Sit Hamilton, Sit! Now Stay! Good Hamilton.

Operating a specific enterprise, whatever its aim or product, requires focusing on measurable quantities of inputs and their measurable effects on outputs. Qualitative factors may enter into that equation, but only as they are necessary to the successful attainment of the specific object in question. That is the mindset of the manager of an “enterprise association,” as the philosopher Michael Oakeshott famously called it, and is to be strictly distinguished from the study of that broader set of social phenomena that, while orderly, are not directed toward one specific goal or product.[1]

The economic perspective is really concerned with this latter, more general sort of coordination. Economics rightly understood tries to comprehend the order that arises from the unplanned actions of many persons and organizations pursuing many different goals while observing only a few basic ethical rules.[2] The history of economic thought, however, has been an ongoing struggle with those who would confuse this more general topic of investigation with the mindset necessary to manage a specific enterprise association. That is essentially the problem with Alexander Hamilton, and why his resurgence in popular culture is so deeply problematic to say the least.

I want to note at the outset, that this observation detracts not at all from Hamilton’s brilliance as a leader and a political thinker, or from his character as a person. Many a brilliant scholar in the history of thought has been led astray by the complexities of his subject matter, and certainly the subject of economics and its primary focus has ensnared not a few intellects of the first order. A singular example is Adam Smith’s own deeply conflicted musings on the nature of value: Was it found principally in the subjective valuations expressed in exchanges, or in the seemingly more objective quantitative criteria of labor and time?[3]

The very origins of classical economics could be said to stem from the conundrums that arise from these conflicting inclinations.[4] Perhaps no better illustration is to be found than in the subtle nature of that most salient of concepts at the heart of the case for free trade: the law of comparative advantage. By focusing on two seemingly objective criteria of labor and time, David Ricardo was able to illustrate nicely why specialization takes place and trade benefits individuals and nations.[5]

But if one is not careful, this most useful of theoretical illustrations can be taken to mean that economic relations are in fact based on objective sources of value, or in other words, that the value inputs of time and labor are fixed certainties. Ricardo, and later Karl Marx, certainly took the idea of labor in this way; and for Marx and those who followed in his train, objective, measurable factors came to predominate in their conception of the great society over Smith’s original insight into the unintended and unseen influences of what he called the invisible hand.[6]

Hamilton made a comparable turn, though more for reasons of politics than theory.

In the Continentalist essays, Hamilton very emphatically rejected invisible hand arguments, writing:

There are some who maintain that trade will regulate itself, and is not to be benefited by the encouragements or restraints of government. Such persons will imagine that there is no need of a common directing power. This is one of those wild speculative paradoxes, which have grown into credit among us, contrary to the uniform practice and sense of the most enlightened nations.[7]

These essays were written near the very end of the Revolution and marked Hamilton’s turn to the problem of creating new and more effective governmental institutions.

Specifically, Hamilton tried, by the end of the 1780s, to strengthen the national government through his essays as Publius, and then, a few years later, through his broad construction of the U.S. Constitution as the first Secretary of the United States Treasury. It was in this capacity that Hamilton authored his famous state papers, which included his Report on Manufactures.

Like his many other reports, such as those on banking and finance, the Report on Manufactures had a primarily political object: to secure the authority of the national government to exercise power over a wide spectrum of political and economic life.[8] Theoretical consistency and academic acumen were not his aims. It is not even certain that the issue was as important to him in the greater scheme of things as many like to insist. It took two years for him to produce the paper following the initial request by Congress that he do so.

Indeed, some historians have even questioned how seriously held were Hamilton’s protectionist views.[9] It is true that he put forward an infant-industries argument, but he argued from military exigency far more consistently. In this context, it should be noted that he was not necessarily contending that every power should be exercised by government, but rather, he wanted every claim to be constitutionally available in cases of emergency. Consequently Hamilton frequently availed himself of any justifications he could think of for government’s authority to intervene, but the most consistent theme running through all of his various state papers is that of national defense.[10]

So we should not be surprised to find that when actual proposals were raised to block trade or impose punitive tariffs, Hamilton demurred. Indeed, he actually proposed and implemented revenue-raising tariffs rather than protective ones.[11] Hamilton was aware of this inconsistency but only offered the revealing but anemic observation that “all the duties imposed on imported articles, though with an exclusive view to revenue, have the effect in contemplation.”[12] No, a duty only imposed for the raising of revenue cannot have a protective effect as well. The two types of tariffs are mutually exclusive. If you wish to maximize revenue, you most emphatically do not want to interrupt commerce. And Hamilton didn’t. Certainly not when James Madison and Thomas Jefferson contemplated exactly that with respect to trade with England.[13]

Neither philosopher nor economist, Hamilton was a statesman and a financial administrator. Understanding this, one should be cautious before making too much of the economics in the Report on Manufactures. Unfortunately, many have lacked caution in this regard. I have written on this before, and why it might be the case.[14] Carson Holloway’s Liberty Forum essay  follows in this train. It is the confusion of Hamilton’s administrative purposes with economics rightly understood. Sorting this out will, I hope, will go some way towards dispelling the Hamiltonian mystique and what, in Washington, threatens to be a disastrous policy mistake.

The aforementioned tensions within Smith’s notions of value have been resolved in modern economics in favor of the concept of subjective value.[15] What gives an item value is not the inputs that go into its production, but the ends that the product serves for its users. Successful products and services have value because they serve someone’s purposes or ends, usually the ends and purposes of many and diverse people, and even ends not anticipated by the service- or product-provider. This is what makes the invisible hand so powerful. No particular end, but many unanticipated plans are made possible by any given valued item, whether it be a natural resource, a manufactured product, or a service. The uses, and therefore values, that are thus generated, are as varied as are the different individuals inhabiting diverse circumstances.

Ricardo’s principle is still correct, but only when understood as applying to contexts where values have been already expressed; that is to say, in existing markets where individuals have revealed substantial amounts of their measurable subjective preferences through acting on their plans.[16] Comparative advantage gives you a beautiful illustration of the benefits of trade and specialization through measuring a small slice of information respecting labor and time.[17] But the dynamic relationship between changing ends and circumstances—the place where the real productive action of an economy happens—is beyond its reach.

Here, measurable aggregates of anything are not very helpful. No particular industry, or output,  or input, including time and labor, will adequately express the multiplicity of values being pursued through time. As such, no such measure will get to the question of what constitutes the creative energies that produce a prosperous or great society. What is helpful here is an appreciation of the sheer volume of information that an economy must coordinate among active and alert entrepreneurs, producers, and consumers—information of changing circumstances and changing wants as transmitted through various relative relations expressed in prices.[18] The more easily and effectively such information is transmitted, the more likely an economy is to flourish.

From Hamilton’s time forward, the velocity with which information is transmitted and utilized has been ever increasing. This change in circumstances is the critical condition by which Hamilton’s report should be evaluated. The Report on Manufactures is a document of its time and place, and there it should stay.

This is true even by the standards of Hamilton’s most consistent purpose, that of military defense. If taken out of context, the argument of the report fails and fails completely. Holloway is quite right to stress that Hamilton laid “more emphasis” on the theme of “independence and security.” But this should provide no solace to those who would seek counsel in Hamilton’s prescriptions.

We might reasonably forgive Hamilton for looking only to the measurable inputs of skins, iron, wood, flax, bricks, ardent spirits, paper, fur hats, sugars, oils, and copper. But it would be folly for us to do so, for exactly the reasons already expressed: direct experience of the vital importance of the quick, reliable transmission of information. There are today, for all practical considerations, few products but what are comprised of components from all four corners of the earth.

In Hamilton’s day it was otherwise. An army moved slowly by land or sea. The products Hamilton listed were the steady supplies required of men who measured their steps not in minutes and hours, but weeks and months. Wars were long, grueling affairs when undertaken by the most advanced powers of that day. But not now. Even when combat in contemporary theaters of conflict lasts years, the particular engagements of the military demand lightning-fast delivery. That means making the very best use of many different types of technology, and applying those resources efficiently.

In Hamilton’s day, there was iron and the beginnings of steel. Today there are well over 3,500 different grades of steel. Only people steeped in research and development today know what they need and when they need it. Protective tariffs will not ensure their supplies. They will only hamper them by limiting their choices on the world market.

And if we were speaking of an outright conflict between technologically advanced nations, the relevant timeframe certainly would not be wide enough to allow us to pull our own iron from our own mines, smelt it into bars, and forge it into steel of whatever grade. An attack would simply arrive too quickly and be too devastating. If there were anything left to measure afterwards with respect to productive capacity, it most certainly wouldn’t be with the ones who hampered and retarded the processes of innovation and efficient exchange.

As for the rest of Hamilton’s arguments, they seem more pertinent to the United States when it was a developing economy than to the nation today.

America’s industries are not in their infancy. We have problems of adaptation and transition, problems that come at us faster and more furiously than in the past, but it hardly makes sense to try to freeze technological and economic change to yesterday’s delivery-and-production systems. Surely when it comes to American industry, Hamilton’s prescriptions, as Holloway himself notes, were not intended to apply to “manufactures long established.” To what, then, in our context can they apply? To precious little, and applying these prescriptions would be more harmful than helpful if directed to any entrepreneurial startup worth supporting!

Failing factories are an undeniable tragedy for those who lose their jobs. But confining them and future generations in the same line of work for generations on end through protectionism is not an effective social policy. It is this tragedy that has produced what Holloway calls the “raw political fact” of the rebirth of interest in protectionism. It runs squarely into the raw facts of economic life. No one will be well served by ignoring those. That is where the debate belongs, not with Hamilton’s report of December 1791.

[1] Michael Oakeshott, On Human Conduct (Oxford, 1991), pp. 112-121.

[2] James M. Buchanan, What Should Economists Do? (Liberty Fund, 1979), pp. 280-283.

[3] Adam Smith, “Of the Natural and Market Price of Commodities,” Volume I, Chapter VII of An Inquiry into the Nature and Cause of the Wealth of Nations (Liberty Fund, 1981), pp. 72-81.

[4] James M. Buchanan, Cost and Choice: An Inquiry in Economic Theory (Liberty Fund, 1999), pp. 3-9.

[5] David Ricardo, On the Principles of Political Economy and Taxation, in The Works and Correspondence of David Ricardo, Volume 1 (Liberty Fund, 2004), pp. 128-149.

[6] Karl Marx, Capital: A Critique of Political Economy, Foreword to the Second Edition,   http://oll.libertyfund.org/titles/marx-capital-a-critique-of-political-economy-volume-i-the-process-of-capitalist-production?q=Ricardo#Marx_0445-01_36.

[7] Alexander Hamilton, The Revolutionary Writings of Alexander Hamilton, edited by Richard B. Vernier, foreword by Joyce Oldham Appleby (Liberty Fund, 2008), p. 187.

[8] See Appleby’s foreword to The Revolutionary Writings of Alexander Hamilton, p. ix.

[9] John R. Nelson, “Alexander Hamilton and American Manufacturing: A Reexamination,” Journal of American History (March, 1979), 971-995.

[10] Max M. Edling, “ ‘So Immense a Power in the Affairs of War’: Alexander Hamilton and the Restoration of Public Credit,” William and Mary Quarterly (April 2007), 287-326.

[11] See Nelson, p. 992; also John E. Crowley, The Privileges of Independence: Neomercantilism and the American Revolution (Johns Hopkins University Press, 1993), p. 154.

[12] Alexander Hamilton, Report on Manufactures, in State Papers and Speeches on the Tariff, edited by Frank William Tausig (Harvard University, 1892), p. 62, available at http://oll.libertyfund.org/titles/taussig-state-papers-and-speeches-on-the-tariff.

[13] Nelson, p. 977; Crowley, pp. 139-141.

[14] See http://www.libertylawsite.org/2013/02/12/alexander-hamilton-and-the-politics-of-impatience-part-i/; and Hans Eicholz, “Hamilton, Harvard, and the German Historical School: A Short Note on a Curious History,” Journal of Private Enterprise (Fall 2014), 43-59.

[15] Buchanan, Cost and Choice, pp. 9-12.

[16] Israel Kirzner, The Economic Point of View: An Essay in the History of Economic Thought (Sheed Andrews McMeel, 1976), p. 177.

[17] Manuel Ayau, Not a Zero Sum Game: The Paradox of Exchange (Universidad Francisco Marroquín, Guatemala City, Guatemala, 2007).

[18] Israel Kirzner, Competition and Entrepreneurship (Liberty Fund, 2013), pp.108-127.