Carson Holloway’s Liberty Forum essay provides an opportunity to discuss an important historical document with current debates about the American economy in mind.
The chief issues that Alexander Hamilton raises in his 1791 Report on Manufactures are the role of manufacturing in the economy and government’s role in encouraging it. It should be remembered that the context in which Hamilton is writing is the transition from British colony to independent nation, and the security concerns faced by the Americans after they won their independence. Three European empires (France, Spain, and Britain) were present on the continent; the Americans were plagued with excessive war debt; and the economy was organized to supply British manufacturing not produce its own goods. The new country’s economy was largely based on agricultural production and trade, making it undiversified and thus vulnerable to the uncertainties of crop production.
Hamilton provided a vision of a new U.S. economy that could produce the goods its people needed for domestic tranquility and economic prosperity, and at the same time produce the goods that were essential for national defense. Doing so meant, in his mind, governmental policies that would encourage manufacturing primarily through the use of tariffs and bounties.
Why the need for government involvement in the encouragement of manufacturing? In part because British policies had set the American economy on the path of reliance on British manufacturing. Hamilton was trying to reorient the economy of the United States to enhance the nation’s independence. He realized that true independence in a political sense would not be realized until economic independence was gained, and it required a vibrant manufacturing economy that would diversify the economy and help to protect it when the agricultural sector was lagging. He crystalized his view by stating that, “Not only the wealth but the independence and security of a country appear to be materially connected with the prosperity of manufactures.”
Hamilton’s support for manufacturing was the result, in part, of his experience during the War for Independence. As General Washington’s aide-de-camp, Hamilton felt the frustrations that resulted from Congress’ inability to adequately supply American troops—a laxity that hampered the military effort so severely that widespread property conscription was necessary to fill the void. Supplies as basic as uniforms, boots, food, and munitions were in such short supply that American soldiers were at a disadvantage on the battlefield.
Recall that congressional tardiness in paying the troops even brought the nation to the brink of a military coup that Washington suppressed at Newburgh, New York on March 15, 1783. Hamilton carried these experiences forward and forever linked economic production to military capacity, national security, and domestic order.
Holloway’s essay does an excellent job of laying out Hamilton’s reasons for promoting manufacturing. He also explains why free-market objections to Hamilton’s economic nationalism need to account for the realities of economic practice. Holloway correctly points out that Hamilton was not a statist. He was generally in agreement with Adam Smith on most economic principles, but he was a statesman whose economic and political theories were inspired by the practical challenges of governing an infant nation. True independence would require encouragement from government because U.S. manufacturing was underdeveloped given the role that the colonial economy played in the British economic system. The debts that had been piled up by the Americans in fighting and winning the war could only be paid off if the economy were sufficiently productive to provide tax revenue—revenue that was also needed for infrastructure development.
Secretary Hamilton was also concerned that the supply of labor was insufficient. Increased immigration was necessary to bolster that supply and keep the cost of labor down. Cheaper labor would make domestic production more efficient and thus encourage the purchase of domestic goods. Hamilton, however, pushes the expansion of the labor pool too far. He identified groups of people who were either idle in labor or underemployed.
These included women and children, who were commonly employed in the factories of Europe, but in America typically confined to working in the home and on the farm. Employing women and children in manufacturing would, says Hamilton, render them “more useful”—including children who become more economically useful at an earlier age. He suggests that England, where more than half of those employed in cotton manufacturing were women and children, be the U.S. model in this regard. It may be unfair to Hamilton to expect that he would anticipate the abuses of factory owners in the industrial age, but he was uncharacteristically blind, in this instance, to the potential evils that mere self-interest would inevitably breed.
Prominent among those who resisted Hamilton’s efforts to promote manufacturing were the Jeffersonians, who were concerned that it would destroy not only the primacy of agriculture, but also its cultural foundation. Thomas Jefferson famously declared that yeoman farmers were “the chosen people of God, if ever he had a chosen people.” He was concerned that manufacturing would lead to the growth of morally corrupt cities like those he had seen in Europe. Hamilton, by contrast, argued that manufacturing would benefit agriculture and the moral ethos: The diversification of the economy would help to keep demand high for agricultural goods and a more prosperous economy would boost demand for those goods. Moreover, manufacturing would advance the productivity of agriculture, making less land necessary for cultivation. Putting idle and underemployed individuals to work in factories would improve their character as well as the economy. Hamilton was insistent that the promotion of manufacturing was in the common good and not merely to the advantage of the North.
What are we to make of Hamilton’s view that “the incitement and patronage of government” in manufacturing would benefit the new country politically, economically, and morally? The modern economy he advocated required a banking system, public debt, and something akin to industrial policy. He was an economic nationalist who promoted autarky as the end of industrial policy. He suggested that government use duties and bounties to protect and encourage domestic production. What may be lost in economic efficiency, if anything, would be counterbalanced by the benefit of greater economic and thus political independence, and greater security.
Bounties were especially important given that American manufacturing was lagging in its development compared to European rivals. The risks and capital necessary to start a new production process could be minimized by bounties, for these would reward entrepreneurs who accepted the challenge to put their capital on the line in hopes that it would lead to efficient production and plentiful demand. Without bounties, it was far less likely that producers would risk competing with mature foreign producers. Once domestic manufacturing was established, bounties and tariffs would, in most cases, be unnecessary. The point, Hamilton emphasized, was to get manufacturing started on a large scale.
The governmental policies he favored also included industrial espionage. This was necessary, he believed, since European governments prohibited the export of methods and machines that gave their producers a distinct advantage. Such governmental involvement was part of the economic reality with which the new nation had to contend. Purely free competition was an abstraction. Protectionism by governments was a reality that had to be addressed with in-kind policies that protected and encouraged domestic production. In Hamilton’s mind, a certain degree of governmental involvement in the economy was compatible with free-market principles.
He was not unaware that there would be objections to his policy proposals on constitutional grounds. Here of course we again see the divide between him and the Jeffersonians. They found no textual support for state development of manufacturing. They criticized Hamilton’s reading of the General Welfare Clause as justification for his programs.
Under the Hamiltonian view, as long as the federal government’s spending was for the “general interests of learning, of agriculture, of manufactures, and of commerce,” it did not violate the Constitution. The Jeffersonian retort was that such a broad construction of the General Welfare Clause turned it on its head by empowering government rather than limiting it. At one point, Jefferson complained to President Washington that Hamilton’s policies called into question whether the new government was in fact a limited government.
This debate was and remains a vitally important one. How might Hamilton’s thinking influence contemporary economic thinking?
Domestic manufacturing was a central part of Donald Trump’s campaign in 2016. Candidate Trump lambasted free trade deals like NAFTA, which, so he argued, resulted in a loss of manufacturing jobs at home. He vowed to reverse the trend.
It should be recognized that there are significant differences between 18th century America and 21st century America. In Hamilton’s day, an infant nation had to worry about security concerns that have long since disappeared. The United States no longer faces the threat of foreign empires on its borders. Likewise, the country is not in its infancy in terms of developing manufacturing. It was in the 20th century that the major loss of manufacturing jobs occurred, and the United States lost its competitive advantage as wages, benefits, high business taxes, and regulations put U.S. producers at a distinct disadvantage. No doubt, the link between domestic manufacturing and national security still exists, and the general environment of global economics is colored by protectionist governments that make playing by free market rules difficult.
Hamilton was surely close to the mark in accepting that some level of governmental involvement in the economy was necessary and that it ought to be directed toward ends held in common: security and economic prosperity. But arguably, he was insufficiently attentive in two respects: he may have been too confident that government would remain within the boundaries of constitutional power; and he may have slighted the needs of local communities as opposed to the nation.
One cannot assume that in all cases what is good for the nation is good for local communities. The recent debates about free trade agreements and the loss of manufacturing jobs strikes a similar note. What may improve the national economy may adversely affect local communities. Tradeoffs are, no doubt, a normal part of politics in a representative democracy, but if too much emphasis is placed on national needs and concerns, local communities suffer and eventually lose their cultural vitality.
This problem takes on greater significance as American foreign policy moves in an imperial direction. The maintenance of a global empire intent on spreading democracy to all corners of the earth is apt to subordinate local needs and concerns to what is characterized as the paramount objective of American hegemony in the world.
Even in the area of education, the prominence of globalism over localism is apparent. The emphasis on STEM (science, technology, engineering, and mathematics) is a case in point. It may benefit the nation in terms of military preparedness, economic competitiveness, and in other regards, but this emphasis has led to a depreciation of the humanities and the liberal arts to the point that we will soon lose sight of what we are defending and what American civilization is. Security and prosperity should be connected to higher ends of civilization. They are not in and of themselves the Good.
Hamilton favored protectionism because he believed that it would make America more independent and more secure. These are worthy objectives. Protectionism may also help to preserve local communities that cannot sustain the devastating effects of industrial decline that come from increased global competition. But for protectionism to serve this purpose, it must be inspired by an appreciation for local community and the cultural conditions that foster human thriving. Hamilton was not at his best when it came to such cultural concerns.
In his defense, he was Secretary of the Treasury, and his focus was economic development. Yet even in that capacity, he should have been able to balance the needs of economic growth with the needs of higher elements of civilized life. The current debate about manufacturing jobs should, likewise, be about more than economics and material prosperity. It should place the needs of the community at the forefront of policymaking and be mindful that economic efficiency is not the highest good.
Talk of American greatness is shallow if it fails to incorporate the full range of human needs. It ought also to avoid the hubris that has plagued great nations from the ancient world to the present time.