Unlike most people who reference – usually in support of protectionist schemes – Alexander Hamilton’s 1791 Report on the Subject of Manufactures, I’ve actually read the entire document, carefully. At around 33,000 words, it’s long, but certainly not a terribly heavy lift. And while Hamilton had little of Adam Smith’s or Thomas Jefferson’s talent for composition, his writing style isn’t half-bad.
No one who reads this Report can help but be impressed with Hamilton’s deep intelligence and learning. The reader also encounters several glimpses of a talented economist at work. Alas, though, these are only glimpses. On the whole, Hamilton put more trust in government officials than in market forces to allocate capital and resources in ways that will best industrialize a fledgling economy. He didn’t adequately understand the role of prices, profits, and losses at allocating capital and resources – or, perhaps instead, he understood the logic, but mistakenly supposed that that logic is weak in economies not yet industrialized.
I quickly add that, nevertheless, there is very little in Hamilton’s Report that supports the case for protectionism or industrial policy in the America of the 21st century. Were Hamilton alive today, he almost certainly would not only oppose, but oppose vigorously, Trump & Co.’s case for Trump’s tariffs. Worth noting explicitly is that Hamilton welcomed net inflows of foreign capital (which cause trade deficits) while Trump & Co. insist that these net inflows are a national emergency.
Here two slices of my latest AIER column, which is on Hamilton’s Report.
Hamilton relied on Adam Smith (also without naming him) to expose the errors of physiocracy — that is, the belief that net economic value is produced only by agriculture. Yet Hamilton went further, arguing that manufacturing can be more productive than agriculture. In making this argument, Hamilton was impressive; one might even sense in it an anticipation of some insights revealed by economists’ marginal revolution of 80 years later.
Regardless of how much or little Hamilton intuited of marginalism, he deserves credit for emphasizing the reality and significance of opportunity costs. To produce some increment of agricultural output requires that some increment of manufacturing output not be produced. And that increment of agricultural output is worthwhile to produce only if its value exceeds that of the foregone manufacturing output. Thus did Hamilton defuse the arguments of persons who believed that, to establish the case for keeping America an agricultural nation, it’s sufficient to point to the positive market value of agricultural output.
In this way, and some others, Hamilton revealed a keen ability to think insightfully about economic matters. Nevertheless, on a full assessment, Hamilton in the Report got more wrong about economics than he got right. Not content to support only the removal of artificial barriers in the US against domestic manufacturing, Hamilton argued strenuously that the government must actively promote American manufacturing. That promotion should consist chiefly of subsidies (“bounties”) supplemented by protective tariffs.
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Not only was Hamilton’s case for protection confined to the need to stimulate industrial capacity in a country lacking such capacity, he also preferred subsidies over tariffs (because tariffs, unlike subsidies, reduce supplies of targeted goods), and he welcomed, rather than bemoaned, net inflows of foreign capital.
Nevertheless, Hamilton ultimately had too little confidence in free markets. The late Gordon Wood’s assessment of Hamilton-as-economist is accurate:
Hamilton was so wedded to a hierarchical view of society that he could only imagine industrial investment and development coming from the top down. Thus he was incapable of foreseeing that the actual source of America’s manufacturing would come from below, from the ambitions, productivity, and investments of thousands upon thousands of middling artisans and craftsmen who eventually became America’s businessmen. Hamilton’s historical reputation as the prophet of America’s industrial greatness therefore seems somewhat exaggerated. He certainly wanted a powerful and glorious nation, but he was no more capable of accurately foretelling the future than the other American leaders.
