[ This essay was first published at the People’s View Feb 2011 and has some notes as updates].
Most of us think of economic theories as lining up from left to right, from communism to free-marketism, but there is a whole other school of economics that is on a slant to that line and provides an escape from the limits of conventional economics. During the 1800s that school was so influential in the USA that it was called “The American System” or the “high wage system”. Here is something from the right winger economists at the Mises Institute complaining about one of the advocates of that system:
And those political views were clearly stated by Lincoln when he first ran for the Illinois legislature in 1832: “My politics are short and sweet, like the old woman’s dance. I am in favor of a national bank … in favor of the internal improvements system and a high protective tariff.” These three things – protectionism, government subsidies to railroad and canal-building companies, and central banking – were called the “American System” by Henry Clay. Economists have another word for them: “mercantilism.”
Practically every conventional economist from Marx to Hayek to Paul Krugman and Gary Becker shares this same contempt for the American System. According to them, it’s just dumb “mercantilism” and economics theory proves that it can’t work. But every single nation that has become wealthy since the dawn of the industrial age has embraced something very much like the American System: China, Korea, Sweden, Taiwan, Germany, and of course the USA. And every nation that has adopted or been forced to adopt the recipes of conventional economics has seen wages fall, manufacturing collapse, and the middle class disappear. That is where we are going in our era of wage cuts where even a decent education is something that middle class people can no longer afford. Sadly for America we have abandoned the American System and we are paying the price. [Obama did a great deal to start to rebuild the American System and Biden is building on it].
In the 1800s American economists marveled at how, thanks to conventional economics, the powerful British Empire was driving down wages both in the home country and in its colonies while American businesses were flourishing by paying relatively kingly wages. All the same nonsense about free trade, low taxes to encourage business, “we can’t afford it”, and so on was used to justify the misery of British workers. British workers, living on tea and bread crusts, working with their children in brutal conditions were told that their suffering was necessary for business to be “competitive”, that the country could not afford to provide them living wages, decent housing, education, and that unions were certainly unaffordable luxuries that maybe American workers could get, but not them. They were told that the best they could aspire to was to be a servant – and that the iron laws of economics, not the blind greed of the wealthy was to blame.
The weird thing about the popular acceptance of conventional economics is that the evidence of our own lives shows it to be dangerously wrong. I’m publishing this essay on the Internet, a technology that was created by publicly funded research and built out at taxpayer expense until it was able to stand on its own. Abe Lincoln would have approved. Yet all over the Internet, you can read authoritative explanations of how public investment can’t create wealth. People who make that argument often have benefited from public K-12 schools, and land grant universities (all those State U’s are a direct result of the policies of the American System). They drive on public roads, often to their public libraries, plug their computers developed with publicly funded research into power systems that were made reliable by public regulation, and type away slogans like “I never got a job from a poor person” and “you can’t spend your way out of debt” (a slogan that doesn’t even make sense for private companies) and “the government can’t create wealth”. Reading “free market” conventional economics arguments on the Internet is like listening to the Flat Earth Society on satellite radio. But we’ve had this stuff thrown at us with such great advertising and by all these authoritative university professors for so long that too many of us have come to accept it as just the way things are. And it’s not as if conventional economics doesn’t work – for some people.
The most bitter and implacable enemies of the American System in the USA in the 1800s were the slave owners. Slave owners made money by getting poor white people to beat enslaved black people into growing cotton which the slave owners exported to factories mostly in England. Their wealth came from foreign trade and they could not afford to offend the English government by, for example, having the US develop its own manufacturing industries that would challenge English exports. Slave owners were in favor of small (but violently intrusive) government, low taxes, free trade, ignorant and poor workers, and an economic theory that justified every injustice as required by economic law. They hated the idea of a middle class that would create new business and technology and possibly push them from their place at the top. They particularly hated the idea of paying taxes for projects that would benefit the middle class. And they recognized that middle class people, not just in the North but in the deepest South were the people who had the education and independence to question the morality of the slave economy. The parallels between the Slave Owners before the Civil War and their Confederate System and the people who own petrochemical businesses in our day are hard to miss when you think about it. The owners of petrochemical companies hate the idea of a middle class that might create new green technologies and business and that has the education and independence to question the morality of pollution. They depend foreign trade and can’t afford to offend the Oil Sheiks by developing green energy in the USA.
In Wisconsin [in 2011 ] there was clear battle between the American System in which middle class unionized teachers provide ordinary people a high quality education and the Confederate System in which wages race to the bottom, education becomes a luxury and power is increasingly concentrated in the hands of the Plantation owners. The states that forbid teachers unions have the worst schools in the country – that’s not a negative for the people like the Koch brothers who are at the top of the old petroleum economy. The last thing they want is a smart educated middle class starting new green businesses and asking uncomfortable questions about pollution. But we’re not getting good guidance from our economists because they have, both left and right, liberal and conservative, decided that all answers have to be found in conventional economics and not in what they think of as the discredited American System.
Despite the economists, maybe Abe wasn’t so dumb after all. Right now in the USA, managers of factories complain that they cannot get private finance to invest in American manufacturing – private equity companies and banks think that US companies should be investing in China. And there is no public bank to replace them, no “protectionism” to help them compete with the Chinese companies that the bankers love so much, [until the Biden Administration’s Inflation Reduction Act was passed] no “internal improvement” to make it cheaper for them to move products to market or access power or recycle wastes. Meanwhile the Chinese government is providing a perfect illustration of how to use the American System right and is kicking our ass.
For a good example of what China is doing, consider its recent moves to limit exports of the of rare-earth elements that are used in a lot of high tech manufacturing. China exports 97% of the rare earth used worldwide and according to conventional economics China should be happy to accept a division of labor where they dig it up and Japanese and US companies use it to make stuff. In fact, this is the classic example of what conventional economists call “comparative advantage” – China has mines, Japan has high tech manufacturing, free trade allows the materials to move from the mines to the factories. According to conventional economics, Chinese should be happy with the low wage work of digging holes in the ground in their rare earth mines. But the Chinese government is not big on believing such stupid theories and it sees no reason why Chinese workers in China should not be manufacturing valuable stuff with rare earth elements and building up the Chinese economy. So the Chinese government is saying to Japanese and American manufacturers, we know that right now you can outbid and outsell our manufacturers using this material, but we spent a lot of money on infrastructure and education and we have smart business owners and capable workers and we’re going to give them a running start in this area – we’d rather have Chinese workers doing high wage, high tech manufacturing than just operating shovels, thanks all the same. [10 years later]
According to conventional economics what the Chinese are doing is hopeless. And if the Chinese government is too incompetent and too corrupt it could easily fail by providing aid to people who don’t operate the manufacturing business well and are just wasting money. But experience shows that the Chinese government can be great at protecting infant industries and letting competent businesses develop – just as our government did when our machine industries and steel mills grew to challenge the British. And consider the results. Following the conventional theory of comparative advantage the Chinese could hope to have a couple of successful mines, a railroad to the port, some workers in the mines and some lugging freight. When the mines played out or technology changed they’d have something like the dead mining towns we have in Pennsylvania. But if they don’t mess up what they’ll have is both the mining industry and high technology companies that employ workers and engineers and that invest in new technology. Ten years from now those factories may be exporting extremely valuable finished products like solar power units. And those factories will be buying sophisticated goods and services from other Chinese companies. Theory says it can’t work, but despite theory, China has a number of of hugely prosperous companies that are able to pay higher and higher wages and compete worldwide thanks to just that sort of government assistance. Meanwhile, by following the theories of conventional economics, the USA has become a nation that exports scrap metal and recycled paper boxes that were used for manufactured goods imported from China. Theory is wrong: the American System works and you don’t have to be American to use it.
Henry Carey who was one of the most well known economists in the USA in the 1850s and was a very influential advocate of the American System is practically unknown these days. Carey said that conventional economics was a theory designed to explain and justify the misery that it caused. One of the conventional economists who was angered by Carey’s ideas was a guy named Karl Marx. As I said above, conventional economics is accepted from left to right – we have to get off that line to see an alternative. Marx accepted many of the basic ideas of standard economics. He just thought that increasing misery would result in a revolution that would destroy capitalism once and for all. Marx wrote a series of articles that attacked Carey by defending the British colonization of India. Marx’s thesis was that under British rule, “free trade” and comparative advantage would modernize India, sweeping away the superstition and ignorance of the unfortunate Indians and bringing them the benefits of the British civilization and a modern economic system which would eventually lead them, somehow, to a revolution. Indians didn’t see things the same way. What they saw was that “free trade” was a method of destroying Indian manufacturing and locking Indians into low wage jobs picking cotton while English companies manufactured valuable cloth for export.
They saw that before “free trade” was imposed on them by British soldiers, India had its own textile industries. They didn’t accept the idea that the iron laws of economics condemned them to slaving in the cotton fields while English factories used modern machinery to process the raw materials. And if you look in the center of the Indian independence flag you will see a spinning wheel symbolizing Mahatma Gandhi’s “unrealistic” campaign for Indians to make their own cloth despite the “laws” of economics. Gandhi urged Indians to defy British laws and the claimed efficiency that comes from economics laws of comparative advantage and to spin their own cloth by hand. And by doing so, they forced the British to give them independence and then, despite those iron laws and Karl Marx, it turned out that Indians could also build a mechanized textile industry and even make their own machinery.
Today we are told by conventional economists to accept the iron laws of economics, work harder for less, get used to school closings, roads with potholes, slums, trains that make people from other countries laugh, sitting in endless traffic jams, pollution, and social disorder because – why because we can’t afford anything better. We could accept that and leave the American system to other countries, or we could follow the leads of Abraham Lincoln and Mahatma Ghandi and make the world better.
See
Manufacturing and Christine Romer
Robert Reich’s paper wizard economics
Economic Reconstruction blog and The Other Canon for more detailed information on the American System.
krebscycle 
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