? And also, can everyone pursue these type of policies all at once?

35:06Can everyone draw on external debt in order to develop their own economies? Well, taking the first part first. So what Hamilton does is all the states have debt. And so when he is Treasury Secretary, he's the first Treasury Secretary under Washington, he pursues assumption of the state debts, as it's called, so that the federal government will buy up at face value all these state debts, which will help reinflate the state economies and liberate the state governments from this debt. But in exchange, the states have to hand over their Western land claims. And many states didn't have a Western boundary.

35:42It was just like, and the Western boundary of Virginia is - It's somewhere in that direction. Yeah. We haven't been to the Pacific yet, but it's like out there as far as we can go. I didn't realize that. Yeah. And so getting all of that land and federalizing it is also a very important part of the toolbox for American industrialization. So the way Hamilton pays for the debt is by taking a loan in Europe. And he offers 4 % interest when most European debt is offering 3 % interest. And there's a debate at the time about whether or not the debt should just be paid off. And Hamilton says, no, no, we need to, this is a - Roll it over, essentially.

36:20You want to keep borrowing. Yeah, what he calls a funded debt. So this is what happens. And part of this is also about keeping your enemies close. He doesn't want the speculator class to turn on the state and attack it and undermine it. He wants to deal them in and critics say, oh, see, he was just a servant of these elites. And it's like, well, yeah, he was helping their interests. But he also was concerned very pragmatically about having this class of speculators turn against the state. And so he wanted them to be committed to state stability. Because I should say, he's very explicit about the risk of the country fragmenting and falling apart and disintegrating into civil war, which, you know, it does to some extent due to the power of states.

37:06So Hamilton was very opposed to state power. Anyway, so that's part of how he funds it. And then also, prior to the Washington administration, states had their own rules. And generally, the tariff was around 8 % after Hamilton's plans go through. It's about 13%. The interesting thing is that the overall tax burden actually goes down. Yeah, I actually, I made a note of this because I thought it was really interesting. And again, I think when people think about like public infrastructure building and industrial policy nowadays. They think like, oh, my taxes will go up. But in this particular instance, I think they fell 77 % from 1785 to 1788.

37:47Yeah. And I mean, that's partly because there wasn't this insane effort to just pay off all the debts and also because there are productive investments being made. Another crucial piece of this toolbox is actually the post office. Yeah, that was really interesting to me. Talk more about that. So in the postal clause, my favorite clause in the Constitution, Article I, Section 8 of the Constitution is very often overlooked. And that explains what the government can do. Most constitutional scholarship focuses on how the government works, the divided government, different branches. But what does this government allow itself to do is rarely explored.

38:22And so Article I, Section 8 is where that is laid out. That's what Congress can do. And there's a debate around the postal clause. Benjamin Franklin and Hamilton and other federalists, as they were called, they wanted to empower the federal government to build canals because they needed transportation infrastructure. And that is opposed by primarily Southerners. As is later said some decades afterwards when the question of federally funded canals again comes up, Daniel Macon, a congressman from Georgia, answers a young local politician who asks him, he says, how come we're opposed to the federal funding of canals?

39:00And Macon says, if we allow Congress to fund canals, they will no sooner and with more propriety soon be after our slaves. He doesn't say slaves. He's some euphemism. So there was, again, this concern. The more you empower the federal government, the greater the risk to slavery. So there is no mention of canals. However, the postal clause says that the post office has the right to build post roads. And that little thing, roads, well, by the 1820s, most rivers were declared post roads. And the post office becomes a massive public works agency. We think of rivers as passive natural features, but they required enormous amounts of transformation to be economically useful.

39:45And it was the post office that did that, hiring contractors. For example, on the Red River, which runs up through Arkansas, this is after Hamilton's time, but these are the effects of Hamilton's work playing out. There was a 100-mile-long snake-infested log jam called The Raft, and it blocked settlement of Arkansas and Missouri. And it was the federal government, i.e. the post office, that went in and cleared that. And so the post office built the vast majority of roads, and that lowered transportation costs, that knit together a national economy. It also subsidized business communications and the press and did an enormous amount to create a national market.

40:28That's incredibly interesting. And up until you talk about it in the book, I had not realized the developmental role for the post office. But I'm glad you said that thing about the young congressman. Why do we oppose allowing the federal government to have this role in the building of canals? And, you know, there was concerns that the abolition movement was going to rise in their way of life and their economic system was going to get destroyed by the advent of slavery. There still is a lot of opposition to the idea that the federal government can have a productive role to play in building out infrastructure or doing whatever the equivalent is of building out a canal today.

41:04So are there deeper strains or other sort of related ideas that you can draw between, you know, the late 1700s and today, excluding slavery? Why people, there's still like economic interest of like deep anxiety about the role of the federal government in these things? Yeah, I think persistent throughout American history is the fear of the slippery slope by the incumbent economic elites. And if the federal government is proposing transformations of any sort, there are always going to be some interests that are threatened by that. And the other thing is it's expensive. And so no one really wants to pay taxes.

41:40And so industries and lobbies are constantly pushing to lower taxes. And so part of the argument for that is don't spend the money. Don't do these big projects. Just give us the money. Let us keep the money. These big projects are pointless and we handle the money better. In the few minutes remaining, can you please defend industrial policy from every single criticism that has ever been made against it? No, but I am thinking back to Adam Smith. And, you know, Adam Smith's argument was partly one of security, the idea that trade would build relationships between countries, whereas Hamilton's argument, it seems, is centered on the development of the U.S., the building of a strong state and how those two are related to each other.

42:27So I guess, number one, what does Hamiltonian style industrial policy actually mean for trade relationships between countries and the prospects for peace? But then also, can you talk a little bit about arguments about, well, government spending creates unproductive capacity or it's unfair for governments to pick winners or losers? Again, I'm asking you to basically address all the critiques of industrial policy in the few minutes we have allotted to us. Well, the first thing I would say is it's not like industrial policy always works out. There are problems with it. It's not easy to do. However, if you look at the history of industrialization in one country after another, it does raise the standard of living and it generally works.

43:09But it always involves a developmentalist activist state. So I don't think there's any escaping that. Now, that can be done in better or worse ways. And the US plays an important role in that. These ideas from Hamilton go to Frederick Liszt, who goes to Germany, who then very influential on the Meiji restoration in Japan and Japan's industrialization and on and on to today. But so in terms of, I mean, I think that's the most important argument is that the actual story of industrialization always involves an activist state. In terms of trade, I mean, Hamilton was not opposed to trade. He just didn't want to be subordinated to this dominant power, the British.

43:49I mean, his concern with national sovereignty and industrial development didn't come at the expense of international trade. So almost always exports also play a very important part of industrialization. Take, for example, a place like Rwanda. Rwanda is very explicit, very kind of Hamiltonian. They say, if we don't have economic growth and development, we're going to have another genocide. We've had four or five, whatever it is. And they're heavily dependent on exporting tea. They don't want to not export tea, but they've had conflicts with the IMF because they want to run a 3 % budget deficit so that they can fund public education all the way through K through 12.

44:29And they say, look, if our farmers are all illiterate, we can't increase productivity and we can't develop. So I'm speaking to industrialization rather than industrial policy. Like what we're dealing with here in the U.S. is something new, which is kind of like the question of re-industrialization. And that's actually a very different problem and project. The book is written to the left. What did you feel the need for like this particular audience to read this particular history? Well, there's a hostility, I think, to the U.S. projects on the left that is not helpful. And there's also a misunderstanding of the Constitution.

45:07I mean, people write off the Constitution as a document written by slaveholders. And I was struck in getting into this, getting under the hood, about how many progressive elements there are in the American constitutional tradition. And I came away from this project with a much deeper appreciation and respect for that. And I wanted to disabuse leftists who fall into these sort of facile notions about the Constitution being bad. I disagree with that. And I think there's actually a lot of room for, quote unquote, progressive goals to be met through the Constitution. the general welfare clause, which Thomas Jefferson freaked out about.

45:45He didn't like it. He said, this could mean almost anything. It's like, yes, it could. It opens the door to all types of egalitarian projects, potentially. I have one more thing, which is, again, when I think about Hamilton's experience versus what's happening today, one of the things I think about is that, as you said, a lot of what he recommended didn't immediately come to fruition. People like Jefferson stood in the way. And nowadays there seems to be, you know, a sort of similar back and forth within D.C. But how do you build political consensus for this type of policy? Because that really seems to have been the challenge for Hamilton.

46:24It happened over time to some degree, but it certainly didn't happen immediately. Yeah. You know, I don't know how you build political consensus around it. You don't do it by not admitting any fault and not having conversations. So I cannot tell you how political consent can be built. I suppose you'll have to write a whole other book about that. I mean, and there are, you know, well, you guys, I just listened to a podcast you did with some Irish guy about, you know, the EU policy. I mean, it's like it's not like there aren't problems with these agendas and those have to be acknowledged and those blockages removed.

47:01That's what I was going to say, Tracy, when you said that, like, oh, it seems so quaint that people are, like, skeptical of the arrow of economic trajectory. We just did this episode and I felt like I had a lot of sympathy. I know, but like if you read the book, like the idealization of agrarianism is just like very surprising to me, especially because you think back to the late 1700s and you don't think that like subsistence farming was a particularly glamorous activity. But then again, as Christian was pointing out, there's all this like idealism and values attached to the hard work of being a farmer.

47:39And wealth of the slave and plantation. Yeah, and that too. And it did provide autonomy for yeoman farmers. And so there were legitimate concerns about the loss of that autonomy. You know, one final argument for industrial planning, for government intervention, is that it is, as Karl Polanyi says, laissez-faire, free trade was planned and planning is spontaneous. Because the pattern again and again is that the forces that want free market advocate for that. They get deregulation. They get tax cuts. And that inevitably leads to a crash in which the government has to step in and regulate and nationalize.

48:17And we just lived through that with 2008, right? I mean, you had an entire generation of bankers and policy experts who had argued against government intervention. And when 2008 came, what did they do? They basically nationalized the U.S. banking system for a number of years and bailed the whole thing out. So another argument for industrial policy is that government intervention in a capitalist economy is inevitable. It's going to either happen ad hoc during an emergency or it can happen consciously through democratic deliberation. Christian Parenti, thank you so much for coming on. Everyone, go read the book.

48:55And also, there are a number of just extraordinary, interesting people at your department at John Jay. I'm in a band with one of the professors. I play music with your colleague, Thomas Herndon. A number of smart people there. And it's a really interesting program here in New York City. Great master's program. Yeah. Thank you very much. Thank you.

49:27Tracy, I really enjoyed that conversation. Even setting aside sort of some of the economic lessons, just sort of like revisiting some of the assumptions we make about the history of that time and what it was actually like, I find to be very useful. Yeah. You know, we didn't even really get into this, but there was also, I think, an instance of price controls immediately after the Revolutionary War. We're going to have to do like a whole other hour on this with Christian. Yeah, we should. You know, there's another interesting thing, and I meant to ask a question about it, but I'm aware that there is a thing in American history called the War of 1812, and I almost know nothing about it.

50:02I certainly was not. I think they set the White House on fire. That's all I know. But in the book, there's a lot in there about the basically insufficiency of the U.S. national defense at that point, born in part due to poor domestic investment that allowed us to be in a situation where the British could destroy Washington, D.C. You know, it's funny. I didn't study or hear that much about the Revolutionary War. But when I went to university in London, there sure was a lot of talk in my international history class about the War of 1812. Yeah, I literally realized I know very little about it and I don't think it gets talked about very much.

50:38I was waiting for you to drop the idea of Hamilton being a secret MMT. Clearly. I mean, come on. No, but it is really interesting. And, you know, this idea of like that there are ways in the U.S. Constitution. And I thought that was a really interesting point that like embedded in the Constitution are these various clauses and comments or lines that really do open up a lot of like space. for active economic power from the government. Yeah. I also thought the point about, well, not just dismissing some of the negativities that can go with industrial policy is really important. Because if you're going to, you know, you can do it.

51:17You can also do it wrong, to Christian's point. And there are plenty of examples throughout world history of things kind of going off the rails and stuff like that. But you need to have a reasonable and honest discussion about the pros and cons and the goals of the policy as well. What exactly you're trying to do here and what the results are that you want to see. It can't just be like throw money at every single problem. You have to have some specificity about what you're trying to achieve. Absolutely. And that's so fascinating because I knew that about like Friedrich List and the industrialization of Germany and the influence that his work in Germany then had on Japan.

51:54But the fact that his work actually addressed to Hamilton, the fact that But Hamilton was the first to write the word capitalist in the English language. Pretty fascinating history. Yeah, absolutely. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at Carmen Ehrman, Dashiell Bennett at Dashbot, Kale Brooks at Kale Brooks. Thank you to our producer, Moses Andam. For more Odd Lots content, go to Bloomberg.com slash Odd Lots, where you have transcripts, a blog, and a newsletter.

52:27and check out the Discord, discord.gg slash oddlots, where you can chat 24-7 with fellow listeners. And if you enjoy Oddlots, if you like it when we do these economic history episodes, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is connect your Bloomberg account with Apple Podcasts. Thanks for listening.

52:59Thank you.

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