Validity of National System in Modern World - Essay Example

A Critical Analysis of Frederick List’s “National System” and its Validity in Modern World Introduction Friedrich List, one of the early 19th century German-American economists, was the founder of the American School of Economics, often known as the “National System”. He was one of the severest critics of Adam Smith’s classical economic thoughts. He is mainly as an advocate of protective and nationalist economic policy. In the 19th century, List was the only “economist, other than Karl Marx, who strongly emphasized the close interrelation of economic theory and political factors” (“Frederick List”, 1968, pars. 6). List claims that his theory of “National System” is based on historical empiricism. Therefore, though he agrees with the Classical School of Economy on the point that global free marketplaces are desirable, he seems to be concerned about the monopolist influence of the strongest economy on the countries of weaker economy. Merely one century after the industrial revolution had began to force the European nations to seek for newer and cheaper sources of raw materials in order to feed their ever booming mills and factories, List foretold the economic imperialism of the technological industry-based economies of the world. Therefore, the prerequisite for a country’s participation in the global free marketplace, as List suggests, is to reach the level of the leading nation. It may seem that List is advocating for such criteria of participation in the global free marketplace, which will mostly impossible for the countries of weaker economies to fulfill. On the surface level, it seems that there must be some nations who will never be able to attain the level of the leading nations. But an in-depth analysis will necessarily reveal that List is the proponent of a long-term and stable free global market which will allow the weaker economies to participate in the free trades which will rather promote their ability to play broader roles in the same marketplace in future. Short Biographical Sketch of Frederick List Frederick’s life was full of turmoil and struggles because of his advocacy for innovations and administrative reforms in his workplaces. He was by birth a German who was born in a prosperous tanner family in the Reutlingen, Wurttemberg in 1789. Throughout his whole life, List had sought for individuality. This tendency provoked him to adopt his father’s business of tannery. Instead, he joined the post of a clerk in the public service and later he became the under-secretary in a ministerial department in 1816. Subsequently he became a professor of political administration at the University of Tubigen and a deputy to the Wurttemberg Chamber where he strongly raised his voice for administrative reforms (Henderson, 1983, pp. 4-5). His rebellion against the administrative conventions at the Wurttemberg Chamber earned him ten months’ imprisonment in the Jail of Asperg. In 1824, h escaped from the imprisonment and immigrates to America where he gathered experiences as a landholder from farming which inspired him to look deep into the economic infrastructure of a country. Furthermore, he claimed that Alexander Hamilton’s works inspired him a lot to view the economy of a country as a ‘National System’. Indeed, during his stay in Germany, his experience with the arbitrary bureaucratic political system assisted him to perceive the political dimension of economy and the importance of the political system’s role in people economic welfare of the common people who are not directly attached to politics (Henderson, 1983, pp. 13-15). For List, “the nation is the most important link between the individual and mankind” (“Frederick List”, 1968, pars. 6). This of concept of List about the indispensability of politics from economy later became realized more by Henry Clay’s “American System”. During his stay in Pennsylvania in America, he wrote “Outlines of a New System of Political Economy” and published it 1827. In this pamphlet, he proposed the doctrine of protectionism which requires the political authority of a country to do everything to protect its economic system. During the final days of his life, List suffered from misfortunes and loss of wealth and committed suicide 1846. (“Frederick List”, 1968, pars. 2-4) Necessity of List’s ‘National System’ in the 19th Century World Frederick List’s “National Economy” was a response to the adverse effects of free-trades on the developing economies in the early 19th century, as Mauro Boianovsky (n.d.) notes, “Friedrich List’s concept of “national economic development”, originally devised in mid 19th century for Germany, the United States and a few other “developing” economies of that period” (p. 1). He proposed his doctrines of protection within a National Economic system during a period when technology-based economy was at its developing stages in his country, Germany. By that time, the Industrial Revolution had been about one hundred year-old, Great Britain had made rapid progress in her industrial sector, while most other European countries as well as the United States was lagging behind in this sector, as Mehdi Shafaeddin (2000) says in this regard, “These countries fell behind Great Britain in industrialization mainly because the first industrial revolution took place in that country” (p. 4). In fact, List observed that in a global marketplace, free-trade between the few industrially developed countries like England, Italy, etc and the developing countries like Germany, the United States, etc would stifle the growth of the related industrial sectors in the countries which belonged to the later categories. In the face of aggressive intrusion of the British products into local European markets, the economists need to rethink the Classical School’s approach to economy which tended to ratify the backwardness of the economies of the developing countries. Since the “Classical School reflect the industrial and commercial supremacy of England in the nineteenth century and are inapplicable to the needs of underdeveloped but rising countries, such as nineteenth-century Germany, France, and the United States” (“Frederick List”, 1968, pars. 6) . Therefore, both underdeveloped and developing societies of the early 19th century would need a different theory which would enable them to nurse and defend their infant industries from the destructive consequences of foreign cheap products. Adam Smith’s classical theory could not meet this demand of the developing and underdeveloped but rising countries because of the atomistic materialistic approach to view the individual as the center of the productive forces. On the other hand, List proposed to view as a part of a larger economic system whose welfare is indispensably related to other major organizations or systems such as the political system, etc. (Henderson, 1983, pp. 89-92) How List’s “National System” Meets of the Demand of 18th Century Scholars as well as the Societies In fact, Frederick List’s tendency to view economy as a national system was not basically any universal approach. Instead, it was an attempt to supply the society with a counter-perspective to define the political system’s role in the economic welfare of the country, as it has been said in “International Encyclopedia of the Social Sciences”: “Observing the destructive consequences of cheap British exports to the numerous small German states…List developed his counter theory of productive forces and of economic stages, related both to historical and cultural contexts” (“Frederick List”, 1968, pars. 6). List’s concept of ‘National System’ had supplied the developing countries of his period with sufficient reasons to provide protection to their infant industries, so that they could develop their own productive force to meet both the internal and the external demand in a global marketplace of free-trade. Though his concept was developed to mitigate the adverse consequences of free-trade, it could provide the developing nations with ample theoretical basis on which they could build a harmoniously functioning economic system. For List, since the economic growth is essentially a natural (or organic) process, a nation needs to protect it during its infancy. He wished to “demonstrate that the growth of an economy is an organic process and that it is only because growth is organic that every nation has a temporary need for protection” (“Frederick List”, 1968, pars. 7). List theory of productive force of a nation asserts that economic policy of a nation is not necessarily absolute and universal. Rather, according to him, a country’s commercial policies are relative and context-related and, therefore, are to be adopted in terms of the interactions between the market-force and the country’s productive force. So, while Adam’s theory considers that participation in global free marketplace is an inherent drive of the industrial growth in a country, for List, the free-trade appears to be a politics on the part of a country’s policymakers. (Levi-Faur, 1997, p. 160) Cores of List’s Concept of “National System” Infant industry argument, free-trade in a global marketplace, productive forces, inseparability of political system from economy, etc are central ideas of Frederick List’s concept of ‘National System’. In fact, he had placed his entire ‘National System’ on his famous argument of infant industry. His infant industry argument was a response to imbalanced industry-backed economic growth in England and other European countries including Britain, France, Italy and others after the first industrial revolution. According to List, “Adam Smith developed his universal theory of international trade – absolute CA– having mainly the interests of Great Britain in mind.” (Shafaeddin, 2000, p. 1) List’s infant industry argument depends on a number of basic principles. From a historical empirical perspective, he assumes that the developing or underdeveloped, but rising countries necessarily have to go through five phases in economic growth. These stages are: “the savage stage”, the “pastoral stage”, the “agricultural stage”, the “agricultural and manufacturing stage”, and the “agricultural, manufacturing and commercial stage” (Levi-Faur, 1997, p. 163). He further notes that at the onset of the Industrial Revolution, most of the countries of the world had already been at the agricultural stage through a natural transition. But the transition of the nations from the third stage to the fourth and the fifth stages are the “natural course of things” (Levi-Faur, 1997, p. 159). Therefore, the nations will not be able to reach these two final stages automatically. Referring to Great Britain transition, he argues that it was entirely a man-made fabrication which had been supported by a great sociopolitical system or power. List uses the term, “market forces” to refer to the natural transition of a society to the final two stages. He argues that if the market forces are allowed to function freely in a country’s economic system, it will tend to debilitate the productive forces. Therefore, protection should be provided to an industry at its infant stage, as referring to this protectionist notion of List, Shafaeddin (2000) says, “infant industry protection becomes necessary for countries which are at stage, if other countries are at different stages of development” (p. 6). In List’s words, if “some [countries] have outdistanced others in manufactures” (List, 1857, p. 78), temporary protection should be provided to the infant industry. In List’s “National System”, the ‘political system’ plays a key role in providing protection to the infant industry. He severely “criticized the classical writers for not being aware of the great social and economic significance of the nation” (“Frederick List”, 1968, pars. 7). For him, in the post Industrial society, a country’s political system has become an inalienable part of the nation’s economic activity. With a view to supporting his idea about the role of the nation or a nation’s political system, he wants to allot a place in Adam Smith’s man-to-mankind relationship and economic interests. He argues that the ‘nation’ is an important link between man and mankind. So, there should be a clear demarcation which will define a nation’s economic interest. In this regard, List (1857) says that Adam Smith “overlooks nationality and national interest by arguing for maximization of the global welfare” (p. 67). He further says that some nations may dedicate themselves to their own economic welfare than to the whole mankind. In such cases, they have to build up their productive force so that they can meet their internal demands and those of the whole world (List, 1857, p. 61). Since this national economic interest is much different from the cosmopolitan ones, a nation must protect their industry at the infant stage. Frederick List’s Influence on Subsequent Economic Theory and Practice List’s infant industry argument was not unprecedented. Rather he himself was greatly influenced by Alexander Hamilton’s and Carey’s writings during his stay in America. But List’s credit lies in the fact that he had been able to develop a system of national economy on the basis of this argument. Subsequently, the economists have developed a number of alternative theories in response to the failure of Adam Smith’s ‘Comparative Advantage Theory’ to explain the role of the developing countries to protect their economies from the adverse effects of free market forces in a global market. Referring to the popularity of List’s “The National System of Political Economy”, Henderson (1983) comments, “This book has been more frequently translated than the works of any other German economist, except Karl Marx.” (p. 97) Though Fredrick List’s theory had been vehemently attacked by his contemporary as well as subsequent critics, he was able to inspire the establishment of an entire school namely, “German Historical School of Economics” based upon his thoughts. Subsequently, his ‘National System’ led to the birth of “National System of Innovation” established by Bengt-Ake Lundvall and Christopher Freeman, the 20th century, who were heavily influenced by Listian thought of the nation’s political role in economics (Henderson, 1983, pp.78-83). Moreover, List was one of the leading theorists of the “American School of National Economy” in the 19th century. Subsequently, his concept of national and political economy greatly inspired American economists like John R. Commons, Thorsten Veblen and John Kenneth Galbraith to establish the “American Institutional Economics” in the 20th century. He further influenced “the practice of nation-building statesmen like Alexander Hamilton and Abraham Lincoln in the U.S., the Meiji reformers in Japan and Otto von Bismarck in Germany” (Lind, 2012, pars 2). List’s Theory in Practice in Modern World During his lifetime, Frederick List had often been misunderstood as reactionary, though he had been able to influence political leaders and authorities of developing countries around the world. Even in his own country, Germany, he was charged with the claim that he was causing social unrest with his reactionary thoughts, though his thought stirred movement, ‘National Socialism’, which eventually consolidated the German economy. Furthermore, his concepts on political economy are often considered to have impact on the foundation of the “European Economic Community”. The very basis of a “united European economic community”, in fact, lies in the reappraisal of one of List’s comments about the inseparability of politics and economics. One of such comments is as following: “Commercial union and political union are twins; the one cannot come to birth without the other following” (List, 1856, p. 276). It is believed that Arthur Griffith in Ireland 1930s, Deng Xiaoping in post-Mao China, Sergei Witte, a Russian Finance Minister had been influenced by Listian thoughts and inspired to adopt protectionist policy to pave the way for the industrial growth. Angus Madison argues that List’s protectionism provides Communist Russia with ample reasons to establish railroad and to start an economic boom in the country through a protectionist attempt against invading capitalist market (Chang, 2002, pars. 1-5). Without List, Witte would not be able to uplift Russia from a backward economy to an underdeveloped country depending only on Marxist economic policy, as Madison (1991) says, “As Marx was not interested in the survival of the capitalist system, he was not really concerned with economic policy, except in so far as the labor movement was involved” (p. 91). Indeed, in the 20th century, List’s concept of national economy had been the source of inspirations for many countries to apply protectionism to allow the economic boom to start from its childbed. Conclusion Frederick List was an influential economist of the 19th century. His “National System” was essentially an age-worthy response to Adam Smith’s economic cosmopolitanism, which, List believes, had been fabricated to boost up industrially developed British economy. He argued that free market force in a global marketplace will necessarily destroy a country’s productive force. Therefore, the political system of a country should devise its economic policies accordingly to protect its industry at its infant stage. List also believed that the political system is an inseparable part of its economic system. Since neither the political system nor the economy can survive without the other, the economic policy of a country should be devised in order to sustain both of the two systems. Though List advocated for the political economy, he sometimes failed to provide credible arguments. As a result, he had often been misunderstood as a reactionary. Though List lived about two hundred years ago, still his concepts can be applied to modern developing countries. References Boianovsky, M. (2011). Friedrich List and the economic fate of tropical countries. Universidade de Brasilia. Retrieved November 08, 2013 from http://www.anpec.org.br/downloads/Encontro%202011_texto%20Boianovsky.pdf Chang, H. (2002). “Kicking Away the Ladder”, Kicking Away the Ladder – Development Strategy in Historical Perspective. Cambridge University, UK. “Friedrich List.” International Encyclopedia of the Social Sciences. 1968. Retrieved November 08, 2013 from Encyclopedia.com: http://www.encyclopedia.com/doc/1G2-3045000721.html Henderson, W. O. (1983). Friedrich List: Economist and Visionary. Frank Cass: London. Levi-Faur, D. (1997). “Friedrich List and the political economy of the nation-state”, Review of International Political Economy. Department of Political Science, University of Haifa. 4:1 Spring 1997: 154–178, p. 163. Retrieved November 08, 2013 fromhttp://poli.haifa.ac.il/~levi/levifaurlist.pdf Lind, M. (September 06, 2012). “Friedrich List and Economic Nationalism”, The Breakthrough Institute. Retrieved November 08, 2013 from http://thebreakthrough.org/index.php/voices/michael-lind/friedrich-list-and-economic-nationalism/ List. F. (1856). The National System of Political Economy. Philadelphia, JB Lippincott and Co. Maddison, A. (1991). Dynamic forces in Capitalist Development: A Long-Run Comparative View. Oxford University Press, Shafaeddin, M. (1998). “What did Frederick List Actually Say?” Discussion Paper, no. 149, Geneva. Retrieved November 08, 2013 from http://unctad.org/en/docs/dp_149.en.pdf Read More