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EH.NET BOOK REVIEW
Published by EH.NET (May 1998)
Peter McNamara, _Political Economy and Statesmanship: Smith, Hamilton, and
the Foundation of the Commercial Republic_. DeKalb: Northern Illinois
University Press, 1998. xi + 191 pp. $35.00 (cloth) ISBN 0-87580-228-1.
Reviewed for EH.NET by Richard Sylla, Department of Economics, Stern
School of Business, New York University. <[log in to unmask]>
TWO FOUNDING FATHERS
Peter McNamara, a political scientist at Utah State University, compares
and contrasts the political economies of Adam Smith (1723-1790), founding
father of Economics, and Alexander Hamilton (1757-1804), the founding
father of the United States most involved in shaping the country's
financial and economic systems. From a thorough study of the writings of
the two-- and in Hamilton's case, from his activities in the public arena--
McNamara draws out a number of implications and conclusions. His bottom
line may surprise you, although it did not surprise me: "The chief
conclusion...is that the _example_ of Hamilton's words and deeds provides a
more useful guide for a liberal statesman than does the economic _model_
yielded by Smith's science of political economy" (McNamara's emphasis).
This conclusion is related to McNamara's own agenda, to which I shall
return.
The careers of Smith and Hamilton intersected in the great events of the
last quarter of the 18th century. _The Wealth of Nations_ appeared just
before the Declaration of Independence, and in it Smith devoted some
attention to the "colonial disturbances." He gave little credence to
American protests over taxes and mercantilist regulations. Taxation of the
colonies was justified by Britain's costs of defending them, and
regulation-- while bad in principle-- had done little actual harm. For
Smith, the Americans' real economic advantage was, and long would remain,
agriculture. Smith thought the Americans were fortunate in this, because
his theories had persuaded him that the productivity of agriculture was
superior to that of either manufacturing or commerce. He also thought that
rural life was less degrading of the human spirit than life in cities.
Smith's preferred solution to the colonial disturbances was peaceful
separation. By saving on the costs of defense, this was in Britain's
interest. But he realized that peaceful separation was "visionary" because
it conflicted with the "pride" of the British nation and its ruling
classes. His fallback position was therefore to grant the colonies free
trade and representation in Parliament. That would likely satisfy the
ambitions of colonial politicians. Given the superior productivity of
agriculture and therefore America's economic and demographic prospects,
America's leading men could look forward to the day when the seat of empire
would move there. Had George III and Lord North followed Smith's advice,
Parliament might now meet in Chicago, Toronto, or Kansas City, with Tony
Blair, Jean Chretien, or Bill Clinton as Prime Minister, and the British
Isles as somewhat more populated constituencies than Hawaii, Bermuda,
Puerto Rico, and the Falklands.
Smith's work was well known to the U.S. founding fathers. His political
economy extolling reason, enlightened self-interest, free trade,
agriculture and rural life, and America's long-term prospects appealed to
the likes of Jefferson, the idealist, and Madison, the realist, both
members of Virginia's planter aristocracy. Much of it also appealed to
Hamilton, like Madison a realist, but one with a more commercial and
industrial outlook. But parts of Smith did not. Hamilton's 1791 Report on
Manufactures, as has often been noted, is an extended and critical
commentary on Smith's views. These views, given their appeal to many U.S.
leaders, had to be addressed and in some cases refuted if Hamilton was to
achieve his goals.
Because he dared to disagree with Smith and because of Smith's icon-like
status amongst Jeffersonians, libertarians, and mainstream and
public-choice economists, Hamilton's detractors have tended to dismiss him
as a mercantilist, a regulator, and a statist. His admirers, in contrast,
have viewed him as a modernizer, an advocate of economic growth and
development with advanced insights into the roles technology and finance
would play in them. Hamilton was not encumbered with the baggage of
Smith's labor theory of value, his quaint theoretical notions of
agriculture's superior productivity, his inadequate appreciation of new
industrial technologies, his primitive ideas on money and finance, his
laissez-faire ideology regarding government, or his undeveloped concepts of
the threats nation-states might pose to one another in pursuing their real
or imagined self-interests.
McNamara's contribution, it seems to me, is to move to the side these
common characterizations and caricatures of Smith and Hamilton, and to
raise to a higher plane the analysis of their agreements and differences.
Simply put, McNamara says that the key difference between Smith and
Hamilton is over method. Smith developed political economy as a deductive
system, the conclusions of which should be the main guides to economic
policy. Hamilton, on the other hand, distrusted the conclusions of
deductive systems as practical guides to policy, preferring instead to rely
on experience and history.
Smith launched a tradition that would revolutionize political economy. He
began with broad, seemingly self-evident assumptions, such as that every
person had a natural and rational interest in bettering his or her
condition. He then deduced from the assumptions conclusions as to the
optimality of free trade and the folly of governmental interferences with
it. While still a revolutionary soldier and apparently before reading
Smith, Hamilton in 1779 pronounced his judgment on deriving policy from
such grand deductive systems: "A great source of error in disquisitions of
this nature," Hamilton wrote in a long letter, "is the judging of events by
abstract calculations, which though 'geometrically true' are 'practically
false' as they relate to the concerns of beings governed more by passion
and prejudice than by an enlightened sense of their interests."
McNamara shows that a recurring theme of Hamilton's thought, and of his
statecraft, was the notion that passions and prejudices were at least as
powerful in human affairs as rational self-interest. In his view, trade in
history expanded not so much because the traders pursued their
self-interest-- other traders had just as much of an interest in stopping
them-- but because the enlightened statesmen of the Dutch Republic,
England, and France established policies that overcame parochial passions
and prejudices. Two centuries later, I would note, the economic historian
Eli Heckscher said much the same thing in his great study, _Mercantilism_.
The problem as Hamilton saw it was that not all statesmen were enlightened.
The pride of British leaders overcame their and their country's interest
when they rejected Adam Smith's suggestions for preventing the American
Revolution. As a result of British pride and prejudice, Hamilton had to
spend six years of his life fighting the redcoats and the Hessians. In
war, he learned to distrust the practicality of deductions based on
assumptions of rational self-interest. When the war was over, Hamilton saw
American proponents of state sovereignty and weak confederation, again for
reasons of passion and prejudice, condemning the country for which he had
fought to an early breakup and the endless commercial and political warfare
that plagued the states of Europe.
Hamilton's solution, formulated in the 1780s with Madison and other
nationalists, was a strong federal government to defend the United States
against external threats and to subject the states to a higher sovereignty
that would avoid European-like strife in North America. The federal
government would have to have strong finances-- public credit, a national
bank, a common currency. Establishing these would also promote a financial
system for the country that would give rise to "a general spirit of
improvement," or economic development. The passions and prejudices of
foreign nations also suggested to Hamilton that the U.S. government would
be wise to take measures promoting manufactures, to diversify the American
economy, put idle resources to work, and capture advantages of new
technologies. This in essence is McNamara's interpretation of Hamilton's
tenure as the new nation's Secretary of the Treasury from 1789 to 1795.
To keep the federal government itself from becoming a threat to liberty,
Hamilton worked with other nationalists to create the Constitution's
elaborate system of checks and balances. A strong executive (president)
and an independent judiciary would counterbalance the legislative supremacy
favored by many Americans. In Hamilton's conception, McNamara argues,
constitutional government, not Smith's deductive science of political
economy, set the parameters for economic statesmanship.
McNamara's skillful and thorough development of Smith's and Hamilton's
contrasting approaches to political economy is the main contribution of his
book. Each approach proved influential in U.S. history. Comparing and
contrasting the Scottish theorist and system builder with the American
applied economist and statesman helps us to understand the achievements and
continuing appeal of each man's thought, and also Hamilton's deeds. In
practice, America's political economy has been mainly Hamiltonian, and with
Hamiltonian results-- a nation that is more powerful, better governed, and
richer than just about any other. Yet its dominant theory of political
economy is still pretty much Adam Smith.
McNamara's study is provocative. He makes a strong case-- which no doubt
will be contested-- for Hamilton as the more insightful and relevant
thinker on political economy. But I think he may go too far in suggesting
that Hamiltonian precepts of constitutional government could-- and maybe
should-- replace the insights of Smith and mainstream economics in guiding
statesmen. Smith, like Hamilton, recognized that there were exceptions to
the general presumption for free trade. And Hamilton understood-- even
developed-- insights of deductive economic theory. In the Report on
Manufactures, for example, he held that subsidies were better than tariffs
as a method of promoting desired activities because they achieved the
intended results without making the consumer pay a higher price.
Economics, wise economists instruct us, is a bag of tools, and there is
room under the big tent of political economy for Smithian and Hamiltonian
insights.
McNamara doesn't like mainstream, deductive economics. His agenda calls or
getting away from it, at least in political economy, and emphasizing
instead the concept of statesmanship. I doubt he will persuade economists,
though. If they can't fit entrepreneurship into their models, and therefore
ignore it, how likely are they to find a place for statesmanship?
Political scientists and historians will have to carry that torch.
I also wonder if McNamara is right in suggesting that Hamilton's example
of economic statesmanship has much to offer new and developing nations,
although I agree with him that it is relevant to current U.S. political
economy, and also relevant in studying U.S. economic history. The lesson
from Hamilton would seem to be to ground political economy in
constitutional government and the rule of law. But using that as policy
advice to leaders of new and developing nations strikes me as about as
promising as telling aspiring musicians to study and follow Mozart's
example if they want to become great composers.
I have spent a lot of time studying Hamilton. He was, I think, altogether
exceptional in his ability to define a problem, think it through, come up
with a good solution, persuade others that it was the right thing to do,
and then see to it that the solution was implemented. As the British
writer Paul Johnson says in his recent _A History of the American People_,
"The truth is, Hamilton was a genius-- the only one of the Founding Fathers
fully entitled to that accolade-- and he had the elusive, indefinable
characteristics of genius." Europeans-- Talleyrand and Lord Bryce are
additional examples-- have recognized that genius for two centuries.
Without a Hamilton, they are still trying to implement Hamiltonian
political economy. So when McNamara recommends following Hamilton's
example as a guide to political economy elsewhere, he comes perilously
close to adopting the sort of mainstream, "can-opener" economics he so
dislikes: Assume we have a genius.
Richard Sylla
Department of Economics
Stern School of Business
New York University
The Federal Reserve Bank of St. Louis REVIEW (May/June 1998) is scheduled
to publish Sylla's paper, "U.S. Securities Markets and the Banking System,
1790-1840," along with a comment on it by Kenneth Snowden. Sylla's latest
research is on the early U.S. financial system, particularly the
development of securities markets.
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