The American System

In 2018 the Trump Administration criticized China for "unfair trade practices" including high tariffs, industrial subsidies, targeted investments, and intellectual property theft.

It brings to mind the American System, which included high tariffs, industrial subsidies, targeted investments, and intellectual property theft.

The American System, rooted in the ideas of the American School of economics, had its origins in Alexander Hamilton's Report on the Subject of Manufactures (1791). In this report, Hamilton argued that the US would not be fully independent until it was self-sufficient in the necessary economic products. Henry Clay named it the "American System" to distinguish it from the "British System" -- the competing theory of economics at the time, represented by Adam Smith's Wealth of Nations. 

Hamilton's Report intended to promote the growth of manufacturing and expand the applications of technology and science to agriculture. It had the following to say about unfair trade practices:

• Tariffs: "duties on those foreign articles which are the rivals of the domestic ones, intended to be encouraged."
• Subsidies: "bounties [are] one of the most efficacious means of encouraging manufactures, and ... in some views, the best."
• Investments in infrastructure: "To diversify and extend these [internal] improvements is the surest and safest method of indemnifying ourselves for any inconveniences."
• Intellectual property theft: "it is desireable in regard to improvements and secrets of extraordinary value, to be able to extend the same benefit to Introducers, as well as Authors and Inventors."

In other words, to develop a prosperous economy, erect tariff barriers, subsidize critical industries, invest in infrastructure, and get to the technological frontier, by theft if necessary.

1791 - 1970s

The American System worked very well for America from 1791 through the 1970s. Of course, not everyone was in agreement from the outset. Certain people were opposed to industrial policy on grounds of personal interests (e.g., large plantation owners) or ideology (e.g., classical economists). Hamilton explained that "There still are, nevertheless, respectable patrons of opinions, unfriendly to the encouragement of manufactures." People might be skeptical to industrial policy due to a belief in that agriculture is more productive than manufacturing, or because the private sector should handle virtually everything, or because consumers will pay more for products produced by the protected industries. In response Hamilton writes "This mode of reasoning is founded upon facts and principles, which have certainly respectable pretensions ... Most general theories, however, admit of numerous exceptions, and there are few, if any, of the political kind, which do not blend a considerable portion of error, with the truths they inculcate."

1970s - 2010s

The departure from the American System coincided with 1970s stagflation and the rapid expansion of neoliberal policies and thought, summarized nicely by Margaret Thatcher: "There is no such thing as society." But that is a topic for another post.

Today

Hamilton's report and the increased acceptance of industrial policy in the news these days brings to mind a passage from Erik Reinert in How Rich Countries Got Rich and Why Poor Countries Stay Poor:

"Since its founding fathers, the United States has always been torn between two traditions, the activist policies of Alexander Hamilton (1755-1804) and Thomas Jefferson's (1743-1826) maxim that the "government that governs least, governs best". With time and usual American pragmatism, this rivalry has been resolved by putting the Jeffersonians in charge of the rhetoric and the Hamiltonians in charge of policy."

Recent developments, such as lawmakers' push to invest billions in the semiconductor industry, are small hopeful signs that we are still open to a pragmatic approach.