The American Political Economy Tradition

Heretics or Pragmatists?

If Cohen and De Long (2016) are to be believed, there is an American Political Economy tradition, that harks back to Alexander Hamilton, that goes against the free market canon of the profession. In their view, the American Political Economy tradition consist of an interventionist approach to economic policy, that arguably should be seen as neomercantilist [1]. Classical political economy, as represented by their main figures in the United Kingdom, Adam Smith and David Ricardo, upheld the laissez-faire and free market tradition, and in this view the same would be true for the marginalist or neoclassical tradition. In that respect, some might see a continuity between both schools of thought and the American Political Economy tradition would be a somewhat heterodox tradition from its inception, at least on policy issues.

This would be, arguably, also true during the Progressive Era in which the view that the rise of cartels made the regulation of the economy acceptable to many economists. In that regard, the Institutionalist School, central in the American Political Economy tradition, would also be somewhat heterodox, departing from the dominant Marginalist or Neoclassical School.

According to Cohen and De Long (2016), the Hamiltonian tradition was reinvigorated during the Civil War and then during the New Deal. But during some brief periods, and in particular in a more persistent way in the more recent neoliberal era, associated with the rise of the conservative movement during Ronald Reagan’s administration, the free-market view became dominant eclipsing the American Political Economy tradition. The true American Political Economy tradition would be associated in policy to those heretical authors that believed in the relevance of market imperfections and were for some degree of government intervention.

A distinctive tradition

The view that there is a distinctive American Political Economy tradition is often associated to the interventionist bent in economic policy, particularly regarding international trade. That would contrast with canonical views in the field, associated with British economists at least up to the post-war period, that defended the efficiency of markets and a laissez-faire policy stance. For example, Irwin (2004: 800), in his analysis of the role of Hamilton, Federalists and the Jeffersonian Republicans on tariffs, suggests that the Report on Manufactures: “is often heralded as the quintessential American statement against the laissez faire doctrine of free trade and for activist government policies” (Italics added).

The archetypal characteristic of the American Political Economy tradition would be a bias for pragmatism in economic policy and the avoidance of dogmatism, and the laissez-faire doctrine, that for a very long time dominated the mainstream of the profession. Political economy was dominated by the European scholars, and particularly the British School, as it is well-known, at least until the 1950s, when the center moved from England to the United States [2]. In the words, of Cohen and De Long (2016: xi): “Repeatedly, government in the United States opened a new economic space, doing what was needed to enable and encourage entrepreneurs to rush into that space, innovate, expand it and, over time, reshape the economy. Each time, and there were many, this was done pragmatically.” Pragmatism in economic policy, even when that implied a certain deviation from the orthodox canon.

In that sense, not only Hamilton could be seen as a neomercantilist author, moving away from Adam Smith, and more significantly from the comparative advantage ideas that would be later developed by David Ricardo, but also Mathew Carey and his son Henry Charles Carey could be seen as breaking up with the dominant views in England, the latter with respect to John Stuart Mill, in their defense of the American System. Both were somewhat influential in economic policy making. The Whig defense of the American System, and the influence of the elder Carey on Henry Clay, and the effective implementation of that program after the Civil War by successive Republican administrations, to some extent inspired and justified by the ideas of the younger Carey, are seen as part of the continuity of this American Political Economy tradition. High tariffs, a distaste for the invisible hand of the market, and predilection for government intervention, even if the size of the state, measured as a share of Gross Domestic Product (GDP) was not particularly large, were the hallmarks of this unorthodox tradition [3].

In the same vein, the Progressive Era and the rise of the Regulatory State are seen in this view as being influenced from a somewhat unorthodox tradition associated with the German Historical School and its influence on American Institutionalists. The connection between both schools is well documented. The regulation of cartels was indeed influenced by the ideas of some of the leading institutionalists, like John R. Commons [4].

The New Deal and the further expansion of the Regulatory State, and the more direct Keynesian intervention, with the growth of the size of government expenditures and taxation as a share of GDP, and the importance and influence of Keynesians within the administration, starting with Marriner Eccles and Lauchlin Currie all the way to the Employment Act in 1946 and the creation of the Council of Economic Advisers (CEA), are the culmination of that interventionist tradition in US history of economic policy ideas. The 1920s, with the ascendancy of Andrew Mellon, and its catastrophic collapse with the Great Depression, could be seen as a brief interregnum.

The Keynesian Consensus of the 1950s and 1960s, when even the Republican administration accepted the need for maintaining the goal of full employment, and the social programs of the New Deal, even if inflation received more attention from the Eisenhower advisors, like Arthur Burns, indicates the relative persistence of the interventionist tradition in American economic policy [5]. It is only with the collapse of the consensus, and the acceleration of inflation in the 1970s, that there is a persistent reversal of the American Political Economy tradition, and a neoliberal turn towards a dominant laissez-faire position, according to Cohen and De Long (2016).

Pragmatists (not heretics)

There are at least two problems with this interpretation of the American Political Economy tradition. It presupposes a simple and direct relation between dominant economic theory and economic policy propositions deriving from it. Also, it is founded on an exaggerated notion of the heterodoxy of the American views on both theory and policy, although pragmatism in policy is more plausible than the heretical bent on theory. There could be continuities in theory, even if there breaks and differences with respect to policy issues, and vice versa, there could be continuity in a policy proposition even after a significant break with the prevailing theoretical paradigm.

This allows for an interpretation of the American Political Economy tradition that suggests a greater alignment with the dominant theories at the center of analytical developments, even when sometimes the policy approach deviated from the dominant dogma. In that sense, the American tradition was closer to orthodoxy than often accepted.

While it is true that Hamilton was for some degree of protection, and not just or fundamentally for fiscal reasons, as argued by Irwin (2004), there is ample evidence that he was a follower of Adam Smith. His main argument for the need for manufacturing is about the role of the division of labor, and how manufacturing would provide a vent for the agricultural surplus, both Smithian notions. He was for an urban, manufacturing model for the country, that required a certain amount of debt and a bank. Also, Smith was for the Bank of England, and while he was more critical about public debt, that resulted from the British circumstances, with much higher debt-to-GDP ratios than in the US. Jefferson, on the contrary was closer to the Physiocratic ideas of an agrarian path for the nation. In other words, Hamilton, basically adapted the classical economic ideas of his time to the circumstances of the new nation. No doubt that was pragmatic, but it was a break in policy not theory.

In the same vein, Henry Carey was influenced by Nassau Senior, and developed a theory that emphasized the harmony between capital and labor, in contrast to the classical political tradition. He even suggested that Frédéric Bastiat had plagiarized some of his ideas. Karl Marx would label him, together with Senior and even John Stuart Mill as typical of the vulgarization of bourgeois political economy. Carey’s turn (he was first for free trade) and defense of the American System that his father had promoted, was perfectly compatible with theoretical views at the center, as represented by Mill’s abandonment of Ricardianism and transition to marginalist ideas. Note that Mill gave qualified endorsement of protectionism, for what became known as the infant industry argument (Irving, 1996: 116).

The ideas of the founders of the American Economic Association, and of many professional economists during the Progressive Era, be that those associated with the Institutionalist School, in particular those related with John R. Commons and the Wisconsin School, or those of marginalist authors, like John Bates Clark, reflected the dominant tendencies in Europe. The debate between the Historical School and the Marginalist School was relevant in England, the Cunningham-Marshall exchanges (Collini et. al, 1983), and can in fact be seen to some extent as a methodological debate between authors that accepted the supply and demand determination of relative prices. Marginalist authors, particularly in the British tradition, although they did remain for free trade (contrary to some Historical School authors, and some politicians like Joseph Chamberlain), were for some degree of government intervention, since market failures did matter.

Finally, the Keynesian turn during the Great Depression, and more so after the Roosevelt recession in 1937-38 and World-War II, come together with the adoption of the so-called neoclassical synthesis, in part the result of British authors, like John Hicks, but also by American economists, like Alvin Hansen, and above all Paul Samuelson. Intervention surely derived from the pragmatic needs of the crisis, the war, first the hot then the cold one, but it was done with full adeherence to the dogmas of mainstream marginalist theory. The intervention now was justified on the basis of market imperfections.

A neoliberal American tradition

Note that neoliberalism — interpreted here as the notion that markets do produce in some form the best or most efficient outcome, be that because markets are truly efficient or simply from the fact that market imperfections are less relevant than government failures, and that laissez-faire is the best policy — had already an important footing in the American tradition [8]. Many of the authors of the Chicago School, Milton Friedman among them, had institutional preocuppations [6]. The neoliberal turn was not a break with the American Political Economy tradition, at least not in theory. It was a change in policy priorities associated with changes in the correlation of power in American society.

There are of course some breaks in the American Political Economy tradition, or some scholars that broke with conventional wisdom. Thorstein Veblen, John Kenneth Galbraith, and Hyman Minsky come to mind [7]. But they remain marginal to the dominant tradition in the US. These were the true heretics.

Notes

[1] Helleiner (2021) identifies Hamilton as a proto-neomercantilist, and a precursor of Friedrich List. Helleiner is more nuanced and acknowledges that Hamilton “expressed more tentative support for protectionist policies than others did” (Ibid.: 4, footnote 9). In this regard, Helleiner seems to disagree with Irwin (2004: 814), who suggests that “Hamilton preferred modest duties because, at this stage, he believed that import tariffs were more important as a tool of fiscal policy than as an instrument for promoting manufactures.”

[2] Arguably from Cambridge, UK, to Cambridge, MA, with Paul Samuelson occupying the place that Alfred Marshall had in the mother country a generation or two prior to him.

[3] Cohen and De Long (2016: 9-10) argue that: “The government did not tax and spend to do this. It didn’t have to. Instead, the government gave railway companies huge tracts of valuable land. Government spending as calculated by national income accounts was a small share of GDP in the nineteenth century. But any government that builds infrastructure and allocates land title on the scale of the nineteenth century US government is big government incarnate.” On the size of the US government that grew from about 2 percent to about 8 percent of GDP, from the early republic to 1914 see Sylla (2000).

[4] But as well by some marginalist authors like John Bates Clark. And it is not clear that Commons and some of his followers did, in fact, break from marginalist conceptions of the economy (McColloch and Vernengo, 2020).

[5] Again, Cohen and De Long (2016: 13-14) argue that: “After World War II, under Republican president Dwight D. Eisenhower (who defined the center of American politics) and his successors, both Democratic and Republican, it was again government that led the next reshaping of the US economy in... major ways… This was a big-time exercise in hands-on direction, in deliberate winner-picking, and it was a very big winner for the United States.”

[6] That is evident in his work with Anna Schwartz on the monetary history of the US. A study done for the National Bureau of Economic Research, an institution intimatelly connected with the ideas of Wesley Mitchell, another key institutionalist author.

[7] That is not to say that there are not some conventional ideas, even in the case of this iconoclastic authors. In the same vein, John Maynard Keynes did remain in some respects a prisioner of marginalist ideas.

[8] On neoliberalism see my response to Philip Mirowsky, Vernengo (2014).

References:

Cohen, S. and J. B. DeLong (2016), Concrete Economics: The Hamilton Approach to Economic Growth and Policy, Boston: Harvard Business Review Press.

Collini, S., D. Winch and J. Burrow (1983), That Noble Science of Politics: A Study in Nineteenth Century Intellectual History, Cambridge: Cambridge University Press.

Helleiner, E. (2021), The Neomercantilists: A Global Intellectual History, Ithaca: Cornell University Press.

Irwin, D. (1996), Against the Tide: An Intellectual History of Free Trade, Princeton: Princeton University Press.

Irwin, D. (2004), “The Aftermath of Hamilton’s ‘Report onManufactures’,” Journal of Economic History, 64(3): 800-821.

McColloch, W. and M. Vernengo (2020), “From Regulation to Deregulation and (Perhaps) Back: A Peculiar Continuity in the Analytical Framework,” Centro Sraffa Working Papers No 46.

Sylla, R. (2000), “Expermiental Federalism: The Economics of American Government, 1789-1914, in S. Engerman and R. Gallman (eds.), The Cambridge Economic History of the United States, vol. II, Cambridge: Cambridge University Press.

Vernengo, M. (2014), “Who's Afraid of Neoliberalism,” INET Debate on Neoliberalism.