Our 250th anniversary has been used by various individuals and organizations to promote ideas and policies other than the celebration of our founding. For example, a recent piece in the Financial Times points out that since Adam Smith’s The Wealth of Nations was also published in 1776, this is time to honor Smith’s ideas. Michael Strain, the author of “On America’s 250th, remember your Adam Smith,” maintains that both the Declaration of Independence and Wealth “prioritise liberty. In the Declaration,” he writes, “Jefferson argues that individual liberty is an inalienable right. Smith argues that prosperity is advanced when market activity is free and not unnecessarily constrained by big government, powerful monopolies, trade barriers or other limits on market competition.” Both, he asserts, have profoundly influenced the United States. “The ideas animating those documents — the importance of free people and free markets to human flourishing — have profoundly shaped America and the modern world.” The author is concerned that commitment to these ideas is now under “direct assault” in America.
The author misleads. While the Declaration has been a grand, aspirational document, Adam Smith’s ideas of free markets and the “invisible hand,” while often given token obeisance, have never been the driving force of the economy or of freedom in this country.
At the country’s inception, Alexander Hamilton laid out his economic ideas in his 1791 Report on Manufactures. His proposals, not Smith’s, became the driving economic philosophy for the United States both in the Eighteenth Century and well beyond the Civil War.
Hamilton was familiar with Adam Smith’s notions of free markets and the invisible hand, but Hamilton rejected them, at least for America. Smith encouraged free international trade. Hamilton, on the other hand, sought tariffs to raise government revenue but also to protect infant American industry. Hamilton also diverged from Smith by advocating government subsidies to industry. In addition, Hamilton encouraged what were then called “internal improvements,” what today would be labeled government spending on infrastructure. Hamilton favored not lesser government but a more powerful national state that would operate to give as much favoritism to businesses as it could.
In the Nineteenth Century, Hamilton’s ideas were incorporated into Henry Clay’s “American system,” although Clay sought even higher protective tariffs than Hamilton did. Abraham Lincoln admired and followed Clay, and Clay’s principles became founding principles of the Republican party. Its 1860 platform, in addition to opposing the extension of slavery, promised to increase tariffs, pass homestead laws (which, in effect, gave away federal land), and build a transcontinental railroad that depended on federal subsidies. These were not consistent with the ideas of Adam Smith.
More crucial to the country’s early economic growth than free markets were the internal improvements of the government. The prime early example was the Erie Canal, which transformed the American economic landscape. The goods and produce of heartland America now had an international outlet through the port of New York, making New York City the economic center of the country. triumphing over Boston, Philadelphia, Baltimore, and Charleston. The canal, of course, was not the product of free enterprise, but of government, in this case New York State government. Railroads later became an economic engine, but the tracks for the intercontinental road, a product of Lincoln’s presidency, and other train routes were laid with federal government subsidies. After the Civil War, many tariffs increased to protect American industries, despite what Adam Smith wrote as desirable in Wealth of Nations.
The federal government interfered with free markets in another significant way in the decades before and after the turn of the Twentieth Century. Adam Smith believed that there should be a free market in labor. Whether that was achievable in his day is not clear, but it became increasingly difficult in the Gilded Age with the rise of massive corporations. These companies did not have to bargain with workers; they could dictate wages and working conditions — well, they could at least until the rise of labor unions, which put labor on a more equal bargaining footing with management. However, time and again, in a part of our history seldom taught, the government interfered in these “free” markets with military force suppressing unions and strikes.
A hundred years after Hamilton, another American economic giant rejected Adam Smith, the invisible hand, and free markets. Smith wrote before the industrial revolution. He posited that while companies would try to make more money than their rivals, competition would ensure that firms would level out and none would dominate the market. His ideas were formed when comparatively little capital was needed to enter a market, but his model of perfect competition did not exist with the rise of large-scale, capital-intensive enterprises after the Civil War. Then it became possible for a few giant firms to overcome competitive restraints and control significant portions of their markets. As Jean Strouse indicates in her massive and masterful biography Morgan: American Financier, J.P. Morgan, who helped shepherd the United States through several severe economic crises, saw competitive markets as inefficient and wasteful driving down the profits needed for necessary capital formation. In a process that came to be known as “morganisation,” Morgan eliminated “ruinous” price wars by combining rival companies into monopolies or cartels that controlled both prices, which could be increased, and wages, which could be reduced. Morgan insisted that the result produced greater industrial efficiency which led to greater national prosperity while leading–by coincidence, of course–to vast wealth for Morgan and other plutocrats. (Adam Smith did not foresee the vast power of the trusts and monopolies, but he did acknowledge, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”)
Any Smithian idea of a small government was destroyed in the Twentieth and Twenty-First centuries as the American state grew and then grew some more. And the notion that free markets unencumbered by government have been our primary economic driving force is indefensible. There are legions of examples, but it is clear, for example, that special tax provisions for oil and real estate industries alone, but also for many other enterprises, have tilted capital markets. Many corporate and personal fortunes have been made or increased by government contracts in “markets” that would not exist without the large, modern state. And so on, and so on.
Indeed, it is striking that it is not Adam Smith but Alexander Hamilton who is again being invoked by present conservatives. J.D. Vance recently said, “American economic policy on the right is now much more Alexnder Hamilton that it is Milton Friedman.” Axios translates this to mean that “Vance believes the GOP’s intellectual center of gravity is shifting away from free markets to a more interventionist government that promotes domestic industry.” Welcome back Hamilton
Our 250th anniversary is not a time to bring back Adam Smith. Adam Smith has never been here.
