A new book by a Harvard Business School professor does not, alas, illuminate what it might be.
Thanks to Broadway, Alexander Hamilton is famous once again. One might wonder whether his unexpected stage stardom would lead at least some Americans to turn to his most important state paper, the Report on the Subject of Manufactures, which contributed so much to the Hamiltonian profile as one of the preeminent Founders of the United States. Maybe not too many did—but solid substantive reasons call us, especially now, to a reconsideration of this greatest state paper of our greatest Secretary of the Treasury.
Presented to the Congress on December 5, 1791, the Report on Manufactures, as it is more commonly known, enacts an 18th century version of an important debate that Americans are having today. Its being 226 years old does nothing to diminish the relevance of its central arguments. Such a distance in time may even offer an advantage: the possibility of understanding those arguments with a clarity undistorted by the ideological zeal and partisan anger that roil our politics today.
The Report defends a position that is still politically powerful: that American prosperity and greatness require a vibrant domestic manufacturing sector, and that government policy should be crafted to promote this end. It also acknowledges and responds to the still relevant and still potent objections that could be raised to such a policy. Finally, it sets forth the prerequisites of a pro-manufacturing policy that is moderate and sensible. By doing all these things, Hamilton’s Report on Manufactures can help us to conduct our own debate more thoughtfully, whatever side we may take on the issues it raises.
Hamilton’s Pro-Manufacturing Policy
As a statesman, Hamilton found himself entrusted with the care of a country whose economy was primarily agricultural. He believed, though, that proper care for that country impelled the government to take steps to encourage the economy to grow beyond agriculture. America’s independence and security depended on its prosperity, and that prosperity would be enhanced by the development of its manufacturing sector.
Hamilton went out of his way to assure his 18th century readers that his argument was not intended to belittle the value or the productivity of the agricultural way of life. Rather, his point was that a national economy that included both agriculture and manufacturing would be more productive than one that was merely agricultural. The growth of manufacturing, Hamilton believed, would add a diversity to America’s domestic economy that would bring great benefits: A nation that produced a wider variety of goods for export would be protected against fluctuations in foreign demand. Moreover, a more diverse economy would call forth more productive energy from the American people.
The farming way of life is gratifying to some but stultifying to others, and human beings tend to “fall below the level of mediocrity and labor without effect” when “confined to uncongenial pursuits,” Hamilton wrote. In contrast, when a variety of jobs are available, “each individual can find his proper element” and thus “call into activity the whole vigor of his nature.” As a result, the entire “community is benefitted by the services of its members, in the manner in which each can serve it with most effect.”
Because he regarded this kind of economic development as beneficial for the country, he recommended in his Report that the government take measures that would encourage it. To be clear, Hamilton was not a socialist or a statist. He did not call for a planned economy. He did, however, believe that there were certain relatively non-intrusive but helpful measures the government could pursue to encourage U.S. manufacturing. The most obvious of these was protective tariffs on foreign manufactured goods. More controversially (both politically and constitutionally), he suggested that the government pay “bounties”—we might say subsidies—to budding manufacturers.
Hamilton on the Limits of Laissez-Faire
This line of policy elicited strong objections then as it does now. In the first place, why should the government interfere in the nation’s economy in the ways Hamilton wanted, which would force it in an artificial direction different from its natural inclinations? Why not let the operations of the free market take their course and permit American manufacturing to develop as quickly as, and to the extent that, its spontaneous impulses would dictate? Surely, as Hamilton stated the objection, “the quick-sighted guidance of private interest” would, “if left to itself, infallibly find its own way to the most profitable employment.”
Moreover, if it turned out that America were to develop no manufacturing base of its own, why could it not, in that event, rely on international trade for its manufactured goods? The country, after all, was not isolated from foreign commerce. It could purchase the manufactures it needed from abroad. Indeed, doing so would seem to involve an efficient international division of labor, with each country producing the goods to which it was best suited, to the mutual advantage of all.
To use Hamilton’s word, indeed there was “solidity” in such arguments. He regarded them, however, as more true in theory than in practice—at least as far as international politics and commerce were concerned. “If the system of perfect liberty to industry and commerce were the prevailing system of nations,” he contended, then America need not do anything to promote its own manufacturing. Under such conditions, each nation would indeed produce what it could best produce and could therefore enjoy a reciprocally beneficial trade with others.
In the real world, however, nations seldom pursued such a policy. Most governments moved to exclude or discourage the importation of goods produced in foreign lands, even as they also provided bounties/subsidies to their own manufacturers so that they could “undersell and supplant all competitors in the countries to which” their products were sent. In sum, the general tendency of governments was not to seek an efficient international division of labor with a view to the most prosperous global economy, but to promote their own economic development, even if that meant imposing on the interests of foreigners. Accordingly, in protecting and promoting its own manufacturers, America would only be doing what most nations do, and indeed what it would have to do if it was to grow its own industrial capacity.
Justice to American Manufacturers
Here we might ask why the government of the United States should care if other governments provided artificial support to their own industries. In some, perhaps even in many, cases their doing so might not harm but help Americans. To say, as Hamilton did, that other nations provided assistance to their own manufacturers so they could “undersell and supplant all competitors” in the country to which their wares are sent seemed to imply that these nations were pulling a fast one and should not be permitted to get away with it. In practice, though, this “underselling” simply meant that American consumers could get goods that they want at a cheaper price—a cheaper price made possible by the expenditures of a foreign government. What’s wrong with that?
The Report on Manufactures offers two replies. First, Hamilton thought that a concern for justice required the government to take steps to protect its own producers from the effects of such policies of other nations. To be clear, Hamilton—unlike many today—did not denounce such policies as engaging in “unfair trade.” His account of European trade practices, he insisted, was not offered “in the spirit of complaint.” On the contrary, he took it for granted that other nations had every right to legislate in support of their own industries if they so wished.
Nevertheless, he also suggested that there was a certain justice in a government’s ameliorating the disadvantages to its own citizens of other countries’ policies. Given that most European governments sought to create “a monopoly of the domestic market” for their “own manufacturers,” said Hamilton in another part of the Report, a “similar policy on the part of the United States in every proper instance is dictated, it might almost be said, by the principles of distributive justice,” but at any rate “certainly by the duty of endeavoring to secure” for American citizens “a reciprocity of advantages.”
Granted, Hamilton was speaking of the extreme case, in which a nation simply closes its market to some of the products of other countries. There is no reason, however, why his reasoning here would be inapplicable to other forms of foreign intervention in the market that are harmful to the interests of American producers. If a nation refuses to admit U.S. products because they compete with its domestically produced items, it seems reasonable for America to exclude some comparable portion of its commerce from America—perhaps with a view to inducing the foreign nation to lift its trade restrictions, thus producing a more mutually advantageous reciprocity. The same thinking, however, would also point to the United States’ acting to shelter its own manufacturers from foreign competition, if that competition receives an artificial advantage from the support of its own government.
Hamilton’s comments in this context suggest two kinds of justice that seem to dictate such policies. He tentatively suggests that “the principles of distributive justice” call for reciprocal trade policies. From a purely disinterested standpoint, there is no reason why any nation’s producers should suffer under foreign trade restrictions that operate at their expense, while the producers in those other countries reap the benefits of those policies.
If all nations respected the system of liberty in trade, a just reciprocity would, apart from any other considerations, require America to pursue the same policy. To depart from it would be to impose artificial burdens on others and thus to secure an artificial superiority for American producers—contrary to distributive justice. Conversely, if the normal policy of nations is to protect their own domestic markets, then a nation that does not do likewise tolerates, perhaps contrary to the principles of distributive justice, artificial burdens on its own citizens and the artificial inequality that could be remedied by a reciprocal policy.
Again, this is only put forward tentatively, with Hamilton saying that “it might almost be said” that such policies are necessitated by distributive justice. He seems more certain of the obligations flowing from the special solicitude that governments should show for their citizens. Thus he holds that reciprocal trade policies are “certainly” called for by the “duty” the government of the United States has to secure equal advantages for its own citizens. It might seem abstractly unfitting, from a purely disinterested standpoint, that manufacturers in some nations should get the benefits of protective policies that operate at the expense of manufacturers in other nations. In practice, though, Hamilton seems to suggest, no government looked at such questions from a purely disinterested standpoint. Instead, governments thought about trade policy in terms of securing the legitimate interests of their own citizens—and they were, he indicated, correct to think of it this way.
Manufacturing, Security, and Independence
The Report on Manufactures lays more emphasis on its second response to the question of why Americans should care if their own manufacturers are undercut by foreign competition. According to Hamilton, a flourishing manufacturing sector was necessary not only to the nation’s prosperity but to its very existence. According to the Secretary of the Treasury, the “prosperity of manufactures” was essential to the country’s “independence and security.” These “great objects,” he claimed, called upon America to work “to possess within itself all the essentials of national supply,” including “the means of subsistence, habitation, clothing, and defense.” (Emphasis in original.) To create these goods self-sufficiently, Hamilton contended, was “necessary to the perfection of the body politic, to the safety as well as the welfare of the society.” In contrast, to lack any of them would be to lack “an important organ of political life and motion.” In the “various crises which await the state,” he warned the inhabitants of a country still in its infancy, “it must severely feel the effects of any such deficiency.”
The “crises” that Hamilton had most prominently in mind were wars. Indeed, the ever-present threat of war was a key concern animating his entire program as Secretary of the Treasury. He sought a sufficient provision for America’s revolutionary debts because a nation needed to be able to borrow at reasonable rates of interest in the event of war. He sought a national bank because a nation needed a large accumulation of capital from which to borrow in the event of war. And he sought to promote manufactures because a nation at war needed to be able to supply itself the things it needed to persist in the fight and ultimately prevail.
Most obviously, the nation needed to be able to provide for itself all the things necessary to keep combatants in the field—weapons, clothing, food, and shelter. Probably, however, it also occurred to Hamilton that the internal provision of “all the essentials of national supply” would permit the nation to wage war without risking the kinds of deprivation among the population that would sap the will to fight, especially in a republic whose governmental action depended on public support.
In confronting this concern for the nation’s security and independence, we approach not only the heart of the Report on Manufactures but the heart of the U.S. Constitution itself. If war were not an ever-present danger, the Constitution would not have been necessary. America could have continued as a confederacy. But since there was a constant threat of war, America needed a single government—one with the power to raise the men and money needed to defend the country from foreign aggression.
It was this same danger that required America to have a flourishing manufacturing sector of its own.
Hamilton was ambitious—for himself and for his country. He wanted America to be a great power, perhaps simply because he saw its potential to be one. Why settle for less? But apart from such grandiosity, he believed America needed, in order to maintain its independence, to be at least a significant power. Major powers across the Atlantic were exhibiting a taste for expansion into North America. French and Spanish holdings surrounded the young country. There was no reason to think the Europeans would lose that appetite just because the American colonies had outlasted the British in the War of Independence. Manufacturing was, in Hamilton’s judgment, the foundation of the nation’s war-making capacity, which was, in turn, necessary to stave off European designs.
This was not his judgment alone. We do well to recall that the Secretary’s Report on Manufactures was written at the behest of the House of Representatives. Lawmakers had asked the administration to advise them on “the means of promoting” such “manufactures” as would “tend to render” the United States “independent” of “foreign nations for military and other essential supplies.”
Special Interests Versus the National Interest
There was another important objection to the pro-manufacturing course laid out by Hamilton in his Report besides the free-market objection discussed above. The Hamiltonian proposals were also deemed to be potentially biased in they way they operated. After all, protection of American manufacturing would directly benefit the manufacturers at the expense of the American who consumed these goods, who would have to pay a higher price for them. This in turn meant a benefit to the manufacturing region of the country—the North—accrued at the expense of the more predominantly agricultural region—the South.
Hamilton disputed the premises of this argument. He admitted that the immediate effect of policies limiting “the free competition of foreign articles” would indeed be an increase in price. This was, however, merely a temporary effect. The aim of his program, after all, was not to build up some single manufacturing firm, but to encourage the development of America’s manufacturing economy. There was no danger of monopoly here, and hence no danger of increased prices in the long term, because America was big enough to sustain sufficient “internal competition” among the many and varied manufacturers its government would nurture into being.
In any case, he argued, those who made such objections were simply thinking about the whole question in the wrong way. The important consideration was not whether a pro-manufacturing policy benefitted this or that class or region. The question had to be considered in a “national view,” that is, in light of whether it was good for the country. And a pro-manufacturing policy would have to be judged to advance the good of the country if manufacturing was indeed necessary to American security, as the earlier part of the Report tried to show.
The comprehensive vision laid out in the Report did not leave out important qualifications to a pro-manufacturing effort by the government.
In the first place, since its aim was to make America prosperous and strong, it was not intended to prop up manufacturing establishments that could not flourish, eventually, on their own. Hamilton indicated as much in his discussion of bounties or subsidies to fledgling industries. “The continuance of bounties on manufactures long established,” he wrote, “must always be a questionable policy,” because such a practice implies that there are “natural and inherent impediments” to the “success” of the industry in question. The aim was to encourage what had a reasonable chance to succeed, for the sake of the nation as a whole. It was not to carry, at public expense, what could not succeed, out of a mere unwillingness to see a given industry fail.
In the second place, Hamilton’s quest for American economic independence was in no way a quest for economic isolation from the rest of the world. Again, he wanted the country to rely on itself for those materials necessary to waging war, and perhaps those necessary to keeping the people of the United States in the comfort to which they were accustomed while war was being waged. This aim left a great deal of room for trade with foreign nations in items that were not among the “essentials of national supply” but were nevertheless desirable. Thus, while Hamilton believed that most nations pursue a policy of protecting and supporting their own domestic manufacturers, he also criticized those who, “urged by a spirit of monopoly,” pushed such policies “to an injudicious extreme.” Such nations, he claimed, sacrificed “the interests of a mutually beneficial intercourse to the vain project of selling everything and buying nothing.”
Is Hamilton’s vision relevant today? It does seem to be, as a matter of raw political fact. Donald Trump’s rise to the presidency has forced a debate over many of the questions at the heart of the Report on Manufactures: whether manufacturing is necessary to American greatness and power; the degree to which other nations pursue trade policies designed to forward their own national interest; the extent to which America should reciprocate. Whether national policy ought be devised on the basis of the concerns Hamilton articulated—that is, whether those concerns are out of place in the 21st century—this we must thrash out for ourselves.
A reconsideration of this seminal document can help us to conduct that debate more intelligently, whichever side we end up favoring. Our arguments over trade policy tend to be cast as contests between ideologically pure abstractions: protectionism versus free trade, economic isolationism versus economic internationalism. The reason these formulations are unsatisfying is that they are not true to political life as we actually experience it. Hardly anybody is in favor of free trade at the expense of national security, or in favor of the protection of unsustainable industries. Hardly anyone wants to isolate the nation economically from the rest of the world or, on the other side, totally submerge it in a homogenous, global free market. Hamilton’s Report reminds us that there is considerable ground between these theoretical extremes. Any reasonable and fruitful debate is likely to have to be conducted within that Hamiltonian middle ground.