Friedrich List's The National System of Political Economy A Critical Analysis from the Perspective of the

Austrian School of Economics

Bachelor Thesis

submitted to
Professor Dr. Dres. h.c. Bertram Schefold
Chair of Economics and Economic Theory
Faculty of Economics and Business Administration

Goethe University
Frankfurt am Main
by
Sascha Klocke
Hoher Weg 29
06886 Lutherstadt Wittenberg
Telephone: 03491/442541
Matriculation Number: 3920776
Field of Study: Economics, 7th Semester

Frankfurt am Main, 10.10.2012

Table of Contents
1. Introduction.............................................................................................................1
2. The National System of Political Economy.............................................................3
2.1. The Productive Powers and the Division of Labour...........................................4
2.2. The Nation-state..................................................................................................6
2.3. The Stages of Development and the Perfect State..............................................8
2.4. Free Trade and the National Interest...................................................................9
2.5. Protectionism....................................................................................................11
3. The Austrian School of Economics.......................................................................13
3.1. Praxeology and Catallactics..............................................................................14
3.2. Consumption and Subjective Value..................................................................15
3.3. The Role of the Division of Labour in Society.................................................16
3.4. Social Utility.....................................................................................................18
3.5. The Free Market and Government Intervention...............................................18
4. The National System A Critical Analysis...........................................................21
4.1. Theory, History, and Policy..............................................................................21
4.2. The Nation-state and National Interest.............................................................24
4.3. Development.....................................................................................................27
4.3.1. Production and the Productive Powers.......................................................27
4.3.2. Progress, Growth, and the Stages of Development....................................30
4.4. Free Trade and Protectionism...........................................................................32
4.4.1. Free-Trade Theory and the Montaigne Fallacy..........................................32
4.4.2. Free Trade, the Balance of Payments, and Dependency.............................33
4.4.3. The Ricardian Law of Comparative Advantage.........................................38
4.4.4. Effects of Protectionism.............................................................................39
4.4.5. The Infant Industry Argument....................................................................42
5. Development and Economic Nationalism in Modern Society..............................51
5.1. Trade and Development....................................................................................51
5.2. East Asia and Latin America Two Paths to Development.............................54
5.2.1. Latin America and Import Substitution Industrialisation...........................55
5.2.2. East Asia's Export-oriented Development..................................................57
5.3. Free Trade in the Twenty-first Century Kicking Away the Ladder............60
6. Conclusion.............................................................................................................63
7. Bibliography..........................................................................................................66
i

1.

Introduction
When List wrote The National System of Political Economy1 in 1841, he set out

to challenge the laissez-faire theories of Classical economists Adam Smith and JeanBaptiste Say, and to offer an alternative theory that would help the nations of the
temperate zone, Western Europe and North America, to develop their economies and
industrialise in the face of British economic dominance, and to extend their influence
and power over the torrid zone, the rest of the world. He established a dynamic
system of economic development, and, basing his theory of political economy on the
observation of economic history and economic reality, laid the groundwork for what
was later to become the German Historical School.2 Especially his arguments for
infant industry promotion as a path to industrial development are well known, and
while he was not the originator of the concept, which stems from Alexander
Hamilton and Daniel Raymond, he helped popularise it greatly.
But not only the Historical School should follow List's path. In contrast to the
Classicists, who tried to eliminate political aspects and nationalism from economic
theory, List put politics and the nation back at the core of his political economy,
laying the groundwork for modern state-centred approaches to political economy. 3
List's classification of countries into the temperate zone and the torrid zone has been
taken up by various theories, amongst them Johan Galtung's theory of imperialism
and Ral Prebisch's dependencia theory, albeit with a shift towards a critical
examination of the relationships between these zones. Whereas List, as we shall see,
advocated the hegemony of the temperate zone over the torrid zone, Galtung and
others criticise this dominance of, in modern terms, the nations in the centre
(including Japan, which only industrialised after List's death) over those in the
periphery, and try to discover ways to overcome it.4
Today, following the explanatory crises of neoclassical theory and neoliberal
policies, heterodox approaches like those of development economists Erik S. Reinert
and Ha-Joon Chang, who seek a middle ground between a radically free market and
complete state control of the economy, are increasing in popularity. 5 Chang's new
historical approach takes up List's analysis of the industrialisation of Great Britain,
which, contrary to common belief, did not happen under a regime of free trade, and
1
2
3
4
5

From here on referred to as the National System.

Salin (1967), pp. 123, 131.
Bolsinger (2004), pp. 2-4.
Galtung (1972), p. 29.
Reinert (2012), pp. 15-17.

expands it to the rest of the central nations, as well as East Asia. In his book Kicking
Away the Ladder: Development Strategies in Historical Perspective6, Chang refutes
the orthodox claim of laissez-faire industrialisation, tries to again determine the role
of governments in economic development by looking at economic history, and
expands upon List's theory of infant industry promotion by examining further policy
tools for a state-led economic development.
When criticising neoliberal economic policy, which is based on advocating small
government, laissez-faire policies, and free trade, it is worthwhile examining to what
extent it actually complies with its stated foundations. Here, another school has
regained popularity over the last decades: The Austrian School of economics.
Founded by Carl Menger in the late nineteenth century, it rose to prominence in
Europe as an alternative approach to economic theory, opposing the German
Historical School. Since then, it was continuously developed by Friedrich August
von Hayek, Ludwig von Mises, Murray N. Rothbard, and others. Mises's book
Human Action: A Treatise on Economics7 remains, together with Rothbard's Man,
Economy, and State: A Treatise on Economic Principles, one of the foundations of
modern Austrian economic theory. In contrast to economists like Chang, the
Austrians do not see the free market at the core of our contemporary economic
problems, but rather continued government interference in the market.
In this bachelor thesis, we shall critically examine List's National System from
the perspective of the Austrian School, in order to establish its relevance for
contemporary economics. After laying out the foundations of List's political
economy and Austrian economic theory, we will focus our analysis on the economic
foundations of the Listian theory, especially the aspects of free trade and
protectionism, and the question of the necessity of protection for industrial
development. We will also look at the history of the textile industry in the United
States, which provides an illustrative example of the use of protectionism to further
industrial development. Then, we will look at the development paths of Uruguay and
Denmark before the Second World War, and of Latin American and East Asian
nations in the twentieth century, which provide insights into the role trade policies
play in economic development, as well as into the challenges and risks that come
with state-led approaches to industrialisation. We will finish this thesis with an
examination of the role of free trade in the twentieth and twenty-first century.
6 From here on referred to as Kicking Away the Ladder.
7 From here on referred to as Human Action.

2.

The National System of Political Economy

List begins the National System with an analysis of the economic and political

history of Western societies from the Italian city states to the British Empire and the
United States of America. He then draws upon his observations and analyses of the
history of economic development of these societies to form his own theories, first in
general terms, and, after analysing the mercantilist, the physiocratic, and the laissezfaire system, applying them to the concrete policy issues of his day, mainly focussing
on the relation of Great Britain towards the continental nations of France and the
German Zollverein, as well as the United States of America. He finishes his book
with policy recommendations for the continent in general, and Germany in particular.
List's political economy is based upon the mercantilist approach of earlier
centuries, concentrating on the development of an industrial sector using
protectionist measures, and designing trade policy to encourage both the import of
raw materials and colonial products, and the export of manufactured goods, thus
challenging the free-trade premises of the Classical economists. A main focus of his
book lies on the re-introduction of the nation as decisive economic unit, which
contests the assumptions and laws of the cosmopolitical, i.e., free-market and freetrade, economic theory of the Classicists and calls for the establishment of political
economy, which should take nationality into account and establish economic policies
for national development.8
However, List does not simply re-state the mercantilist policies, but goes much
further. By developing a theory of productive powers, he shifts the focus of economic
development from the accumulation of material wealth, the focus of the work of the
Classicists, towards the accumulation of mental capital within the nation as the
driving force of economic growth.9 Introducing different stages of economic
development, he also stresses the need for different economic policies at different
times in the nation-state's evolution, contrasting the static world of Smith with a
dynamic approach, and offering a practical guide for economic policy at any given
stage. Thus, his approach, which can be characterised as neomercantilism or
economic nationalism, gave an alternative to Classical Liberalism for the
organisation of national and international economy.

8 List (1909), p. xl.

9 Levi-Faur (1997), pp. 157f.

2.1.

The Productive Powers and the Division of Labour

The theory of the productive powers is an integral part of List's ideas on political
economy and national development. It is also a fundamental difference of List's
theory and the predominant Classical theory of the school of Adam Smith. List
states: The causes of wealth are something totally different from wealth itself. []
The power of producing wealth is therefore infinitely more important than wealth
itself; it insures not only the possession and the increase of what has been gained, but
also the replacement of what has been lost. This is still more the case with entire
nations (who cannot live out of mere rentals) than with private individuals. 10 He
criticises Smith's laissez-faire economics for only focussing on the aggregate
material wealth of the individual citizens to determine the wealth of the nation, and
stresses that the national productive power is not only equal to the aggregate
productive powers of individual citizens, but greater, due to the fact that the total
amount of these powers depends chiefly on social and political conditions, but
especially on the degree in which the nation has rendered effectual the division of
labour and the confederation of the powers of production within itself.11
He underlines the importance of the mental capital of society (nowadays called
human capital), which includes education, inventions, institutions, law, politics,
culture, religion, and public morale. This mental capital, which costs exchangeable
values (material resources) in the present, will lead to greater possibilities of
development in the future, just as the present state is a result of the accumulation of
mental capital by previous generations. List strongly criticises the Classicists for not
appreciating the mental work done by these individuals per se, but only in so far as
their services were paid for by material goods. This, to List, seems to be especially
insufficient when one moves the focus from the individual towards the whole nation
and the national productive power, which, as we have said above, to List is greater
than the accumulated productive power of the citizens.12
Most important in the development of productive powers is the development of a
manufacturing power (that is, industrialisation), and he dedicates more than half of
the second book of the National System to the discussion of the manufacturing power
and its relations to the other aspects of the economy. Based on the observation that
towns with a manufacturing industry have positively influenced the development of

10 List (1909), p. 108 (emphasis in the original).

11 ibid., p. 137.
12 ibid., pp. 113-117.

the surrounding countryside13, he concludes that all the mental powers of a nation,
its State revenues, its material and mental means of defence, and its security for
national independence, are increased in equal proportion by establishing in it a
manufacturing power.14 The division of labour and subsequent specialisation allow
for an ever increasing improvement of industry, agriculture, and the mental powers.
List also describes the reciprocal nature of sectoral economic development: the
growth of one sector is dependent upon the other, but in turn encourages its growth,
and vice versa. Furthermore, the development of the manufacturing power, and the
subsequent increase in the division of labour, population, and productive powers,
allows the increased use of the natural resources and possibilities of a nation, which
had been unattainable before.15 As we shall see, the significance List puts in the
productive powers vis--vis material wealth plays an important part in his argument
for protectionism as a beneficial policy for national development.
Within his theory of the powers of production, List expands on Smith's theory of
the division of labour. He criticises Smith for limiting the theory to individual
manufactures, and stresses that the same law extends its action especially over the
whole manufacturing and agricultural power, over the whole economy of the
nation.16 He points out that, as we have noted, it is not simply the division of the
process of production into several different steps, but their eventual reunification into
a single product which is of importance. As David Levi-Faur puts it: Thus, List
offers a collectivist interpretation of the production process, which is the union of
human efforts towards a common goal of development.17 Indeed, Levi-Faur notes
that the division of labour (and, according to this view, division of interests within
society) on the one hand, and the necessity to unite the divided processes under a
common goal on the other, is one of rationales of state intervention in the economic
sphere.18
However, List does not expand the division of labour fully to the international
scale. While countries have different endowments of natural resources and
agricultural potential, all nations of the temperate zone have, in his view, an equal
capability of industrialising and should thus follow nationalist economic policies to
set this progress in motion and bring it to fruition. 19 Therefore, [both] international
13
14
15
16
17
18
19

List (1909), pp. 164f.

ibid., p. 168.
ibid., pp. 170, 184.
ibid., p. 122 (emphasis in the original).
Levi-Faur (1997), p. 162 (emphasis in the original).
ibid., pp. 162-164.
List (1909), p. 309.

and national division of labour are chiefly determined by climate and by Nature
herself.20 The implications of this view on List's theory of trade and development
will be discussed below.

2.2.

The Nation-state

As the title of the National System suggests, the nation-state plays a vital role in
List's system of political economy. The nation is here seen as the link between the
individual and the whole of humanity, it is synonymous with society itself, for the
interest of society amounts to the well-being of the nation. On this, List bases the
justification of intervention in the economy: that private interest must be restrained if
it runs contrary to the societal, or national, interest. 21 Hence, he criticises the
Classicists for ignoring the nation in their economic theories, and attacks the
cosmopolitical approach for omitting national interest and basing the theories on an
artificial world where all nations of the earth form but one society living in a
perpetual state of peace.22
Accordingly, it is the nation that is the primary source of lasting prosperity. It
unifies the efforts of the individuals of successive generations in a common goal, the
national interest, and subordinates private interest to this goal, thus creating the
necessary conditions for continuous economic development, as the state is the
primary creator of the productive powers necessary for such development. It allows
for the harmonious cooperation of the different economic sectors, leading to a
cohesive whole.23
With regard to List's political economy and his policy suggestions, it is important
to examine the nature of the nation. The nation is defined by possessing one
common language and literature, a territory endowed with manifold natural
resources, extensive, and with convenient frontiers and a numerous population. 24 It
becomes a nation-state when the state, or confederation of states, encompasses the
whole cultural nation, and thus, it is this complete nation-state, and not just any state,
at which the ideas of List's political economy are aimed. 25 This is made clear when
List emphasises that states in an imperfect political condition, that is, not fulfilling
the requirements of a great nation (especially concerning territory and resources),
20
21
22
23
24
25

List (1909), p. 131 (emphasis in the original).

ibid., pp. 139-141.
ibid., pp. 99f.
ibid., pp. 132, 141, 270.
ibid., p. 142.
Levi-Faur (1997), p. 165.

cannot regulate their economy with regards to the development of a complete,

harmonious, and independent nation-state. List even goes so far as to say that, in this
case, politics must be excluded from the economic sphere, essentially recommending
an approach based on Classic economic theory.26
The idea of national independence is a major objective of this theory, and
economic independence from other nations is seen as a key factor to obtain this goal.
Hence, a sufficiently large territory is necessary. It is of such an importance in List's
system that he even declares the removal of territorial deficiencies a valid reason for
war. Another important territorial necessity, apart from mere size, is the possession of
a coast, allowing the nation to establish a commercial and military marine and
expand its powers over the rest of the world.27
To understand this notion, we have to take a look at List's theory of climate and
geography, and how it affects the nature of nations. In his view, the countries of the
temperate zone are most favoured by nature to establish great nations and an industry
of their own, as they have ample resources, favourable agricultural conditions, and a
natural superiority over the countries of the rest of the world (which he
indiscriminately called countries of the tropical, or torrid, zone, irrespective of their
actual climatical conditions). Therefore, these nations have the mandate of
developing their economy to the best extent and expand their influence over the other
countries of the world by transferring their excess productive powers and population
to them via colonisation, benefiting both the development of the colonised countries
by civilising them, and the mother nations by enriching them through trade with the
colonies, an idea in accord with the mercantilist theory of trade. In this way, just as
the nation benefits its citizens by furthering the productive powers, it benefits the
whole human race by expanding its positive influence over the less advanced
nations.28
As he considers the tropical nations generally unsuited for the development of a
manufacturing power, List concentrates his theory of industrial development on the
countries of the temperate zone, as their progress, by enabling them to expand their
power over the whole world, will bring forth the best possible development of all
countries. Political economy shall thus help great nations to perfect their economy in
manufacturing, agriculture, and commerce, and bring about political and military
power by developing the productive powers of the nation. As the national interests of
26 List (1909), pp. 157f.
27 ibid., pp. 142, 330.
28 ibid., pp. 131, 141f, 172.

the different great nations, especially when they are still developing their national
power, stand in conflict with each other, it is important for the individual state to
develop its independence and protect its economy from the interference of other
states.29

2.3.

The Stages of Development and the Perfect State

Just as List views the geographic location and the territorial properties of a
nation-state as elemental for the successful application of his economic policies, so
does the stage of economic development play a crucial role. According to the
National System, a country should not simply implement protectionism at any phase
in its evolution, but only at a certain point. To make this clear, List developed a
model of five stages of development, describing the respective characteristics of each
stage and the fitting policies for them. These stages are original barbarism, pastoral
condition,

agricultural

condition,

agricultural-manufacturing

condition,

and

agricultural-manufacturing-commercial condition.30
During the first three stages, while the countries still need to accumulate enough
mental and material capital to start a successful industrialisation process, List sees,
like the Classical school, free trade as the most beneficial means towards progress. It
is only at the beginning of the fourth stage that the state should intervene and restrict
foreign commerce, for then, the nation has the means to develop its own industrial
power, but is not capable to do so due to the overly strong competition of already
established manufacturing powers. However, as soon as this process is completed,
and the nation enters the fifth state fully developed, the state should end its
intervention and return to free trade again.31
This last stage represents to List the perfectly developed nation: in it, the national
industry is completely developed in all branches, and the sectors stand in a balanced
ratio towards each other.32 It is also important to stress that List specifies that both
agricultural production and industrial production shall be equally developed in order
to guarantees the complete economic independence of the nation. Indeed, Salin
specifically notes that List's stages model of development does not only encourage
industrialisation, it is, correctly understood and correspondingly extended, also a
warning against any over-industrialisation and any degeneration of agriculture.33
29
30
31
32
33

List (1909), pp. 329f.

ibid., p. 143.
ibid., pp. 144f.
ibid., p. 114.
Salin (1967), pp. 125f (own translation).

2.4.

Free Trade and the National Interest

As we have said, Friedrich List was not opposed to free trade per se. Rather, his
model follows the free-trade argument of the Classical authors for as long as the
respective societies have not yet reached the point where they will be able to develop
their manufacturing power, either due to a lack of mental and material capital, or due
to territorial deficiencies, and again from the point on when they reach the stage of a
perfectly developed manufacturing power which can compete with other, similarly
evolved nations. His argument is that it is contrary to the national interest to carry on
free trade instead of developing a national industry as soon as the opportunity offers
itself. This point can either be reached in the natural course of economic
development, or, in some cases, the process can be sped up by trade restrictions that
may arise during war-time, as was, for example, the case with the United States of
America during the War of 1812.
Once a country reaches the agricultural-manufacturing stage and establishes itself
as a nation-state, free trade poses several problems in the eyes of List. The most
important is the dominance of foreign manufacturing countries. List maintains that,
due to the advantage of possessing superior productive powers, early industrialised
nations will pose such a strong competition to domestic manufacturers that the latter
cannot come into existence.34 Thus, a dependency on products of the superior
manufacturing nation is created, and the national productive powers, which develop
best with the development of a national manufacturing power, cannot expand. This,
in turn, causes developing nations to remain chiefly in their agricultural state and
focus their economic activity on the export of agricultural products and the import of
manufactured goods. Apart from the obstructed development of productive powers,
List sees another problem with the dependency on foreign countries: that the foreign
demand is too unstable a factor, as it is, to a great extent, determined by political acts
like commercial policy or wars, harvests, and similar circumstances. As national
prosperity should best be continuous, this is an undesirable state of things.35
For List, contrary to the belief of the Classical School, international commerce is
not guided by natural economic laws, but by economic policy, which is shaped by the
respective power of the nations engaging in it. Therefore, it serves the nation best to
establish a solid home market, which will, due to the reciprocal nature of the growth
of the economic sectors, be both larger than the foreign market, and offer a more
34 List (1909), p. 125.
35 ibid., pp. 197f.

stable demand for the products of the national economy. A last issue is the balance of
trade. List maintains that predominantly agricultural countries are often in a negative
balance of trade with the superior manufacturing nation, and that this is the cause of
commercial and financial crises, price instability, and bankruptcies. This effect is
even amplified by the possibility to keep the unequal balance of trade in existence for
a longer period of time when the exporting nation extends credit towards the
importing nation.36
These issues, however, only arise in the trade between the great nations. With
regards to colonies, List sees no problems in the balance of trade, as the colonies do
not possess an independent national or commercial system, and because, due to the
fact that they are colonies, trade with the mother country is not affected by political
circumstances or war.37 Also, as they lie in the torrid zone, and are thus unsuited for
the development of an independent manufacturing power, the exchange of colonial
goods and raw materials for manufactured goods is a natural exchange, and benefits
the agriculture of the colony to the best possible extent. This exchange is then both
the driver of progress in the manufacturing nation, which can expand its industrial
production due to large and secure export markets, and in the colonies, which can
expand agricultural production and advance their civilisation.
Based on his experience and economic analysis, List condemns England for
intentionally suppressing the continental manufacturing industry, even though it does
not gain any benefits from it, because its colonies yield sufficient colonial and
agricultural goods in exchange for the English manufactured goods. 38 From his point
of view, the English supremacy during the nineteenth century tried to strangle the
economic development of the remaining temperate nations by trying to enforce a
free-trade regime in the whole world, even though it developed using protectionist
measures itself. It is in this light that List coined the term kicking away the ladder: It
is a very common clever device that when anyone has attained the summit of
greatness, he kicks away the ladder by which he has climbed up, in order to deprive
others of the means of climbing up after him.39
His observations of the effects of free trade on the development of all nations
suited for industry led List to conclude that universal free trade, as advocated by the
Classicists, has to be considered unnatural in terms of political economy. Therefore,
36
37
38
39

List (1909), pp. 154, 219-223.

ibid., pp. 230f.
ibid., p. 156.
ibid., p. 295.

10

the protective system for the establishment of a national manufacturing power is not
a mere device of speculative politicians which is contrary to nature, but in fact the
expression of the natural efforts of nations to attain to prosperity.40

2.5.

Protectionism

Protectionism in List's theory is the means of a nation fulfilling the necessary

criteria to transform itself from an agricultural or early agricultural-manufacturing
state into a fully developed agricultural-manufacturing-commercial state. This
system has become known as infant industry protection, and List is one of its bestknown proponents. Just as he laid out detailed conditions for the viability of
protectionism as an economic policy, so does he go into great detail to explain which
industries should be protected, and how this should be done.
First, it is important to stress that List considers protectionism only an option for
the development of the industrial sector. In the agricultural sector, he follows the
approach of the free traders, that is, the conviction that protection is harmful, and that
trade brings the most benefits. In agriculture, he supports the view that protectionism
leads to the artificial development of sectors which would likely not have evolved
spontaneously, leading to a shift of resources from the sectors that can exist under
free trade towards the protected sectors. In contrast, the manufacturing sector of a
nation is governed by other laws than those that govern the rest of the economy, as
protectionism here not only shifts resources from one sector to another, but awakens
the natural and productive powers of the nation, which were unused in the
agricultural state. Thus, industrial protection does not merely subtract from the total
wealth and power of the nation, but, on the contrary, adds greatly to it.41
This differentiation can be well explained by List's view on the international
division of labour. While the Classicists regard the outcome of free trade as natural,
arranging the international division of labour according to the comparative
advantages of the countries participating in it, List holds that this is only true in the
agricultural sector, which depends on the natural endowment of resources and on
climate. It is valid only for the trade between countries of the temperate zone and
those of the torrid zone, because the latter only supply agricultural goods and raw
materials, whereas in the manufacturing sector, all temperate nations are equally able
to fully develop their industries. If one nation has the advantage of being the first, it
40 List (1909), p. 146.
41 ibid., pp. 173-176.

11

can unnaturally suppress the natural development of like industries in the other
nations, as the latter cannot compete with the established industry. To remedy this
fact, and to further their national interests, states have to engage in protectionism in
order to help their natural development, as the protective measures would stimulate
the national economic development.42
List's approach to protection is a very practical one, for he includes the
constraints an emerging industrial nation faces in his protective policy. Tariffs are to
be introduced gradually, starting at a low level, as prohibitively high tariffs would be
disadvantageous in a nation where the industry still has to develop in order to satisfy
domestic demand. Furthermore, as long as the skill of the national industry is not yet
sufficient, the import of machinery and immigration of skilled workers should be
encouraged until the developing manufacturing nation is able to supply them itself.43
The low introductory tariffs should then rise in accordance with the development
of the manufacturing power of the nation and the accumulation of its mental and
material capital until it reaches the necessary height to completely protect the
respective industry from foreign competition, up to the point when the production
process has been optimised and competitiveness is reached. Only the most important
industries necessary for national development shall be protected heavily, while other
industries will be able to develop under a lesser degree of protection, as the
productive powers created by the core industries will give them greater productivity
from the beginning. Thus, different industries can develop at their own pace,
according to the possibilities of the nation. And even if the nation has not yet
managed to develop all industries perfectly, the nation can engage in trade with other
developed nations by offering the lower-quality goods.44
These measure shall eventually enable the emerging agricultural-manufacturingcommercial nation to fully develop its productive powers and manufacturing industry
until it can re-enter the free international trade with other advanced nations and the
colonies. List cautions against focussing solely on political objectives without
bearing in mind that, eventually, the developed state shall engage in commerce again.
This can be seen as an improvement of the old mercantilist system, where the focus
was solely on the nation, resulting in prohibitory tariffs when lower tariffs could have
brought the same, or even better, results for the national industrial development.45
42
43
44
45

List (1909), pp. 246, 253.

ibid., pp. 250f.
ibid., pp. 144f, 260.
ibid., p. 272.

12

3.

The Austrian School of Economics

Amongst the present-day economic schools of thought, the Austrian School

occupies, due to its methodological differences, a special position. While the

majority of orthodox and heterodox schools rely on the positivist approach,
collecting and evaluating historical data to formulate theories, the Austrian School
relies on the method of praxeology and deduces the canon of theoretical economics
from the self-evident axiom of human action.
Since the establishment of the Austrian School economics in 1871, when Carl
Menger published his Principles of Economics, the methodological gap between
mainstream economics and the Austrian School has widened. When Ludwig von
Mises wrote Human Action in the 1940s, he did not single-handedly develop a
completely new methodology of economics or a radically new theory, but analysed,
systematised, and explained the methods most economists were already relying on in
their work, and subsequently unified them in a general treatise on economics. 46
However, after World War II, Anglo-American economic theory achieved
predominance in the field of economics, and with it came the rise of mathematical
economics and the present-day prominence of the neoclassical synthesis movement,
marginalising the praxeological method and leading orthodox economics to almost
exclusively rely on positivism, empiricism, and mathematical models.
The Austrian theory, based on praxeology, and specifically its economic branch
of catallactics, differs greatly from orthodox economics. It is concerned with the real
actions of individuals, and not with the behaviour of artificial constructs like the
homo oeconomicus, thus coming to conclusions which are relevant for reality, and
not only valid for a virtual model environment. 47 By adhering to methodological
individualism and strict subjectivism, it is able to eliminate implicit valuejudgements and thus become a true wertfrei and objective science. This method leads
to the establishment of qualitative rather than quantitative laws, thus limiting the
sphere of pure economics to economic theory.48 Everything beyond that falls either
into the category of economic history, the other main branch of the study of human
action, or political economy, where ethical judgements and political motives are
added to pure economic theory. In the following, we shall focus on the aspects of
economic theory that are of primary relevance to the analysis of trade policies.
46 Hoppe (2007), p. 10.
47 Mises (1998), pp. 646f.
48 Rothbard (2009), pp. 1025, 1357.

13

3.1.

Praxeology and Catallactics

Praxeology, an aprioristic science like mathematics and logic, is the science of

human action. It is a deductive system that establishes laws based on self-evident
axioms and irrefutable chains of reasoning.
Ludwig von Mises defined human action in a single sentence: Human action is
purposeful behavior.49 While simple, this definition implies a number of important
concepts. Purposeful behaviour means acting towards an end which is an
improvement of the present state. If it were otherwise, man would not have to act, as
he would be in a state of perfect satisfaction. 50 Thus, as Rothbard states, [a]ll action
is an attempt to exchange a less satisfactory state of affairs for a more satisfactory
one.51 While economics focusses primarily on the material ends of a transaction, the
ends are by no means restricted to material gains, as psychological factors and
psychological satisfaction may play an important role as well.
Action implies the choosing of certain ends over others, and the respective means
to achieve them. The choice of one end over another leads to a ranking of different
ends, that is, subjective valuation. In choosing, an individual always tries to achieve
the highest possible end on his or her value scale, and tries to minimise the cost (the
alternatives foregone), therefore maximising personal utility. 52 It is important to note
that praxeology and economics are not concerned with the content of the specific
ends themselves, but solely with the means of achieving them, which constitute
human action. The end is thus a given in praxeological analysis, and the task of
evaluating them falls into the fields of ethics and politics. 53 As the ends, and with
them any speculation on their underlying motives or any ethical judgements about
them, are outside the realm of the aprioristic reasoning, economics based on this
methodology can be established as a truly wertfrei science, without implicitly
including ethical judgements.54 As action is necessarily directed towards the future, it
involves uncertainty, because future circumstances are, to a certain extent, outside of
the control of the individual, and the choice of means might prove inadequate. 55
Nonetheless, even though ex post the choice of the individual might turn out to be
unsatisfactory, it was aimed ex ante at achieving a more satisfactory state of being.
Enquiring the laws that govern human action, praxeology necessarily employs
49
50
51
52
53
54
55

Mises (1998), p. 11.

ibid., pp. 11-14.
Rothbard (2009), p. 19 (emphasis in the original).
ibid., pp. 70-72.
Mises (1998), pp. 17-21.
ibid., p. 48; Rothbard (2009), pp. 1360-1363.
Rothbard (2009), pp. 7f.

14

methodological individualism. For it is only the individual that can act, and not a
collective. While it is true, and uncontested by praxeology, that an individual is
always part of a social group, this group can only act through individuals. Therefore,
only through methodological individualism, the study of the actions of the individual,
can the action of collectives be analysed. This is necessarily so, as only individuals
have ends they want to achieve. Individuals with similar ends might join in groups to
achieve them, or have ends with regard to that group, but the collective itself does
not have any ends independent from its members and cannot act towards achieving
them.56
Having explained the concept of human action, we shall now focus on
catallactics. Catallactics is the branch of economic analysis that deals with
interpersonal exchanges and encompasses all the phenomena associated with these
exchanges. There are two types of exchanges: voluntary and coercive. Coercive
exchange signifies a hegemonic relationship between the actors and is an exchange
to the benefit of the hegemonic actor. Voluntary exchange signifies the peaceful
interaction of individuals for mutual benefit. This mutual benefit is implied in the
concept of voluntary exchange, as otherwise, the exchange would not have taken
place freely. It further implies that the exchanging parties subjectively value the
respective good of the other party higher than the good they exchange. The aggregate
of voluntary exchanges is what is known as the market, and it is the basis for a
voluntary society that is not based on violence, the contractual society. The opposite,
the hegemonic society, is then based on violence and exploitation of individuals by
the hegemonic power.57

3.2.

Consumption and Subjective Value

As we have explained, individuals act to attain a higher state of satisfaction in

comparison to their present state. In our modern day society, this is achieved to a
high degree by interpersonal, indirect exchanges. Individuals will always try to
maximise their utility. In the market society, they will do this by acquiring the best
combination of money income plus psychological factors. Other things equal,
individuals will thus try to maximise their money income, which can be allocated in
three different ways: it can be used for consumption, invested, or added to the cash
balance.58 Consumption, the improvement of the present state of an individual, is,
56 Mises (1998), pp. 41-43; Rothbard (2009), pp. 2f.
57 Rothbard (2009), pp. 79-85, 90f.
58 Rothbard (2009), pp. 216-219.

15

however, the ultimate goal of human action in the economic sphere.

Economic analysis is not limited to the study of the exchange and production of
material goods, but also includes immaterial goods and services. In fact, as Rothbard
notes, even material goods are ultimately valued for their service in helping to move
from a less desirable state towards a more desirable state, and not so much for their
physical content. A certain good is valued subjectively in comparison to other goods
by the consumer for its usefulness in achieving a certain end, in short, its utility.
Because ends are subjective for each individual, the value of each good is subjective,
too. And, just as the ends are ranked on a subjective value scale, all possible goods an
individual can acquire for a specific money income are also ranked on a value scale,
considering the trade-offs and foregone opportunities of other goods when buying a
specific good. Also, all measures of utility have to be ordinal, not cardinal, as it is
solely possible for the individual to know if he or she is better off, but not to quantify
how much better off. Accordingly, we can only know the ordinal value scale of each
individual, but we cannot objectively compare value scales amongst individuals.59
For the allocation of money income between the three possible ways mentioned
above, time preference plays an important factor. Individuals prefer to achieve their
ends in the quickest way possible, and thus, only when the most immediate needs of
lower-order goods have been satisfied will the individual allocate money towards
future consumption of higher-order goods, as the production of these encompasses
more time and foregone opportunities. As there is only a given amount of money
income (capital) available, there is necessarily a trade-off between present
consumption and savings and investment (future consumption). Only if the demand
for present goods has been satisfied, and only if the expected utility of future goods
is higher than the disutility of foregoing present consumption, will investment in
future goods be made. Thus, the individual time preference plays a crucial role in the
allocation of the disposable income.60

3.3.

The Role of the Division of Labour in Society

The principle of the division of labour is already implied in the theory of

interpersonal exchange, for it only makes economic sense in the case of two different
goods being traded. If different goods are being traded, the parties partaking in the
exchange must necessarily have produced them beforehand, and thus, a certain
59 Rothbard (2002), pp. 22f; Rothbard (2009), p. 162.
60 Rothbard (2009), pp. 15-17, 47-53, 63.

16

specialisation in production must have been achieved, with the aim of acquiring a
certain other good in exchange on more favourable terms than had it been produced
by the respective parties themselves. The extent of specialisation, and hence the
scope of the division of labour, thus lies in the size of the market. From the fact that
specialisation occurs, we can deduce that it must increase production. Most
obviously, individuals will specialise in the production of goods they have an
absolute advantage in. However, even a relative advantage of producing some goods
will be beneficial to both parties. Ricardo developed the latter aspect in his theory of
international trade, where it is called the law of comparative advantage. In the more
general sense, it is called the law of association, as it is the association of individuals
in the market that allows for specialisation in production, thus allowing for mutually
beneficia1 exchanges.61
The division of labour is an important cornerstone of society, because it allows
for the economic cooperation of individuals, regardless of their respective subjective
ends. Mises notes that it is the increased productivity of the division of labour that
created the modern society, and not society that created the division of labour.
Therefore, society is an outcome of human action.62 Confusion might arise from
the term division of labour, but due to the fact that the division of labour and
interpersonal exchange are necessarily linked to each other, it is actually a theory of
cooperation. It offers individuals with different abilities the chance to specialise in
the fields they have an absolute advantage in, and, as we have seen in the law of
association, even offers individuals with only a relative advantage to take part in the
market. Another point of confusion stems from the fact that in the market, there is
competition between different actors. However, this competition is not a violent clash
of different interests, but takes place within the cooperative framework of society and
serves to assign to each individual the best position within this framework.63
Also, the principle of the division of labour is valid for all levels of economic
activity, from one person or factory producing one certain consumption good, to
specialisation in the production of higher-order goods that will be used in the
production process of future consumer goods, from the regional to the international
level.64

61
62
63
64

Rothbard (2009), pp. 95-99.

Mises (1998), p. 145.
ibid., pp. 115-117, 143-145, 157-159.
Rothbard (2009), p. 102.

17

3.4.

Social Utility

Social utility is an important concept, especially in welfare economics and

political economy. It deals with the interrelations of personal utility and seeks to find
the socially optimal outcome of alternative policies. From a praxeological point of
view, it is only possible to deal with utilities deducible from concrete actions of
human beings (that is, in an a posteriori manner), and to do this, we have to resort to
the concept of demonstrated preference. This concept means just that: in order to
know an individuals preferences, we must see what he or she has chosen in action,
and can then deduce from this that the end aimed at by this action has been highest
on the individual value scale.65
Due to the fact that utility is an ordinal concept, it cannot be measured or
compared. Hence, the only principle to objectively determine changes in social utility
is to use Pareto's unanimity rule, meaning that social utility can only increase if no
individual is made worse off by an exchange. All other methods necessarily include a
value judgement about individual utility. Utilising the concepts of mutually
beneficial voluntary exchange and demonstrated preferences, we can conclude that
exchange on the free market increases social utility by increasing individual utility,
for the fact that exchange takes place demonstrates that both parties expect to benefit
from it, and that both value the end they hope to achieve highest at that particular
point in time.66
Other efforts to increase social utility break with the unanimity rule. The most
common case is state action. State action is coercive (for the exchange between the
individuals does not take place voluntarily, but is conditioned by laws and the threat
of the use of force), and therefore, if the state tries to redistribute income or goods in
order to increase social utility, it decreases the utility of the individual it takes from,
and increases the utility of the individual it gives to. With utility being neither
quantifiable nor comparable, we can conclude that this does not increase overall
social utility. Accordingly, the only way to maximise social utility is voluntary
exchange.67

3.5.

The Free Market and Government Intervention

The free-market system is guided by the principles explained above: the

unhampered, voluntary cooperation of individuals through interpersonal exchange
65 Rothbard (2002), pp. 1-5.
66 ibid., pp. 22f, 28f.
67 ibid., pp. 30-32.

18

and the division of labour, through which each individual tries to maximise his or her
personal, subjective utility, including both material and psychological satisfaction.
Keeping in mind that utility is always subjective and incomparable between
individuals, we can objectively conclude that the free market maximises social
utility, with society being defined as the sum of all individuals, and not as a third,
independent entity with own objectives different from those of its members, or
possessing any other means of achieving them than through the individuals. Based on
the fact that voluntary cooperation in this contractual society is mutually beneficial, it
would offer an explanation as to the origin of society based on the logical
examination of human action. Here, society not would have been the result of some
pre-existing natural communal spirit that prompted individuals to cooperate and to
form social groups. On the contrary, this spirit would stem from the fact that
cooperation is beneficial for the individual, and would later have created the
communal spirit by prolonged beneficial interactions of individuals.68
The free market is the outcome of the praxeological analysis of human action and
interpersonal exchanges. The same holds true for the propagation of the free market
by the Classical Liberals like Adam Smith, as well as the French laissez-faire
economists like Frdric Bastiat and others. The conviction that the free market, or
the invisible hand, benefits all participants was not an a priori assumption of these
economists, it was, just like in the analysis of the Austrian School, the outcome of
their efforts to understand the workings of the economy. 69 Furthermore, when talking
about the functioning of the free market, what is meant is not some automatic
mechanism, but precisely what we described before: conscious action of individuals
to fulfil their desires in the best way possible. Thus, the real difference is between
decentralised decision making of individuals and centralised planning by a
hegemonic actor (in most cases, the state), and not between an automatic, impersonal
mechanism and conscious planning by the state.70
While the free market is, of course, presently only a theoretical construct,
because in virtually all cases of history and in our present societies, there is or has
been some form of intervention into the market, which influences individual
behaviour, the valuation of ends, and the means to achieve these ends. Nonetheless,
the paradigms of economics hold true as soon as the necessary conditions can be
observed to exist in reality, even in a hampered market. As soon as there is
68 Rothbard (2009), pp. 99-102.
69 Rothbard (2002), pp. 32-34.
70 Mises (1998), pp. 725-727.

19

interpersonal exchange, the deduced laws of interpersonal exchange apply. When

labour is regarded as causing uneasiness, as it is in reality, it applies that any gains of
utility through labour will be weighed against the disutility of labour itself. Economic
theory is not only valid in an artificial state of perfection, or under certain artificial
assumptions like that of the homo oeconomicus, but under any circumstances, as long
as the basic conditions underlying the theory are present.71
Nevertheless, in order to completely understand the economic reality, we also
have to deal with the nature of government intervention, which plays a decisive role
in any society. Rothbard defined intervention as follows: Intervention is the
intrusion of aggressive physical force into society; it means the substitution of
coercion for voluntary actions.72 From this, a number of conclusions can be drawn:
Coercive action is by definition involuntary. It forces individuals to act or interact in
a manner they would not have done otherwise. Also, this means that, necessarily,
there is a loss of utility involved for the coerced individual. Therefore, coercive
action is beneficial for one actor, the one coercing (or profiting from coercive acts
like income redistribution or protectionism), and disadvantageous for the other, the
one coerced. It benefits one actor or group of actors at the expense of another and is
thus a true zero-sum game, in contrast to mutually beneficial voluntary exchange.
The most common intervention into the market is government intervention, which
can be classified in two categories: binary and triangular. Binary interventions means
that it takes place directly between the individual and the state (like taxation),
triangular means that the government intervenes in the exchange between two
individuals (like it is the case with tariffs).73 In our analysis, we shall focus on
triangular intervention, especially tariffs, as it will be the most relevant in the
discussion of protectionism.

71 Mises (1998), pp. 64-66, 643.

72 Rothbard (2009), p. 877.
73 ibid., pp. 877-880.

20

4.

The National System A Critical Analysis

Having laid out the foundations of List's political economy and the the Austrian

theory, we shall now critically analyse the arguments and propositions of the
National System, including the foundations of List's suggestions of protective
policies, as well as the protective policies themselves. We shall also take a look at the
tariff history of the United States, especially during the first half of the nineteenth
century, and the effects tariffs had on the establishment of the textile industry.

4.1.

Theory, History, and Policy

Economic theory, history, and policy are three distinct aspects of the study of
economics in general. While economic theory and history deal with the study of
human action, economic policy tries to predict future economic developments and
intends to influence them to achieve specific goals. The task of economic theory is to
understand the role of human action in the economic sphere and to formulate
objective laws through the method of praxeology, as we have described it above, and
to aid the other fields in their respective efforts. Theory is necessary to understand
historical actions, bring different events into relation with each other, and estimate
their impact on economic development.
Economic history, in contrast, deals with past actions and seeks to explain the
specific value judgements that led individuals and groups to act as they did, as well
as to explain historical economic events. It is thus an essential and complementary
part to the study of human action.74 As human action is always singular, and
economic events are a complex mesh of numerous variables, economic theory is
essential to gain an objective understanding of history and a scientific explanation of
the past. For the same reasons, however, it is not possible to empirically extract
objective theories from historical events. History studies human action under the
special social, political, cultural, and environmental circumstances of that specific
time. Due to the ever-changing nature of these circumstances, and the fact that
human action involves choice, and is not merely an always repeating reaction to
certain stimuli, it is not possible to generate universally valid economic laws from
historical data, because, in order to even understand this data, it is necessary to draw
upon pre-existing theorems that can only be established by a priori reasoning.75
List, the Historical School, and the empiricist approaches that make up the main
74 Mises (2007), pp. 20f.
75 ibid., pp. 205-210.

21

of orthodox economics in the present oppose the idea of a priori true laws and instead
try to find historical laws through observation. Relying on the positivist approach,
they seek to find the theories that explain the phenomena they study from the
available data about these phenomena. List, and later the proponents of the Historical
School, then used their findings and the theories based on them to support
interventionist programmes, which have been attacked by the laissez-faire theorists.
With this comes, of course, an implicit politicising and the inclusion of ethical
considerations, thus robbing the theories of their scientific objectivity.76
In his approach, List does not only apply the historical method to formulate his
theories. He goes further, resorting to what Ludwig von Mises calls the philosophy
of history. The philosophy of history refers to theories which assume that a
transcendental entity set a course for the development of the world, and it is the fate
of humanity to progress along this course, guided by the theories espoused by the
philosophers of history, until eventually, the perfect state as destined is reached. 77
While Mises focussed his elaboration on the philosophy of history especially on
Marxist thought, one can easily see that List also falls into this category. He sees the
nation-state as a pre-existing natural unit of society, and its development toward
greatness as the natural course of history, which needs to be supported by
protectionist policies, as the cosmopolitical approach of free trade is unnatural and
prevents nations from developing in the way they should. The end of this
development will be a group of perfect, self-sufficient nation-states and dependent
colonies, and in List's view, this state of affairs is destined to exist for eternity.78
However, both the existence of a perfect state and the natural progress
towards that state are simply assumptions that lack objectivity, as they are derived
from intuition. The same holds true for the arbitrary definition of some institutions or
developments as natural and others as unnatural, especially when List comes to the
conclusion that the voluntary cooperation of individuals, as it exists under free trade,
is unnatural, because it seemingly stands in conflict with the interest of the nation as
a whole.
Economic policy, in contrast to economic theory and economic history, aims at
the attainment of future ends. It is, therefore, not an objective science, as an
interference in the voluntary exchange of individuals on a free market, the means of
economic policy, necessarily needs to involve value judgements as to what targeted
76 Mises (2003), pp. 72f; Mises (2007), pp. 198-204.
77 Mises (2007), pp. 162-165.
78 List (1909), pp. 126, 216f.

22

outcomes would be, from the point of view of those suggesting an economic policy
action, more desirable than the outcomes in the free market. The objective economist
can thus only analyse whether the suggested policy is suitable for the attainment of
the desired end.79 Therefore, in the following analysis of economic policies, we shall
mainly focus on the effects of certain policies and set ethical questions aside.
Economics deals with human actions and their outcomes. Human action is not
subject to the laws of nature, that is, it does not follow predetermined paths that
always lead to the same outcome. While this inserts uncertainty in forecasting, it is
not completely impossible to anticipate the results of economic policies. 80 For one,
economic theory sets a number of possible outcomes if the means chosen for an
end are illogical, or if the end is impossible to achieve, the policy does not make
sense. To better anticipate possible outcomes, we have to revert to what Mises calls
thymological experience, the knowledge about human value judgements based on
historical observations. This experience can help to anticipate future value
judgements. Due to the uncertainty inherent in human action, however, economic
predictions differ from those of the natural sciences in so far as the outcomes cannot
be predicted in quantitative measures or mathematical probabilities. Furthermore, to
determine the likelihood of an outcome, it is not sufficient to only take all the
possible factors that could influence the outcome in mind, but also estimate the
influence each factor has on the outcome vis--vis the other factors.81
The important role of the economist is to evaluate economic policies not only by
their intended ends and direct, short-term consequences, but to anticipate and
highlight both indirect and long-term consequences, that which is not seen 82, as
Frdric Bastiat phrases it. He reminds us of the invisible third actor, who is often
overlooked when the effects of a certain policy are evaluated, all the while being
equally affected by the policy aimed at others.
List often does not highlight these indirect and long-term effects when he lays out
his policy recommendations. This might be due to his disdain for economic theory,
for he states that a statesman should be well acquainted with the powers and the
requirements of the nation, and, without troubling himself with scholastic systems,
should develop the former and satisfy the latter.83 Such an approach is, of course,
susceptible to omitting undesired consequences from policy considerations.
79
80
81
82
83

Mises (2007), pp. 28-30.

ibid., pp. 4f.
Mises (1998), pp. 117f; Hoppe (2007), pp. 43-47; Mises (2007), pp. 311-315.
Bastiat (2007a), p. 3.
List (1909), p. 320.

23

Furthermore, throughout the National System, List did not clearly distinguish
between these different fields of economic science. In fact, he consciously merged
them, denouncing economic theory when applied to nation-states as against the very
nature of things and against logic84, and tried to discover certain universal laws of
economic development by studying the economic and political history of various
countries. He then used these supposed laws he observed to create a political doctrine
which, if properly applied, would lead the nations of the world on their natural
paths of development. As we have seen, this approach is unscientific, based on
numerous assumptions and implied ethical judgements, and can lead to incomplete
conclusions with regards to the effects of the suggested policies.

4.2.

The Nation-state and National Interest

We have said above that the nation-state is an important element in the National
System, as its development is the focus of List's economic policies, and its stage of
development is an important prerequisite for the correct application of these policies.
Therefore, it is necessary to critically analyse List's interpretation of the nature of the
nation-state, and especially his theory of national interest vis--vis the individual
self-interest, upon which, as List criticises, the Classical economists of his time, as
well as modern day free-market economists, primarily put their focus.
The state, and the modern nation-state in particular, can be defined as a territorial
monopoly over the application of force.85 It is characterised by the organised and
legalised use of force over the society within its territory, and the use of coercive
exchanges to reach its ends, and is, therefore, not the same as society the way we
have defined it above, i.e., the aggregate of individuals and their voluntary
interactions and exchanges, but stands opposed to it. Just as society is not an entity
separate from the individuals, with own interests or own ways of acting, the state is
not a separate entity either. It is made up of a political class, characterised by the use
of coercive means to achieve economic ends, in contrast to the remaining class(es) of
society, which use voluntary means to achieve similar ends. This is reflected in
Oppenheimer's classification of the applied means in economic means in the latter,
political means in the former case.86
The fundamentally exploitative nature of the state is not changed by the specific
ways its set-up grants power to one social group or other. Whether it is a less
84 List (1909), p. 97.
85 Hoppe (1995), p. 94.
86 Oppenheimer (1922), pp. 25f.

24

developed feudal or caste system, in which a certain fixed group holds the power to
rule continuously, or whether we analyse a modern, democratic state, in which the
class wielding political power is determined by elections, it is still used to achieve
economic ends by the use of political instead of economic means. The wish to wield
political power, and thus attain resources by means of coercion, naturally creates
conflict between different groups with different interests, as coercive exchanges are
by definition a true zero-sum game, in which one individual or group profits by the
loss of another. Hence, it is precisely the existence of the state and its promise of
political power which creates conflict in society, whereas voluntary interaction in the
civil society and the division of labour tend to mitigate conflicts, for they are based
on mutual benefits.
Levi-Faur notes List's concern for the need to coordinate the different interests in
a society which has vastly increased the scale of the division of labour. He mentions
explicitly that the manufacturing sector during the times of industrialisation had to
overcome the resistance of the agricultural and commercial sector before it could
properly develop and flourish. He further stresses the crucial role of the state in cases
of conflict between groups with different economic and social interests.87 However,
the state is not an independent third-party arbiter, but an entity made up of
individuals with their own specific interests, and influenced by special interest
groups, be it through financial support, political votes, or otherwise. Levi-Faur fails
to notice that critical fact, and thus, the underlying problem of state action: that it
does not solve the conflicts of interest between different economic and social groups,
but merely shifts special privileges from one group to another, which, in the best
case, postpones the conflict until the next change in leadership, or, in the worst case,
incites it even more.
As List regards the nation-state as a decisive economic unit, national interest is
crucial to List's political economy. The fulfilment of national interest is the
foundation upon which the legitimation for the interference with the free economy
rests. Even today, as Levi-Faur points out, nationalism is a primary source of
legitimacy and guidance for the management of the economy of the nation-state.88
To arrive at an objective national interest, it is necessary to regard the nationstate as equal to society, and as an entity separated from its members. Only then is it
possible that the interest of the nation can be contrary to the interests of the
87 Levi-Faur (1997), pp. 162f, 169.
88 ibid., p. 154.

25

individuals who actually constitute the nation, and, in extension, to that of other
nations, as is the case in List's theory. As we have describe above, this does not
apply. Society cannot think or act, and neither can the state (as representative of the
national interest), only individuals can a fact that collectivists disregard in their
theories and their actions will necessarily be guided by their own interests. 89
Therefore, the clash between self-interest and national interest is in reality a clash
between the interests of different groups of individuals, with one or both groups
involved trying to hide this fact by designating their views as the objective national
interest, thus legitimising the use of coercion to bring it about.
Another problem the doctrine of national interest has, is the question how to
determine it. As wants and valuations are subjective, there can be no scientific way to
determine the national interest. Furthermore, the interests of groups in power change
constantly, as we can see on the political stage and by analysing history. Thus, when
espousing a theory based on the national interest, one can only formulate it by
relying on the philosophy of history and historical determinism, as List does, and be
convinced that one has correctly interpreted the plan a superior authority has for
society oneself. Thus, List refers to the nature of things when he maintains that his
formulations for the development of the nation-state are the rightfully understood
interests of the state, and that there inevitably exists a conflict between the different
states following their natural national interest. 90 These, however, are just assumptions
without any scientific foundation.
To List, national interest means the development of productive, political, and
military power, and national independence to the degree of economic selfsufficiency. In reality, these are special interests of special groups, and even during
List's days, were not generally accepted by all. The political struggle surrounding
protectionism in the United States gives an excellent example of the fact that national
interest is understood differently by various groups in society, and is, in fact, simply
group interest. As Taussig points out, the states most vehemently supporting the ideas
of protectionism the Middle and Western states - where those that invested heavily
in establishing a manufacturing industry, while the New England states, mostly
involved in commerce and shipping, as well as the Southern states, where slavery
prevented the establishment of manufactures, opposed it.91 Eventually, the use of
political power to further group interests led to the War Between the States, which
89 Mises (2007), pp. 250-252.
90 List (1909), pp. 99f.
91 Taussig (2010), pp. 65-67.

26

was itself an expression of specific nationalism, as the North was unwilling to allow
the South to secede from the federation of states, effectively converting the United
States into a federal state, while the Southern states saw their state and confederate
interests differently.92
National interest is not something that nature instils into society so it can follow
its predetermined path towards a state nature has prepared for it, but the interest of
certain groups of society. Of course, depending on the successful propagation of
these ideas, greater or lesser parts of society might accept these goals and take them
as their own, as was the case with political and economic nationalism in Europe
before the two World Wars. However, this still does not mean that the whole nation
supports them, or that society as a whole benefits. It is also important to note that the
Classical Liberals List is attacking in his National System also had the national
welfare in mind. When recommending their laissez-faire policies, their aim was
equally to further the national well-being. Neither did they want to ruin the industry
of their home country, nor sell it out to foreigners by instituting free trade. The
conflict only arose due to different opinions on how to best promote the national
interest. As Mises notes, they recognise the fact that interventionism may grant
special privileges and advantages to certain societal groups. However, they see this
as only a short-term benefit, whereas, in the long run, the free market would benefit
society as a whole the most.93

4.3.

Development

Another important aspect we need to keep in mind before we can correctly

analyse trade and the consequences of intervention is the nature of production in
society, as well as the nature of growth and development. Without that, it is
impossible to correctly discern the consequences of trade policies.
4.3.1.

Production and the Productive Powers

Production is the cornerstone of economic activity. Production supplies the

economic means for the individual ends and the necessary capital for growth. It is
increased both by the accumulation of capital and the increase in productivity
through said capital accumulation and the division of labour. In the economic realm,
production always stands at the beginning of the process, consumption, as we have
92 Kreptul (2003), pp. 65f.
93 Mises (2011), pp. 5-7, 23.

27

said, at the end. Consumption here means the fulfilment of individual ends, and is not
limited to material goods, but also encompasses immaterial goods, services, leisure,
and so on.
In his theory of productive powers, List criticises that the Classicists focus on the
accumulation of material capital, while passing over human capital, the mental
productive powers. Levi-Faur goes even further and suggests that, while the division
of labour and capital accumulation are characteristic for development, the cause is
the increase of mental capital, which is much more important and should be the
concentrated on.94 This is, however, not quite true, as we can easily see by a logical
examination of the process of production and development. First of all, in order to
institute a division of labour, households need to surpass the level of subsistence
production, so they can trade their surplus with individuals specialising in other
fields. At a certain stage, and especially in the process of industrialisation, mental
capital naturally gains more importance, as new technologies need to be invented and
operated. However, mechanisation also allows the employment of unskilled
labourers, who need only a little training to be able to execute their tasks, compared
to the extensive skill-sets artisans of earlier times had to develop.
If we consider the nature of education (representing the formation of human
capital), we can also see that first, there needs to be an accumulation of capital and
an increase in productivity to support it. Education is an investment in human capital,
which needs years in order to yield results. Society needs to be able to sustain both
the teachers and the students during this time, until education pays off and increases
productivity. Thus, logically productivity has had to be increased, the division of
labour expanded, and material capital accumulated before investment in human
capital could have been made. The same holds true for the relationship between
agriculture and the manufacturing sector. In order to establish a manufacturing sector,
agriculture needs to be developed to a degree where it can sustain both the
agricultural population and the manufacturing population. Furthermore, capital needs
to be accumulated in order to establish a manufacturing industry, as this needs
investment in machinery, raw material, and wages, which will be reimbursed only at
a later time, when the products are finally sold.
There are, as List correctly points out, mutually reinforcing tendencies between
the sectors (the development of industry benefits the development of agriculture, the
development of agriculture benefits the development of industry, the increase in
94 Levi-Faur (1997), p. 160.

28

human capital increases productivity, which in turn allows for more investment in
human capital, etc.). However, it is important to note that first, the material
conditions for other aspects of development need to be created. In the case of
government intervention in the economy, the argument remains the same. As
government is a non-productive entity which acquires its resources by coercive
exchanges with the productive parts of society, society first has to produce something
in order for the government to use it for its own ends.
Thus, the development of the productive powers needs to be preceded by the
accumulation of material capital, even though later, they will both reinforce each
other, and the importance of the productive powers will grow. However, it is not, as
Levi-Faur claims, the amount of human capital alone that explains the differences
between developed and developing societies. The distinguishing factor is the
abundance of material capital and consumer goods, which makes the development of
human capital possible in the first place. Accordingly, the supply of final consumer
goods is not limited by the available human capital, but by the available material
capital.95
The structure of production is determined on the free market by the needs and
ends of individuals. First, they will satisfy their immediate needs, and then move on
to satisfy their longer-term ends. The better the economy is at satisfying immediate
needs, the more will the focus shift towards the long term, and investments in
material and human capital will be made. Therefore, the productive powers on the
market will be developed according to the current subjective valuations of alternative
ends (consumption versus investment) by the individuals. As consumption is the
ultimate end of production, the optimal amount of consumption and investment will
be determined by voluntary exchanges. As Rothbard states: Production makes no
sense whatever except as a means to consumption. Investment in capital goods means
nothing except as a necessary way station to increased consumption.96 Production is
not an end in itself.
To say that the productive powers are underdeveloped in such a system, as List
does, begs the question of what their correct level of development should be.
Theoretically, there are no limits in increasing the productive powers, or for that
matter, the other powers of the nation as well. However, there is no measure as to
where the optimum the interventionists try to reach is located. Simply by varying the
95 Rothbard (2009), pp. 546f.
96 ibid., p. 966.

29

amount of labour and leisure, there can be great differences in the total output of
society, which could be used to improve the nation. In fact, as Rothbard points out,
the mercantilists were even critical of national holidays for the reason that they
robbed the nation of potential output.97
An example of this would be the cultural development List advocates. In the free
market, the level of culture, arts, and literature would be determined by the amount
of money or goods individuals are willing to voluntarily exchange for them, thus
showing their preferences and the importance individuals attribute to these services.
List, however, criticises this approach of evaluating immaterial goods through
exchanges. In List's view, the production of immaterial goods is productive per se,
because they in some way enhance the productive powers of the nation, and not
because they are remunerated with material goods or other services. The latter stance
leads, in List's opinion, to false views. 98 Here, we face the question of the inherent
use of arts and culture, if not for the enjoyment and education of the individuals
willing to sacrifice other alternative ends for them, as well as the question of the
optimal amount. List himself notes that there should not be too many people
occupied with creating productive or mental powers, but he does not give any
indication as to what the exact amount between to little and too much is.99
4.3.2.

Progress, Growth, and the Stages of Development

When talking about trade policies to enhance growth and industrial development,
it is important to note that these terms, in the way they are usually employed, already
include the implicit value judgement that development is desirable. While it is true
that the ability of a population to supply itself with the basic needs like food,
clothing, and shelter would be considered by almost anyone as desirable, further
development, like large-scale industrialisation, is not necessarily desired, as the
cultural and societal change which can follow such a development might not be in
the interest of various cultural groups. We have already mentioned Salin's
observation that List's idea of the perfectly developed state with a harmonious
relation between agriculture and industry implies a warning against overindustrialisation. And indeed, List's idea of economic self-sufficiency would mean
that a nation-state has to its agricultural sector at a sufficiently large size in order to
guarantee food independence, even though List does not suggest any policies to
97 Rothbard (2006a), p. 247.
98 List (1909), p. 116.
99 ibid., p. 130.

30

accomplish this, explicitly stating that agricultural protection is harmful, perhaps

because he underestimated the scale of industrial development Western nations
should reach. Another example of a group opposed to continuous progress and
growth would be the ecological movement, which sees economic development to a
certain degree as destructive and urges society to take the interest of the planet into
consideration.
Mises notes that the term progress and its antagonism retrogression are
teleological terms. They only make sense if we regard societal development as
following some sort of path towards a predetermined goal set by a higher authority.
Thus, we can only speak of progression by taking into account the aims of
individuals towards which society as a whole can progress, like the demonstrated
preference of a majority of people to live in better material conditions than their
predecessors.100
List tried to determine a universal path of national development. The result is his
model of development stages as a historical law. Yet, such a law does not have the
character of real scientific laws. It lacks universal validity, and there is no concise
proof that societies, or states, have to progress through these stages. Society is
constituted of individuals, whose ideas and actions form history. It is not, as Mises
points out, a biological organism which follows a predetermined path.101 Still, this
biological analogy is implicit in many theories based on historical laws, as the
frequent use of biological terms, like that of infant industries, suggest.
When creating a, supposedly objective, growth theory, and establishing the state's
role to manage and stimulate growth, one would need to justify the necessity or
desirability of growth in an objective way. However, this is repeatedly passed over.
From a purely economic point of view, growth is determined by the actions of
individuals, by their choice between present and future consumption. Depending on
their time preference, and ability to invest, growth is stronger or weaker. Once the
task of growth is taken over by the state, it is no longer beneficial in the Paretooptimal sense, as it forces upon individuals a loss of utility in the present for a
promised gain in the future. Due to the fact that interpersonal and intertemporal
utilities are not comparable, it is impossible to objectively speak of forced growth as
ultimately benefiting those individuals who did not chose to invest sufficiently in
the first place.102
100 Mises (1998), pp. 192-194.
101 Mises (2007), pp. 225f.
102 Rothbard (2009), pp. 962-964.

31

4.4.

Free Trade and Protectionism

At the centre of List's National System lies the question of the role of
protectionist policies in economic development. In order to correctly assess the
effects of restrictions on trade, we first have to examine the nature of free trade and
the underlying assumptions of the attacks on free trade. Then, we can proceed to
trace the effects of protectionist policies in general, and infant industry promotion in
particular.
4.4.1.

Free-Trade Theory and the Montaigne Fallacy

The opinions on free trade can be classed into two groups: the harmonists, as
represented by the laissez-faire schools like the Classical Liberals and the Austrian
School, which see free trade and the free market as producing optimal outcomes, and
the anti-harmonists, as represented by List and other interventionists, who see the
operation of free trade and, accordingly, the free market, as somehow deficient,
making state intervention necessary.
As we have noted earlier, the free traders advocate free trade not out of a desire to
harm their nations and the individuals living within them. Rather, based on their
analysis of the free-market principle, and seeing that it achieves the Pareto-optimal
fulfilment of individual desires, they regard free trade as the most advantageous
mechanism to allow individuals to reach their subjective ends in the best way
possible. The previous analysis of the market mechanism has shown that social
utility is maximised under its implementation, without the need to make any
judgements about the content of the individual ends or individual time preferences.
In this way, both short-term interest and long-term interest are well accommodated.
The interventionists, on the other hand, see the free exchange of goods across
borders as harmful to national development and social welfare, and thus want to
restrict it to help individuals reach their true long-term interest as defined by the
interventionists. This restriction can have varying degrees, reaching from complete
and never-ending protection to List's idea of infant industry promotion until the
national industry is fully developed.
At the heart of interventionist thought lies the so-called Montaigne fallacy. This
fallacy is the belief that trade is not a mutually beneficial endeavour, but a zero-sum
game which benefits one party at the cost of another. 103 It is the basis of mercantilist
thought, and of theories based upon this system, like List's economic nationalism.
103 Rothbard (2006a), p. 203.

32

Free trade is essentially the inter-spacial voluntary exchange of goods. Within

political boundaries, it is generally accepted as beneficial, but as soon as this trade
crosses political boundaries, opinions diverge. Traders are vilified and seen as, to
quote List, profiting at the expense of the agriculturists and manufacturers, at the
expense of the nation's productive powers, and indeed of its independence. 104
However, free trade, just as any exchange, is, per definition, mutually beneficial for
the individuals engaged in it, and the merchant achieves his gain as a facilitator of
the exchange, bringing the producers and consumers from different geographical
regions together. For this, it does not matter whether there are political boundaries
between the individuals or not. The only way he benefits at the expense of some
uninvolved third party, is the way in which each party in a voluntary exchange might
be said to benefit at the expense of someone else, that is, because they decided to
trade with one another, and not with the third party which might have wanted to
participate in the exchange.
Of course, there are, in reality, countless restrictions on free trade due to the
desire of hegemonic powers and special interest groups to intervene in the market for
personal gain. Still, basing the analysis on the theory of free trade and the free
market, it is easier to see how certain undesired effects, like balance of payments
issues, come into effect, and by what means they can be counteracted.
4.4.2.

Free Trade, the Balance of Payments, and Dependency

The question of the balance of payments, especially of a prolonged disparity

between imports and exports, is repeatedly used as an argument against free trade.
However, as we shall see, the underlying issue is not so much one of trade, but one of
monetary policy. Balance of trade disparities arise when one nation imports more
than it exports, or vice versa. As Mises explains, in a world of direct exchange, such
imbalances cannot arise. In a world of indirect exchange with money, these
imbalances are settled by the transfer of money. However, these transfers still
represent the underlying goods present in these exchanges, even though they are
obscured by the use of money. The movement of money is then nothing more but a
distribution of a medium of exchange to where it is most needed. Should those
regions with a negative balance of trade require more money, they will address this
need by exporting more, those that have a surplus of money will import more.105
104 List (1909), p. 208.
105 Mises (1953), pp. 182-185.

33

For a sound monetary system, this effect can be studied using the quantity theory
of money. If currency flows out of the country, domestic prices will decrease, while
the prices in the destination country of the currency outflow will increase, therefore
shifting the relative relation of prices in favour of the country with currency outflow,
making its exports more attractive for outside countries, while at the same time
making imports from the foreign country less attractive at home, equalising the
balance of payments and reversing the flow of currency until supply and demand are
at balanced level again. In a system of sound money, it is impossible to continually
import more than is exported, though we have to bear in mind that exports do not
only include material goods, but also investment shares and other financial products.
Nonetheless, temporary imbalances can, of course, be caused by changes in the real
economy, i.e., the demand for exported and imported goods. These imbalances,
though, are just a short-term phenomenon which will be equilibrated by the
automatic adjustment mechanism described above.106 The only way for a country to
continuously import more than it exports is to increase the money in circulation,
which, in modern times, is usually done by issuing unbacked paper currency or an
electronic equivalent, which prevents the adjustment of domestic prices and the
equilibration of the balance of payments. Also, the expansion of unbacked currency
leads to all sorts of economic disorder, frequently culminating in economic crises.
This joint occurrence of imbalances in trade and economic crises led theorists,
especially those basing their explanations solely on observation and not on aprioristic
theories, to see the cause of crises in the balance of payments. We can see this clearly
when looking at the financial crises of the United States in the first half of the
nineteenth century. List, an advocate of the balance-of-payments explanation for
economic crises, names disproportionately large imports as the main cause. While he
contends that banks may have an effect on the intensity of the crisis, he maintains
that they are not the reason for them. He criticises the Classical view that the balance
of trade would equalise itself through the outflow of precious metals, and does not
see money as simply another commodity. In the context of the United States, he
mentions that the export of precious metals undermines the paper currency and
necessarily leads to a credit crisis, which, as is usually the case, has a large negative
impact on the economy. He also criticises large price fluctuations that accompany the
export surges of precious metals and, rightfully so, their negative impact on the
economy. These occurrences, however, have their roots in a deficient monetary
106 Mises (1953), pp. 249-251; Salerno (2010), pp. 172f.

34

system. Nonetheless, in spite of his own observations, he maintains that banks and
monetary policy are not the cause of the crises, only an amplifier.107
In contrast, Taussig notes that, by 1816, the currency was in a state of complete
disarrangement, and concealed and supported an unsound economic condition. 108
Furthermore, this state of affairs was amplified by excessive speculation in Europe,
and eventually led to a currency bubble which burst in 1819, resulting in the Panic of
1819. Along the same lines, Rothbard notes that the price fluctuations in the US
market were primarily due to a rapid expansion of the money supply by creating
unbacked paper currency. This, in turn, allowed imports to increase drastically
compared to exports, resulting in a negative balance of trade, which then led to an
outflow of precious metals, contractionist monetary policy, and the eventual crisis. 109
With regards to later crises, especially those of 1837 and 1839 (the last two List
witnessed before the publication of the National System), Taussig explicitly negates
the proposition, brought forth by protectionists, that trade policy, especially tariffs,
were the cause of the economic problems. In fact, he sees no connection of the tariff
acts with the economic crises, and points again to monetary causes, like inflation,
credit expansion and the accompanying speculation.110
Thus, we can see that, while prolonged imbalances in trade and economic crises
can occur alongside each other, this is due to a common cause, monetary policy. This
implies that, in order to eliminate the problem of continuous imbalances and
economic crises, economic policy has to address the monetary causes of these
symptoms, and not the perceived problem of trade, as trade-relate policies cannot
solve the fundamental flaws of a deficient monetary system.111
Apart from the balance of payments issue, national economic independence is
one of List's main concerns. Therefore, the dependence on foreign economies, which
is a side-effect of extensive trade, plays an important role in his criticism of free
trade. This concern was further amplified by what List saw as the striving of
England, in his days the world's leading economy and the first industrialised country,
to dominate all other nations by means of trade, a sort of trade imperialism to
subjugate those countries which have the natural ability to become great, industrial
nations, in addition to the legitimate (for List) classic imperialism through the
establishment of colonies in those countries of the torrid zone which cannot develop
107 List (1909), pp. 86, 218-222.
108 Taussig (2010), p. 25.
109 Rothbard (2007), pp. 4-23.
110 Taussig (2010), pp. 102-104.
111 Salerno (2010), p. 178.

35

any meaningful industry anyway.

Thus, he argues that England as a nation was actively trying to hinder the
development of any manufacturing power in other continental nations and the United
States. He asserts that England does this even though the industrial development of
the other nations of the temperate zone would not be detrimental to its own interest,
and furthermore adds that a nation, by developing its own industry, gains more than
the other nation, which is now excluded from the market, loses, thus increasing the
overall welfare of mankind as a whole. By taking into account the potential
development of agriculture and the production of colonial goods in the countries of
the torrid zone, he shows that the world market is sufficiently large to accommodate
the manufactured goods from several industrial nations, and thus, no conflict of
interest would arise over export markets, either.112
While it is certainly the case that there will be sufficient markets for the goods
produced (because production is carried out for eventual consumption and adjusted
according to demand), this assertion of the existence of a market so large that English
production alone could not satisfy it questions List's own argument for the protection
of national industries: That the English manufacturing power is so superior that free
trade would lead to an English manufacturing monopoly in all markets, and eternally
assign all other nations, be they from the temperate or torrid zone, the place of
supplier of agricultural goods and raw materials. He himself states that England can
supply itself with all the necessary goods by trading with the colonies of the East
Indies, and thus questions the possibility of an English manufacturing monopoly over
all countries that would be suitable colonies.113 This begs the question why England,
or better, the English manufactures, private enterprises which produce in order to
make a profit, would monopolise trade over the whole world if they cannot get
anything in return.
By confusing the indirect exchanges as being made for money only, instead of
being made to eventually acquire goods, a mistake common in mercantilist and
neomercantilist thought114, and by overlooking the fact that a continuous negative
balance of trade can only be maintained by inflationary monetary policy, which leads
to crises and gives the exporters nothing but paper if nothing is imported in return, he
even comes to the conclusion that the domination of English manufactured products
would continue should England ban the import of agricultural products for political
112 List (1909), pp. 154-156.
113 ibid., pp. 156, 297.
114 Mises (1953), pp. 251f.

36

reasons.115 While this state of things might exist for a short period of time, in the long
term, this state of affairs will lead to financial crises, losses for the exporters, who do
not get anything in return for the goods they supplied, and is highly likely to collapse
eventually.
The same holds true for List's argument that a creditor can renew credits to the
debtor for an extended period of time.116 Applied to trade, this could take the form of
exporters giving consumer credits to the individuals in the nations they export to.
However, these credits need to be repaid at some stage, which could then result in
reduced consumption of the products of the exporters, thus not serving them in the
long run, or they need to be defaulted on, resulting in the exporters giving away their
goods for free. As free enterprises are dependent on making profit, it is highly
unlikely that such a state of affairs could ever set in for a prolonged period of time.
And indeed, as Sampson S. Lloyd notes in the appendix to the English edition of the
National System, while it is probable that British loans to the United States in the
beginning of the second half of the nineteenth century increased demand for British
products in the United States, it eventually cost the British a lot due to an increase in
national debt and losses to private holders of foreign government bonds, as state
bankruptcy led to these loans never being repaid, thus effectively turning the goods
bought with them into gifts, as we have explained above.117
Another argument for protectionism in this context is List's contention that by
free trade, the national industry makes itself subject to the commercial regulations of
a foreign nation. Therefore, it would be better to regulate the domestic industry by
national policies, so it is controlled to the benefit of one's own nation, and not
controlled to the benefit of another.118 This argument, however, is fallacious. As free
trade is a voluntary endeavour, those engaging in it can judge for themselves whether
they want to accept the risks and possible drawbacks foreign regulation outside their
control might have, and act accordingly. Under free trade, no-one is forced to make
exchanges with foreign manufacturers. If individuals wish to buy domestic products,
they are free to do so, and thus encourage the development of their national industry.
Protectionism, on the other hand, is a coercive measure which leaves individuals no
choice, or at least makes their preferred choice so costly that they will settle for the
second-best alternative.
115 List (1909), p. 125.
116 ibid., p. 223.
117 Lloyd (1909), p. 351.
118 List (1909), p. 136.

37

Finally, it is important to note that, as Bastiat writes, the kind of dependence that
results from exchange, from commercial transactions, is a reciprocal dependence. 119
As trade means exchange, both parties expect to benefit from it, and any break of
these relations, as in the case of war, will be injurious to both. List might contest that
the agricultural nation is more dependent on the manufacturing nation. But given that
those nations which should apply protectionism in List's theory possess the necessary
conditions to start a manufacturing industry, albeit at a higher cost, they might be
able to switch from producing surplus agricultural goods to producing manufactured
goods more easily than the manufacturing nation will find alternative employment
for those manufacturing industries that lost their export market. Furthermore, this
mutual dependency serves as a motivation to keep interruptions of trade relations, for
example by wars, to a minimum, as the implied cost is not only the actual cost of
war, but also the lost benefit of voluntary exchanges.120
4.4.3.

The Ricardian Law of Comparative Advantage

The Ricardian law of comparative advantage, the special application of the more
general law of association, is one of the cornerstones of free-trade theory, and even
critics of Ricardo recognise it as a vital contribution to the canon of economic theory.
In summary, it states that all countries benefit from the international division of
labour, no matter their degree of development, as it is always beneficial for economic
actors to trade with others who have a comparative advantage in producing
something, even though the one actor might have an absolute advantage in producing
everything. In this way, no-one is left out of the international division of labour, or,
correspondingly, of the division of labour in general.121
It is important to note that the law of comparative advantage does not rest on the
Classicists' theory of value, but is an a priori truth, the conclusions of which follow
necessarily and logically from the conditions described in it. It is also value-free, as it
does not describe free trade as preferable to protectionism. It merely states that the
supply of goods under free trade is greater than under protectionism. 122 Chang
understands this, as he acknowledges its truth under the conditions in the present
state of things, while at the same time pointing out that it does not give any
implication as to whether protectionism is necessary or not if a country wishes to
119 Bastiat (2007b), p. 275.
120 ibid., pp. 275-277.
121 Rothbard (2006b), pp. 94f.
122 Mises (1998), p. 161; Hoppe (2007), pp. 14-16.

38

establish a new industry.123

Of course, the extent of the workings of this law depend on the mobility of
capital, labour, and commodities. As Mises explains, if commodities are not mobile,
there is no exchange and all states will live in autarky. If capital and labour are
perfectly mobile, they will move towards the regions with more favourable
circumstances and material conditions and standards of living will tend to equalise. 124
However, this does not in itself invalidate the law of comparative advantage based on
immobile capital goods and labour, and even though capital can presently move more
freely, there has, as of yet, not been a prolonged period of time with perfect mobility
of both capital and labour to see this equalisation actually take place.
In the same way the law of comparative is frequently brought up by the
champions of free trade, it is attacked by those opposed to it. However, rightly
understood (that is, as a law of the benefits of voluntary exchange on an international
scale), it has not been logically refuted. It does not suggest that countries should
necessarily specialise in the production of one single good only, nor that they should
not develop any other branches of the economy where they might gain a comparative
advantage in the future. The latter is the case with List, who accepts the validity in
the production of agricultural products which are determined by nature, and, to a
certain extent, in the specialisation of nations into those producing manufactured
goods and those providing raw materials (which is, in his view, also naturally
determined), but questions its ability to account for industrial development, as well
as with Chang, as we have stated above. This critique, however, ignores that the law
of comparative advantage is not a law of development, but a law of trade.
Furthermore, it calls for the absence of interference in the economy, and not some
forced specialisation according to comparative advantages, or the prohibition of any
other economic activity. In a free economy, individual actors and groups are still free
to develop any branch of industry they like. To what extent this is solely possible by
protectionist policies, especially infant industry promotion, we shall explore
subsequently.
4.4.4.

Effects of Protectionism

Before analysing the special case of infant industry promotion, we will take a
look at the effects of protectionism in general, as they, being a general rule, equally
123 Chang (2008), p. 47.
124 Mises (1990b), pp. 141f.

39

apply to protection for infant industry promotion as a special case.

Protectionism is the interference of government in the voluntary exchange of
goods and services on an international scale, ranging from complete cut-off of trade
and economic isolation to the protection of certain domestic industries against more
competitive foreign industries. Traditional measures include quantitative restrictions
and prohibitions, which create an artificial shortage of goods, and tariffs, a tax on the
consumption of foreign goods. In modern times, various new measures have been
invented, in order to bypass free-trade agreements, including anti-dumping measures,
standards of all kinds (health, quality, and so on), laws on intellectual property, etc.
We shall focus on tariffs, as they were the most widely used tool of protectionist
policies in the nineteenth and early twentieth century, and also the measure List
recommended in his policies.
Tariffs are a triangular intervention, that is, government intervenes in the
voluntary exchange between two individuals. Tariffs are a monopolistic grant of a
government to some of its domestic industry, leading to the establishment of quasimonopolies and, in turn, to higher prices for the consumers of the nation, who have
to bear the cost of the intervention. It hurts the exporting industries of foreign
nations, and, due to the reduction of the international division of labour, all
consumers that participate in world markets.125 Furthermore, it comes at a cost to the
exporting industry of the protected nation, because the demand for exports is reduced
as a result of the decrease in imports (a balance of payments issue, as the reduced
demand for foreign exchange leads to a reduced supply in foreign exchange 126), and
because it puts the exporting industry at risk of being targeted by retaliatory tariffs of
other countries, a policy that List himself deemed legitimate, given that the
retaliating country is capable of establishing an industry of its own. 127 With regard to
the rise in prices, List points out that the Classical School was wrong to claim that
the price of domestic products is increased by the amount of the protective duties. 128
This is correct in so far as economic theory does not say that prices always rise by
the same amount as the tariff imposed on them, but that they would do so other
things equal. Of course, there are other things that influence the concrete change in
prices, like the substitution of certain goods for others.
Another effect to the disadvantage of the consumer is the shift in the production
125 Rothbard (2009), p. 1101.
126 Mises (1953), p. 252.
127 List (1909), p. 255.
128 ibid., pp. 313f.

40

structure and the use of scarce resources. Nonspecific resources, which can be used
in various industries, and labour will shift from the effective industries, where they
were employed before the protectionist intervention, to the inefficient protected
industries, as the monopolistic grants to those industries will guarantee an increased
profit, and thus seem more attractive to investment. This increases the cost of
production of other industries, which will then likely have to increase their prices to
remain profitable. And the rise in prices of certain consumer goods caused by tariffs
will lead to a reduction of the money a consumer has available to spend on other
consumer goods, hurting the non-protected industries and, of course, all those
consumers that do not profit from the gains of the protected industry through
employment or other involvement in them.
List claims that, by erecting protective barriers, the government does not exactly
tell individuals how to invest their money. While this is certainly true, he ignores the
incentives government gives through protection for the employment of capital in the
protected industries. After all, this expected outcome is the reason government
embarks upon protectionist policies in the first place. And indeed, directly after the
statement we just mentioned, List writes that we have imposed restrictions on that
competition, so far as in our opinion is necessary, to give those among us who invest
their capital in these new branches of industry, and those who devote their bodily and
mental powers to them, the requisite guarantees that they shall not lose their capital
and shall not miss their vocation in life; and further to stimulate foreigners to come
over to our side with their productive powers.129
Now, while this does not include any forced redirection of capital by the
government per se, it provides strong incentives. On the one hand, the investor in the
protected industry is secured against the loss of his capital, as List says himself,
which he is not in any non-protected industry. On the other hand, higher profits can
be expected from investing in these industries, for List advocates the protection of
industries vital to the nation-state, and thus, it is quite likely that consumers will not
substitute all products from protected industries with products from non-protected
industries, as they will be more or less dependent on them. This is quite obvious
when we consider, for example, the textile industry, which was crucial to industrial
development and a major focus of protectionist policies.
Rothbard pointed out that the tariff argument is prone to the use of reductio ad
absurdum, as the reasons brought forth for protectionism might as well be applied to
129 List (1909), p. 135.

41

regions or even individuals. This is here a valid application as the qualitative effects
of tariffs are always the same, independent of the size of the protected zone, and
because the principle of economic independence, as espoused by List, could equally
be applied to smaller entities than nations.130 One argument to prevent such attacks is
based on List's definition of the great nation which should apply protectionism: it is
the nation that is sufficiently large to provide for itself in terms of agricultural
products and raw materials, has a large territory and a large population. To other
countries, as we have said, List does not recommend protectionist economic policies.
Given the fact that the division of labour increases productivity, and that
protectionism reduces productivity, we can conclude logically that the degree to
which the reduction in productivity will affect the consumer in terms of fewer goods
at higher prices is reduced the bigger the remaining free-trade zone, i.e., the nationstate, is. Nonetheless, it does not make the negative effects of protectionism
disappear.
4.4.5.

The Infant Industry Argument

The infant industry argument is a special case of the general argument for
protectionism. Summarised, the argument reflects basically the Listian case for
protection: A nation has the potential to develop a branch of industry on its own, but
due to strong competition from established producers in other countries under free
trade, it cannot do so, in which case the development of the country is hampered.
Therefore, the government needs to establish a protectionist system for these
industries so they can grow to a competitive state, and only then rejoin the
international market. Keeping in mind the previous analysis, we can easily see that
this is more of a political argument than an economic one. It supposes a path of
natural development which is not followed due to a failure of the market, and of
individuals to see the long-term benefits of developing their own industry instead of
relying on trade with other nations. Thus, politics needs to intervene, in order to
achieve the correct outcome of economic interactions and economic development,
and guide its citizens towards a future that they will regard as better, too.
To correctly apply infant industry promotion, some conditions need to be
satisfied. In List's theory, these are a nation sufficiently evolved in terms of territory,
resources, and population, on the verge of establishing a manufacturing industry,
which would suppose the sufficient availability of capital and labour to successfully
130 Rothbard (2009), pp. 1102f.

42

carry out such a development. Taussig gives as possible reasons for the application of
infant industry promotion a population growth which is so fast that the automatic
change in the structure of production from agriculture to industry does not take place
as fast as it might be desired, and technological change in another country, which is
either kept from the rest of the world, or not adopted by other countries due to the
reluctance of the population to change their accustomed habits and occupations.131 If
the conditions for successful industrial development are not met in the first place, it
is of no use to apply protection to potential new industries.
Moreover, we have to differentiate between infant industry promotion in the
general sense, that is, the establishment of a new industry and its protection until it is
internationally competitive, and in the Listian sense, that is, protection of new
industries until they are fully developed and supplying the whole home market with
goods. Between the two, there exists, of course, a difference in the duration of
protection, for an industry can long be competitive before it is able to supply the
whole home market of a nation. We have said that the argument is a political one. It
assumes the inability of the citizens of a nation to see the benefits of industrialisation
the advocates of infant industry promotion can see, or, if they have this insight, to act
accordingly and bring these benefits about. It omits that, perhaps, individual
preferences lead economic actors to act in the way they do, and not in any other.
We do not say that industrialisation is not beneficial to the population in the sense
that it increases productivity and the division of labour, and thus renders more goods
available to the consumers at lower prices. However, the ultimate valuation of this
material benefit cannot be made by economics, but must be made by individuals, or
proclaimed by hegemonic actors. The claim of the advocates of infant industry
promotion is that the industries developed in such a way will quickly benefit the
whole population, and therefore repay the initial cost. In List's words, while a
sacrifice of value is caused by protective duties, it is made good by the gain of a
power of production, which not only secures to the nation an infinitely greater
amount of material goods, but also industrial independence in case of war.132
This trade-off between value, or present goods, and productive powers, or future
goods, is a trade-off individuals face daily in their economic exchanges. It is a tradeoff that is also present once an industry has been established, in so far as individuals
have to chose between present consumption and the maintenance or further
131 Taussig (2010), pp. 14f.
132 List (1909), pp. 117f (emphasis in the original).

43

development of industries by investments, which will affect the future consumption

of goods. However, these intertemporal trade-offs are, just like subjective value
scales, neither comparable between individuals, nor quantifiable. Twice the amount
of a certain good for the same price in ten years is not necessarily better in the eyes
of an individual than once the amount of goods in the present, just as the same
amount of goods is valued differently by different individuals.
In a free market, under a free trade system, there is nothing that prevents
individuals or groups of individuals to act in order to acquire the benefits
industrialisation brings about. If the projects are deemed profitable in the future, and
sufficient funds are available, there will be investment in them, even though there
might be some losses involved during the initial stage. This, just as the risk taken
with the investment, is, however, inherent in any kind of investment, be it enterprises
that want to compete with foreign established enterprises, or enterprises that want to
compete with established domestic enterprises. Furthermore, if a sufficiently large
part of society deems industrialisation and independence in times of war a goal worth
striving for, they can voluntarily buy domestically produced goods instead of foreign
goods, thus carrying the additional cost of the added psychicological satisfaction
themselves. It is not necessary for the establishment of new industries in a large
nation that the whole society buys goods only from the new businesses, nor is it
possible to even provide for the whole demand with a newly established industry.
And once the new industry has established itself, it should be able to compete on the
free market for the customers who do not attach any additional value to the product
besides the material satisfaction it brings.
A main criticism, also brought forth by List, is the monopolistic dominance of the
foreign manufacturers, who do not allow any new competitor to enter the field, as the
former industries have acquired a historical advantage in skill and capital. This is, as
Rothbard contends, true. But it simply means that the present valuations of
consumers are such that they want to take advantage of the previously invested
capital, instead of letting it go to waste by investing new capital in new structures
which serve the exact same end. Furthermore, as Rothbard continues, this charge
could also be used on an interregional scale within the nation, where some regions
are deprived of the benefits of an own industry due to the fact that other regions
already established such an industry, or even to any new firm that does not have the
necessary capital, skill, and experience in optimising the production process that
older firms have (the specific productive powers of a given firm or given region, so
44

to speak). Also, being free to enter an industry does not mean being able. Of course,
in industries intensive in capital, not everyone can secure the necessary amount to
start a new firm. However, this capital needs to be available even for the
establishment of infant industries, and for the financing of the already established
industries, and therefore, it should be possible to raise it on the free market if the
project is deemed profitable.133
Besides, this argument also works in the opposite direction, showing why the
establishment of a new industry can have specific advantages for the same reasons.
Historical investments, sunk costs, restrain existing enterprises in adapting to
technological change and changes in demand. If a new production technique is
developed, it would be easier for new locations and new enterprises to enter the field,
whereas established industries in older locations will have to see whether the
improvement will reimburse the losses incurred by investing in the now less
profitable old technology. Such shifts, as Mises remarks, have also taken place within
countries, when old centres of production became less profitable than new ones,
without the aid of protective tariffs.134 It is, therefore, not generally impossible for
new industries to develop in new locations, even though they face competition from
other countries, and thus, no nation that satisfies the necessary conditions for
industrial development will be hindered to develop economically. The only question
is the moment in time when it will develop, and this moment might be considered
undesirably late by political actors and certain groups of individuals. This is,
however, a question of value-judgements, which cannot be answered by economic
reasoning.
In addition to the direct effects of infant industry promotion on consumers, we
also have to consider the effects on production. Establishing infant industries by
making investment into them profitable through political intervention means shifting
the necessary capital and labour away from profitable industries where these factors
were previously profitably employed, or would be profitably invested, a fact often
overlooked by advocates of these policies. As a matter of fact, it is neglected by
interventionists in general that all capital employed through political intervention
does not spring into existence from nothing, but is coercively transferred from the
free market that created it in order to further political ends.135 This transfer, however,
remains largely invisible, as the alternative employments of capital and labour do not
133 Rothbard (2009), pp. 655f, 1105-1107.
134 Mises (1990a), pp. 114f.
135 Mises (1998), pp. 654f.

45

come into existence, and therefore cannot be measured. These are the unseen effects
Bastiat analysed, the possible alternative development that could have taken place,
about which we can retrospectively only speculate.
Apart from the economic and political questions of infant industry promotion,
there arise also some practical problems. Just like protectionism in general, infant
industry promotion includes gains for those involved in the protected industry, and
losses to all consumers. The advocates of infant industry promotion, including List,
stress the benefits of the new industry in the long run, and claim that they make up
for the present losses incurred. Leaving considerations concerning the measurability
of subjective utility aside, there are some difficulties of economic calculation to be
considered. While the cost of production in protected industries will sink with the
improvement of productive processes, in order to reimburse the present losses, the
products produced by the newly established industry would eventually need to be
cheaper than the goods produced by foreign competition, which, after the protection
during the infancy period, would enter the market again. If not, then somehow, the
newly established industry would need to have some indirect effects on the
remaining economy of the country to make up for the costs incurred.
One such effect is given by List in the positive influence industry has on the other
sectors through the increase in productive powers. He gives the example of a corn
mill which furthers the prosperity of the farmers living in its vicinity, and then takes
this example to the national level, that is, manufacturing and agriculture in general. 136
The effects of the mill on the farmers we do not need to dispute. However, on the
national level, this argument does not necessarily hold true. In the case of the United
States, for example, those living in the vicinity of a manufacturing industry do indeed
observe positive effects on wages, value of land, and so on. But those living further
away, like the inhabitants of the South, do not necessarily feel any of the positive
effects the manufacturing industry has. History has shown that in this case, the South
had to bear the highest burden, while the North reaped the highest profit from
protectionist policies.137 Here, the phenomenon is indeed a geographical one, not one
determined by political boundaries, and it is not surprising that the Southern states
were not convinced to bear the majority of the cost of establishing new industries.
Another problem is the selection of industries to which protection should be
applied. As private investors apparently do not deem certain developments profitable,
136 List (1909), pp. 128f.
137 DiLorenzo (2003), p. 126.

46

it remains an unanswered question on what basis governments are certain that

investing in the industries they selected will turn out to be profitable and sustainable.
Should these investments turn out to be unprofitable in the long run, they will only
create a cost for the consumer without any benefits in the future. List circumvents
this problem with his aim of economic self-sufficiency of the nation-state, which
means that all vital industries will be developed, which then, however, could make
re-joining the world economy difficult, and which cannot be considered practical in
the present-day world economy with the high diversity of products available.
The economic history of the United States, which, under the American System,
relied heavily on the use of protectionist policies to steer its economic development,
provides an illustrative example of the influence of protectionism on industrial
development and the motives behind the interventions. In our examination, we shall
focus on the textile industry, a main industry in the period of industrialisation, and
important for the economic self-sufficiency List advocates.
In the United States, the question of protectionism rose to prominence after the
War of 1812. It should become a source of constant political conflict, especially
between the North and the South, eventually leading, along with other factors, to the
War Between the States half a century later. The War of 1812 cut off the formerly
important commercial ties between the United States and England, acting as a natural
protection to domestic manufacturing industry. Thus, there was a lot of investment,
especially in textile manufacturing, to satisfy domestic demand of these products.
After the war, these manufacturers, who, for the most part, could not compete with
English competition, formed a first interest group to continue protection. The Tariff
of 1816 was generally accepted across the political spectrum, however, not only out
of a feeling that the new industry should be protected. While this certainly had an
important influence, Taussig notes that especially the South supported the tariff out
of concerns over a possible new war with England, and because it was a much
needed source of revenue to repay the debt incurred during the war (as the federal
government could not levy any taxes in these days, it had to rely on tariff income).138
The cotton manufacture developed rapidly before the Panic of 1819, especially
since technical improvements, like the use of the power-loom, perfected by Francis
C. Lowell independently from English models in 1814, made production more
efficient. After the war, the Tariff of 1816 did not prevent an initial depression in the
cotton industry, and the following crisis further depressed the condition of the
138 Taussig (2010), pp. 23-25.

47

industry. However, after the Panic of 1819 led to a rearrangement of the financial
sector, the price structure became more advantageous, and cotton manufactures
rapidly recovered, with profits leading to an expansion of the industry. By 1824, the
cotton manufacture was already securely established as an industry. While Taussig
notes that the war certainly helped to speed up the process of establishing the cotton
manufacture, he suggests that the Tariff of 1816 did only little to further help the
industry, and that after 1824, the tariffs were no longer necessary to protect the cotton
industry from competition. It is worth noting that the technologically advanced
factory in Waltham, Massachusetts, managed to not only withstand the depression
during the Panic, but even to expand its business.139
Here, we can see that, when advocating infant industry promotion, it is important
to differentiate between long-term protection to fully establish an industry or shorter
protection until some enterprises in the infant industry have the ability and sufficient
technological knowledge to withstand foreign competition, leaving its further growth
to the market, as the duration of the protection from foreign competition not only
determines the total cost of protectionism the consumers have to bear, but can also
influence the future competitiveness of the industry in general.
The woollen manufacture developed similarly to the cotton industry. After
development was encouraged strongly during the war, it continued to expand
continuously, even though it received only mild protection between 1816 and 1828,
and by the end of that period, had been firmly established like the cotton industry.
Also, the application of the power-loom for the woollen manufacture took place at
the same time as in England, if not earlier, and thus, other things equal, made the
production in the United States not costlier than in England. In 1828, a new tariff was
enacted, imposing high duties on a wide range of products, and giving strong
protection to the woollen manufacture for the first time. But by then, the textile
industry was already in a position to compete with the English products and the
increased protection was no longer necessary.140 Thus, it only put an unnecessary
burden upon the consumers in the country.
We can see from the observation of the history of the textile industry in the
United States during the first half of the nineteenth century that, as Taussig writes,
while the conditions for infant industry promotion existed, protectionism actually had
little impact on the initial development of said industries. Moreover, he points to
139 Rothbard (2007), p. 23; Taussig (2010), pp. 31-38.
140 Taussig (2010), pp. 40-45.

48

several factors unrelated to trade that helped the industrial development: a change in
the old habits and the old economic system through the Panic of 1819, skill in
developing and applying new technologies, stable political institution, and freedom
of movement for labourers. He acknowledges that the war had an impact on the
initial development of manufactures, but notes that it is difficult to conclude from
this the necessity of infant industry promotion, for it is impossible to know what the
future would have looked like had it not occurred. It thus seems that infant industry
promotion did not play the most important role in the establishment of an
internationally competitive textile industry, even though protection certainly shaped
its future development. And from 1840 on, as Taussig points out, the defence of
protectionism already started to move away from the infant industry argument, and
towards an argument for wages, and the iron industry, which was already established
and not in its infancy any more, moved towards the centre of the debate.141
Additionally, looking at the character of the protective movement of that period,
we can see that many arguments for and against protection were made for political
motives and special interest, and not so much out of concern for the general national
interest. This can be observed from the beginning of the protective movement
between the end of the War of 1812 and the Panic of 1819. The agricultural Western
and Middle states calling for protectionism did not solely want protection for the
newly established industries, they also included calls for the protection of their own
agricultural goods.142 After the Panic, politics became even more prominent in the
debate about tariffs. The best example is the Tariff of 1828. Being opposed to earlier
tariffs, as a comparatively larger share of the burden was carried by them, and not
those regions which where benefiting from the manufactures, the Southern states
moved to eliminate the tariffs, while at the same time bearing in mind the upcoming
presidential elections. They joined the drafting of the tariff bill, and tried to make
sure that the tariffs imposed had such a wide range that the products of the Middle
and Western states would also be heavily penalised, thus prompting a rejection of the
final bill by Congress.143 However, the plan did not succeed and the Tariff of 1828
had thus been passed in a form approved by no one.144
While others, like Chang, disagree with Taussig's radical interpretation of the
little effect protectionism had, it is generally agreed that at least by the 1830s, the
141 Taussig (2010), pp. 57-61.
142 ibid., p. 65.
143 ibid., pp. 75-80.
144 ibid., p. 90.

49

cotton industry would not have needed further protection. Nonetheless, the United
States continued to keep up some of the highest barriers to free trade, and only
switched to free trade policies after the Second World War. 145 This would suggest a
strong political motive behind the continuing protection and illustrate clearly the
dangers of such interventionist policies when the decision makers become captivated
by or politically dependent on the special interest groups which profit from certain
interventionist measures. In the case of the post-war US textile industry, we can
again observe this clearly. According to J. Michael Finger and Ann Harrison, the
U.S. textile and apparel industries achieved a degree of protection that was
unparalleled in the rest of the manufacturing sector 146 after the war. This was, in no
small part, due to the political interest the US government had in offering that
protection. The textile industry, by now located in the southern parts of the United
States, and the political representatives of that region, were an influential interest
group which was able to put enough pressure on both President Kennedy and
President Nixon to exchange protection of the textile industry for political support.
According to Finger and Harrison, the protection granted to the textile industry
amounted to 83% of the cost of import restrictions on the overall US economy. It was
only in 1994 that this protection was lifted.147
This example does not only illustrate the risk of protectionism becoming
permanent well beyond the period of industrial infancy. It also raises the question
about the general success of infant industry promotion to create internationally
competitive industries in all sectors the state chooses to develop. After all, the US
industry was protected for over a century, yet only fifteen years after the end of the
Second World War, when the United States finally lifted the heavy protection, one of
the key industries of the previous period already faced difficulties in competing with
foreign nations. While one could argue that the establishment of the textile industry
was still worthwhile from the political objective of establishing a domestic
manufacturing power, and perhaps because the establishment of the textile industry
caused sufficiently large external effects, it raises doubts about the claim that
eventually, infant industry promotion will benefit the consumer greatly due to the
lower prices that domestic production will soon offer.

145 Chang (2003), pp. 25, 29f.

146 Finger, Harrison (1996), p. 43.
147 ibid., pp. 44-48.

50

5.

Development and Economic Nationalism in Modern

Society
In this last part, we shall examine the relationship between trade and

development, both in general terms, and by looking at the illustrative case of

Uruguay and Denmark, which shows not only the influence of trade, but also the
importance of endogenous factors for a successful industrialisation. Furthermore, we
will take a look at the different development paths East Asian and Latin American
countries have taken, and highlight the successes and problems encountered. We
shall also examine the modern free-trade agreements and see whether they can be
considered as a policy of kicking away the ladder.

5.1.

Trade and Development

While trade policy certainly had a great impact on the specific form economic
development and industrialisation took place, trade theory itself, and especially freetrade theory, has only little explanatory power when it comes to development.
Economic growth happens through capital accumulation (including human capital),
that is savings and investment, from which individuals profit through an increased
division of labour, which makes more products available, allows for specialisation,
leads to increased productivity resulting from the higher rate of capital to labour, and
allows for the development of the productive powers. This is true for all countries,
whether developed or underdeveloped.148
The production of higher-value-added goods is often an objective of development
policies in an effort to diversify the economy away from often natural comparative
advantages in agricultural production and resource extraction, which many
developing countries hold. It requires investment into higher stages of production,
which in turn requires a shift of time preferences from the short term to the long
term, and the accompanying savings. Furthermore, should the country wish to
continue its participation in international trade, or re-enter international trade after a
period of development, it is necessary to develop new comparative advantages in
these higher-value-added sectors. Here, it is worthwhile to once again take a look at
List's theory.
While he accepted the law of comparative advantage as valid for naturally
determined advantages, he saw no natural differences between the countries of the
148 Rothbard (2009), p. 970.

51

temperate zone with regards to the manufacturing sector, while on the other hand, he
regarded these countries as more suited for manufacturing than the rest of the world.
From this, we can infer that he regarded mainly socio-political and cultural factors as
relevant, which were, though different amongst the various countries, distinct from
the circumstances in the rest of the world.149 It is, however, reasonable to assume that
developing countries would be able to achieve an environment conducive to the
establishment of an industry, too, and the experience not least in East Asia, which we
shall examine further below, is an example of that.
The question in the context of this thesis, concerning the relation of trade and
development, is, whether it is necessary for the government to intervene in trade in
order to enable such a development, or if it can happen under a system of genuine
free trade with little government intervention. Analysing the question of necessity of
government intervention is neither to say that government intervention in trade did
not happen during the industrialisation of the now developed countries, nor that it did
not influence the economic development of these countries. As we have seen from
the history of the United States, government intervention took place, and it
necessarily shaped the way development should happen. We want to examine
whether countries can develop without strong protectionist policies for infant
industries. That protection and the coerced reallocation of resources does shape the
specific character of the industrialisation is a logical consequence of the intervention,
and there is no use in denying it, as the orthodox establishment does, as Chang
argues throughout Kicking Away the Ladder.
We have already seen by looking at the United States that the need for tariffs in
the establishment of new industries is not as clear a matter as it is made out to be.
The early driver of industrialisation, the textile industry, was quickly competitive, as
the case of the Waltham factory (which even withstood the upheavals of the Panic of
1819), the consensus that the cotton industry did not necessarily need protection by
the 1830s, and the invention of improved machinery like the power-loom at the same
time as the English show.
The comparative analysis of the development of Denmark and Uruguay at the
end of the nineteenth and beginning of the twentieth century by Dieter Senghaas
offers valuable insights regarding the factors that contribute to the success or failure
of economic development, and shows that protection is not necessarily imperative for
a successful industrialisation. Comparing these countries around the turn of the last
149 List (1909), p. 131.

52

century, Senghaas shows the different development paths of two small, exportoriented economies with similar starting conditions. By the early nineteenth century,
the feudal structures in Denmark were removed and the system was replaced with
that of free farmers, while at the same time, a modernisation of agriculture took
place. The majority of farms was in private possession, and the modernised
agriculture specialised in exports.
During the European agricultural crisis in the second half of the nineteenth
century, Denmark faced heavy competition of cheaper agricultural products from
transatlantic countries, which Denmark countered by shifting its focus from the
export of pure agricultural goods to value-added agricultural goods in an effort to
gain new comparative advantages, instead of reverting to protectionism. 150 It
focussed on the establishment of an agricultural industry, aided by a high level of
education and a focus on practical formation useful for the industry. What is notable
is that the agricultural businesses were mainly in private possession and selforganised in cooperatives, which took on a coordinating function.151 This model
allowed for a greater spread of real income among the population, and stimulated a
local industrialisation to satisfy the demand for consumption goods. With the Crash
of 1929, the Great Depression, and their repercussions across the globe, Denmark
decided to give up its liberal policies and concentrate more on protectionist and
interventionist measures, a development which should be reversed only later in the
twentieth century.152 Nonetheless, we can see that a successful initial development
under free trade, based on private initiative, is possible, and that through this private
initiative, new comparative advantages could be developed once the old ones started
to disappear.
The case of Uruguay differs significantly from that of Denmark. Its agriculture
had mainly been devoted to meat production. From the 1870s onward, land reform
was enforced by enclosures, putting much of the previous herders out of work.
British influence increased significantly through the granting of credits and
investments in the cattle industry. Uruguay accepted the role of supplying
agricultural products and raw materials for Britain, and receiving manufactured
goods and British capital in return. However, due to the centralised nature of cattle
farming, most profits were not reinvested, but rather spent on the consumption of
European consumer goods and luxuries. Its place as a supplier of British needs
150 Senghaas (1982), pp. 149-152.
151 ibid., pp. 154f.
152 ibid., pp. 157-159.

53

further hindered a diversification of the national economy. In the early twentieth

century, there was some political drive towards the creation of a domestic
manufacturing industry, and a stronger focus on economic nationalism. Nonetheless,
the cattle industry remained dominant on the large scale.153 With the Crash of 1929
and the subsequent world economic crisis, Uruguay, like the rest of the Latin
American countries, shifted its focus from exporting cattle towards import
substitution industrialisation, which we shall examine more closely presently.
Comparing the two countries, Senghaas notes that, while Denmark was
successful in adapting its economy to new international demand and thus laying the
foundation for continued development, Uruguay failed to do so, relying primarily on
the gains of its cattle exports. In Denmark, the capitalist system was one of
competition, while in Uruguay, it rested mainly on an oligarchical basis, as did the
socio-political power structure. Senghaas concludes that the reason for the different
development paths lies mainly in these differences in the social structures. 154 This is
important to stress. He questions the interpretation of the world-systems theory and
the dependencia theory, which see this development as a necessary outcome of
international political power structures and economic dependency of peripheral
countries on the central nations, especially since Uruguay was not a typical colonial,
but an independent country. Rather, he underlines that internal structures,
endogenous factors, played a major role in overcoming, or succumbing to, the
challenges and changes on the international market.155
From this example, we can see that trade can have decisive influences on national
development, but must not necessarily result in the negative consequences List and
modern critics of free trade caution against. Moreover, we can see the importance of
internal factors to successful development, both with regards to the general skills of
the population in adapting to changes, and of the socio-political power structures
which might further or impede such changes.

5.2.

East Asia and Latin America Two Paths to Development

The economic development of East Asia and Latin America offers two interesting
examples of a government-steered approach to development. Both have been very
distinct, and the results have been very different. While in Latin America, the
approach led to an eventual collapse of the system and a resulting radical shift
153 Senghaas (1982), pp. 161-165.
154 ibid., pp. 169-174.
155 ibid., pp. 215-220.

54

towards liberal policies, with subsequent economic improvements, the Asian

approach has been more successful, even though the Asian financial crisis of 1997
did show structural deficiencies in this case, too, and it remains to be seen in how far
these countries will be able to translate their astonishing economic growth into a
sustained development that will eventually see them approach Western living
standards.
5.2.1.

Latin America and Import Substitution Industrialisation

The Latin American approach, import substitution industrialisation based on the

dependencia theory, is perhaps the most Listian approach to economic development
in the twentieth century. Dependencia theory, developed most prominently by Ral
Prebisch and CEPAL, the United Nations Economic Commission for Latin America
and the Caribbean, has its politico-economic basis in the Prebisch-Singer thesis,
which states that the terms of trade between primary products and higher-valueadded goods deteriorate over time to the disadvantage of primary-goods producers.
The peripheral nations supply raw products, agricultural goods, and cheap labour for
the central nations and serve as export markets for the developed nations in return.
This places them in a state of dependency on the central nations, especially with
regards to technology, and inhibits their development, which is amplified by actively
obstructive policies of the central nations.156 In order to remedy this situation,
countries need to industrialise with a special focus on the development of domestic
technologies. It is worth noting that Prebisch and CEPAL did not advocate for
protectionist policies and a development based primarily on domestic production for
the domestic market.157 Nevertheless, the Latin American countries broke off their
ties with the central nations and focussed on the development of a domestic industry,
a process known as import substitution industrialisation.
As we have shown previously, the dependency argument was similarly applied by
List with regards to the not yet developed nations of the temperate zone and their
relation to the British economic superiority, even though he explicitly advocated the
modern state of dependency in his system of fully developed temperate zone nations
and their respective colonies, which serve, as dependencia theory criticises, as export
markets and suppliers of agricultural and colonial products and raw materials. While
the original dependencia theorists did not advocate for protection, the Latin
156 Yergin, Stanislaw (2002), pp. 234f.
157 Levy-Orlik (2009), pp. 442-444.

55

American governments followed List's recommendations of protectionism and

focussed on the development of their national industries. However, they did not only
apply protection to carefully selected industries, but spread them across the entire
manufacturing sector.158
The policies of the Latin American countries differed in detail, but there are
several key elements characterising them, which Yergin and Stanislaw described:
Politically, they were often led by military dictatorships of all stripes, which took
control of the economy to a varying degree, ranging from Fascist models of
corporatism in Argentina to Socialist models like that of Peru. The economic policies
were based on state control over the economy, economic nationalism, and antiAmericanism. Protection was granted to help develop the domestic industry.
Government control was crucial, and the state was both seen as the engine of
economic growth, and a possibility to attain wealth. While, during the first twenty
years, from 1950 to 1970, the model seemed to work and economic indicators like
income showed positive development, the 1970s made clear that the economic
structure was highly deficient. The countries experienced (hyper)inflation and overindebtedness, which aggravated during the decade and eventually led to a debt crisis
in 1982, a subsequent restructuring of debt, and the restoration of the balances of
payment under guidance of the IMF and the austerity programmes it imposed, the
controversial IMF conditionality.
The years following the debt crisis should become known as the Lost Decade, a
period in which the Latin American countries experienced little to negative growth.
In addition to reforms imposed from the outside, the failure of state-led economies
was evident, and the people of many countries chose to elect politicians that would
embark on a market-oriented development path, often through thorough and rapid
changes.159 Nonetheless, the problems created by previous mismanagement,
uncompetitive industries which were shielded from international competition through
protectionism, or from any risk at all when they were directly state controlled and
could sustain losses by making up for them with public funds, and a high regulatory
burden, together with the contagion effects of several financial crises, have meant
that the countries still face obstacles to a sustained growth path.
The change towards a more open and market-oriented economy was done in most
countries by radical reforms. In Bolivia in 1985, Gonzalo Snchez de Lozada, then
158 Levy-Orlik (2009), pp. 444f.
159 Yergin, Stanislaw (2002), pp. 232-238.

56

minister of planning, pushed through a reform that cut tariffs, reduced government
budgets, eliminated price controls, reformed the tax system, and restructured the
public sector, resulting in a stabilisation of the economy thereafter. 160 Chile's path
was somewhat different. Already during the 1970s, Augusto Pinochet, who was
influenced by the Chicago School, used his dictatorial powers to reform Chile's
economy towards a market economy, including a deregulation of the financial sector
and free trade. While this early adaptation did not prevent Chile from suffering like
the rest of the Latin American countries during the 1982 crisis, market reforms were
carried on during the 1980, correcting mistakes (like those made in the financial
sector) of the previous generation of reformers, and opening up Chile's economy
even more. The governments after the return of democracy in 1989 continued along
that path. As a result, the economy grew and diversified, exports rose, and inflation
was reigned in. Chile thus became a role model, experiencing stable growth for
years, with a liberal economy that rested primarily on the market principle and not on
government intervention.161
A similar process can be observed in other Latin American countries, like
Argentina, Peru, and Brazil, which all took on radical reforms to escape the trap
governments steered their economies into. Altogether, Latin America can be seen as
an illustration of the risks that come with the shaping of the economy after political
wishes. While outright Socialist planning certainly made matters worse,
protectionism did not help in establishing competitive, internationally oriented
industries. The government programmes and isolated industrial development were
costly, corruption was widespread, and hyperinflations and over-indebtedness had
such dramatic effects that, eventually, these countries had to surrender to IMF
conditionality, which was likely far from their original goal of national
independence.
5.2.2.

East Asia's Export-oriented Development

The economic development of East Asia contrasts strongly with that of Latin
America. Initially, the East Asian countries instituted policies of import substitution
industrialisation after the Second World War. However, when faced with a cut-off
from American aid in the middle of the 1960s, they shifted towards an exportoriented industrialisation and encouraged the inflow of technology and capital, thus
160 Yergin, Stanislaw (2002), pp. 232-234.
161 ibid., pp. 239-242.

57

starting a development that should become known as the Asian economic miracle. 162
Before the East Asian nations embarked on this development, Japan performed a
similarly astonishing development, and the East Asian nations should use the
Japanese economic policies as an orientation for their own, distinct frameworks.
Japan laid the economic foundation which made it an economically strong nation
already before the Second World War, which devastated Japan's economy and
infrastructure greatly.163 After the war, though, it should catch up again rapidly. Based
upon solid economic foundations, like an educated workforce, a strong work ethic,
low inflation, and a high savings rate, Japan quickly became one of the world's
leading economies. This success was engineered by the state-led development of an
export-oriented industry focussing mainly on higher-value-added products, like
consumer electronics and cars, which was supported by the strong cooperation of
businessmen, politicians, and bureaucrats. Government policies were directed at
export promotion and the support of producers, not consumers, which resulted in
high domestic consumer prices. This system, though, also had its downsides. Even
after the initial growth was achieved, a liberalisation of the economy proved to be
politically difficult. Furthermore, the country burdened itself with heavy debt, and a
speculation boom during the 1980s resulted in a deep recession in 1992 and left the
country paralysed.164 Up to the present day, the economy has been more or less
stagnant.
The East Asian countries, while applying distinct systems designed for their
national circumstances, should follow Japan's example of an export-oriented
industrial development. One case is the development of South Korea. In 1961, the
country came under the autocratic rule of General Park Chung Hee, who, during his
rule until 1979, committed the country to economic development. He was supported
by an efficient bureaucracy, and, as was the case in Japan, by a workforce motivated
by a strong work ethic. When the country started its programme of export promotion,
it first targeted a wide range of industries. With growing development, however, Park
started a policy of picking winners, selecting already successful enterprises for
further government assistance, turning them into large, government-supported
corporations. It is worth noting that Park was very active in personally supervising
the country's economic development and the performance of its industries, setting
goals and punishing failure. Furthermore, his regime laid out tough rules for the
162 Woods (2010).
163 Chang (2003), pp. 46-49.
164 Yergin, Stanislaw (2002), pp. 142-149.

58

workforce, which had to support the economic growth with hard, disciplined work
and long work hours.165
When the population became discontent, Park counteracted by controlling
inflation and attempting to spread the benefits of economic development more
widely across the population. After his assassination in 1979, South Korea embarked
on a programme of economic reform and liberalisation. The state regulated
corporations were becoming increasingly inefficient and dependent on financial aid
from the government, agricultural production was inefficient as well, and the banking
sector faced serious problems. The economy became too big to be centrally managed.
Like in Japan, the successful development of the Korean economy also had its
downsides. The large corporations were heavily indebted, the development of small
or medium-sized businesses was neglected, and corruption was widespread.
Eventually, the Asian financial crisis of 1997, which started with the collapse of the
Thai currency, affected the Korean and other East Asian economies heavily.
Following the crisis, South Korea turned towards privatisation and reform, taking
away power from the large corporations, which were a major cause of the
vulnerability of the Korean economy during the crisis, and encouraging the
development of smaller businesses.166
East Asia shows a more successful path governments can take to encourage
industrial development and increase their output than the one Latin American
countries have taken. Nevertheless, it is important to realise that this development
also came at a cost. The benefits and profits of the industrialisation went to a large
part to the big corporations, politicians, and corrupt bureaucrats, and not to the hardworking population, and the special interests of government officials and bureaucrats
prove a potent barrier to necessary market reforms. Large private and public debt
leaves the economies vulnerable to contagion from financial crises, and, in some
cases, dependent of foreign assistance, which results in stronger foreign political
influence. After a successful industrialisation, it remains to be seen whether the old
system can be changed so that the benefits of economic growth are spread across the
whole population, and whether the countries manage to reform their political and
economic structures towards a long-term sustainable system, and solve the problem
of their private and public debt loads.

165 Yergin, Stanislaw (2002), pp. 151-154.

166 ibid., pp. 154-157.

59

5.3.

Free Trade in the Twenty-first Century Kicking Away

the Ladder

The criticism of free trade goes back hundreds of years. From the mercantilist
theories of the seventeenth and eighteenth century, to List's economic nationalism, to
the modern theories of dependencia or imperialism, and eventually to present-day
development economists like Chang, it has been seen as a zero-sum game, profiting
one nation at the cost of another, and impeding national development. The
Montaigne fallacy has not yet lost its appeal. While in the eighteenth and nineteenth
century, the discussion was between economic nationalists like Friedrich List on the
one side and Classical Liberals on the other, in the twentieth and twenty-first century,
it is mostly a conflict between the orthodox school, especially since the rise of
neoliberalism in the 1980s, and a heterodox mix of different schools, including the
new historical approaches of Chang and Reinert. At the centre of the debate are
especially the WTO policies, IMF conditionality, and the various free-trade
agreements of the last decades.167
We have already established the meaning of genuine free trade: it is the
expansion of the market principle of unhampered, voluntary exchanges across
political boundaries. Per definition, it is mutually beneficial, even though it might not
conform with political development goals of governments and political economists.
However, the question is to what extent free-trade agreements, the most popular form
of free trade in the present, do actually fit the genuine meaning of free trade.
A lot of confusion stems from mixing together neoclassical and neoclassicalsynthesis theory, actual economic policy, and misleading terms applied by both
supporters and critics of free trade. Simply using words like neoliberalism or adding
free-trade to aforementioned agreements does not necessarily give them a liberal or
free-trade substance. Chang criticises the rise of Neo-Liberalism, which emphasises
the virtues of small government, laissez-faire policies and international openness.168
The rise in popularity of neoliberal policies might be true in the field of theoretical
debates. It is, however, far removed from actual policy. With some exceptions,
governments intervene decisively in every developed economy, the regulatory and
tax burden has not been significantly reduced in any of the large nations, public debt
remains high, and so do public expenditures.
The same holds true for free trade. Genuine free trade does not require treaties or
167 Thrasher, Gallagher (2008), pp. 13-21.
168 Chang (2003), p. 15.

60

trade agreements, it only requires an elimination of trade barriers like tariffs or

quotas, and other regulations, whether domestic or trade related, as well as subsidies
or other privileges to domestic industries. Neither does it require international
oversight committees.169 In the case of free-trade agreements of the twentieth and
twenty-first century, many of these issues have been passed over, especially those of
more subtle barriers like regulations, or even actively promoted.
While the so-called free-trade zone of the European Union eliminated border
controls and tariffs, the European superstructure publishes roughly 34.000 pages of
legislative decisions a year in its Official Journal.170 Its common agricultural policy
is designed to protect European agriculture from foreign competition. The North
American Free Trade Agreement comprises more than 2000 articles, with detailed
rules on exceptions to free trade, new regulations, and so forth. The WTO
agreements also lay out detailed special rules, with the Agreement on Trade Related
Aspects of Intellectual Property Rights (TRIPS) being outright restrictive to free
trade. Various environmental, anti-dumping, health, labour, etc., regulations are being
enforced around the world. All this, however, does not have a lot in common with
genuine free trade. It is much more the replacement of one set of restrictions with
another, designed by those nations with the greatest economic and political power.
Chang also notes the various institutions that the now developed countries suggest
for adaptation in the developing countries, along with their economic policies,
despite the fact that many of these institutions were the result, rather than the
condition, of economic development in the nations of the centre, which had
comparatively free internal markets during their period of industrialisation.171
As Chang observes, all this puts restrictions upon the development of peripheral
countries and amounts to a modern, multilateral version of the 'unequal treaties' that
Britain and other NDCs [now developed countries] used to impose on semiindependent countries172 On the one hand, it restricts their potential to utilise activist
government policies as an approach to development, on the other, it appears to be an
effort to defend currently held comparative advantages like technological superiority
(in the case of the TRIPS, for example), and, more importantly, to make up for the
comparative disadvantages that come with the high regulatory burden, high taxation,
and high cost of labour in the developed countries. These neoliberal policies seem to
169 Rothbard (2006c), pp. 367-369.
170 Pignal (2012).
171 Chang (2003), pp. 129f.
172 Chang (2003), pp. 127f.

61

be steered much more by economic nationalism and neomercantilist beliefs, even

though they are clad in free-trade rhetoric.
This impression is consolidated when looking at subtle approaches to export
subsidies by developed nations, like the granting of foreign aid and the granting of
credits by governments of developed nations to the governments of developing
nations, often involving some sort of conditionality. Both are designed to further the
exports of the developed nations at the cost of the public of the developed countries
(in the case of aid or defaults on the credits granted), and of the public of the
developing nations (in the case of a repayment of the debt), which have to supply the
funds for their governments use. Just like it is the case with protectionism and other
policies designed to further economic growth, it subsidises the profits of certain
industries at the cost of the consumers at large. Furthermore, developed nations could
unilaterally adapt free-trade policies if they indeed believed in the free-trade theory,
instead of forcing treaties or agreements of supposed mutual benefit upon other
nations.
Thus, we have to agree with Chang when he writes: [A]re the developed
countries 'kicking away the ladder' by which they climbed up to the top beyond the
reach of the developing countries? The answer to [this question], unfortunately, is
yes.173 However, this is not done by the application of free-market principles and
free-trade policies, but by also subscribing to the notion that free trade is, eventually,
a zero-sum game which has winners and losers. In other words, by designing a policy
aimed at furthering the interest of certain national industries, at the cost of the
consumers of one's own country, and those of the countries of the developing world,
by subscribing to economic nationalism, and, incidentally, trying to fulfil List's
vision of international trade in a world of perfectly developed central nations and
dependent peripheral nations.174

173 Chang (2003), p. 128.

174 Rothbard (2006c), pp. 369-375.

62

6.

Conclusion
In the National System, List made notable contributions to economics. His theory

of the productive powers shows the importance of the correct use of different forms
of capital for economic development and underlines that the means for the
production of material wealth are most important for continued prosperity, and not
merely the accumulation of material wealth itself. He also stressed that it is the union
of the economic actors that lies at the heart of the theory of the division of labour, a
fact the Austrians equally emphasised. Furthermore, he drew attention to the nonmaterial factors that contribute to successful economic development, like the sociopolitical and cultural circumstances of a particular society, though he did not see the
need to elaborate more extensively on the last point and its influence on economic
development, likely due to the fact that his theory addressed primarily the economic
development of the central nations, which have many cultural, political, and societal
similarities, and instead laid his focus on protectionism as a central means to promote
industrialisation.175 Here, it is important to note that List's approach was decidedly
pragmatic, using free-trade approaches to further early national development, and
interventionism at the later stage.
As our analysis of economic theory and economic history has shown, the
necessity of protectionism as a policy tool for economic development cannot be
established with certainty. The case of Denmark offers one example of a nation
which managed the shift from the export of agricultural primary products to the
export of higher-value-added agricultural goods, and the establishment of a domestic
manufacturing industry and a potent domestic market under a free-trade policy,
relying on favourable societal structures and private initiative. In comparison to
Uruguay, it also shows the importance of endogenous factors for development, which
are taking a more prominent place in contemporary development theory, especially as
it focusses on the nations that List declared categorically unfit for industrialisation.
We have pointed out the cost of protectionism to the individual consumer. While
List justified the present cost of protectionism with the future benefits
industrialisation will bring, we have to remember that this is not an objectively
economic argument, but a subjectively political one. To establish an objective case
for the benefits of industrialisation through protectionism, one would need to be able
to compare subjective preferences between individuals and between different points
in time, a feat that is impossible to achieve. In addition, he drew upon the argument
175 List (1909), p. 247.

63

of national interest. This, though, is a subjective political argument, too. The nationstate is not a living entity with own interests and goals different from those of the
individuals and groups who formulate them and act on behalf of the state. The same
holds true for development goals in general. As there is no natural development path
along which nations inevitably have to progress, these goals need to be set by
individuals, and enforced through the use of coercion, as they apparently cannot be
achieved through voluntary interaction and cooperation of individuals in the free
market. The questions as to what politico-economic goals are right, to what extent
the interest of individuals may be subjected to the interest of those in government
who set the course for the development of the nation and national powers, and
whether it is ethical to enforce them at the cost of some to the benefit of others are,
however, beyond the scope of the economic analysis of this thesis.
We have also shown the risks inherent in infant industry promotion. List tried to
reduce them ex ante by setting a clear conditionality for the application of infant
industry protection, calling for a gradual application of tariffs, the careful selection of
industries, and stressing that they should not be applied beyond necessity. However,
as the history of applied infant industry promotion has shown, already in the United
States of the nineteenth century, politics, and not the selfless fulfilment of national
interest, began to play an increasing role in the application of protectionism, which
was extended beyond the infancy period. Similarly, in Latin American countries,
protection was indiscriminately applied across the whole manufacturing sector,
without taking strategic considerations into account, a policy that eventually resulted
in the collapse of their economic systems. Also, the importance of prolonged tariff
protection to initiate industrial development vis--vis the other factors influencing
economic development, like institutions, culture, and habits, is not quite obvious, and
the success of the export-oriented approaches in contrast to more inward-oriented
development suggests that there can be other, more efficient ways to achieve the goal
of industrialisation.
Thus, the present-day relevance of List's theory has to be considered from several
angles. The National System is, as we have said, an important foundation for
contemporary political economy, and for studying the relationship between central
and peripheral nations. His theory of dependency, achieved through the application
of international economic policies and unequal treaties, is at the core of the current
debate about the relationship between the centre and the periphery and the criticism
of contemporary free-trade agreements, even though it has to be remembered that
64

these issues do not stem from the application of genuine free-trade principles, but
from the use of political and economic power to enforce policies to the advantage of
the more powerful nations. List's historical analysis has shown that economic policy
can be used to achieve certain development goals, and the development of the East
Asian nations acts as proof that government intervention, if correctly applied and
supported by a sound economic and socio-political foundation, can speed up the
industrialisation process. Thus, the general aspects of the National System can be
considered as important for the present day.
Nevertheless, the special tenets of his theory must be evaluated differently. While
some countries did indeed follow List's path of establishing great nation-states and
colonising peripheral countries to gain national power, the colonies have been lost
again and the relative political power, especially of Western European nations, is on
the decline, while the more advanced nations of the periphery, especially in Asia,
increase their influence and importance. With the extensive trade between
industrialised nations themselves, the end of the colonial age, and an increased
dependence on natural resources which are only abundant in certain regions of the
world, the most notable example being oil, List's central goal of the economic
independence of the nation-states seems unattainable, even for a country like the
United States, which has both the world's biggest economy and greatest military
power, in addition to its extensive political influence.
List's vision of a world with industrialised nations in the centre and dependent
colonies in the periphery was once the object imperialism tried to achieve, and
towards which today, to a certain degree, central nations still strive on the more
subtle path of free-trade agreements, protection of technological advantages through
intellectual property laws, and so forth. In the periphery, now made up of sovereign
nations, this state of international relations, however, is the exact problem the
countries try to overcome, in order to free themselves from dependency on the
industrialised nations, and manage a successful industrialisation process themselves.
Development economists like Chang, or previously the dependencia economists, are
also trying to formulate theories which aim at surpassing this state of international
relations, and aiding less developed countries to initiate stronger and sustained
economic growth. Also, their policy tool-kit has expanded, shifting the focus away
from a more self-sufficient industrialisation through tariff protection towards exportoriented growth like in East Asia, and an analysis of the institutional conditions for
economic development.
65

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Ehrenwrtliche Erklrung
Ich erklre hiermit, dass ich die vorliegende Arbeit selbstndig und nur unter
Benutzung der angegebenen Literatur und Hilfsmittel angefertigt habe. Wrtlich
bernommene Stze oder Satzteile sind als Zitat belegt, andere Anlehnungen
hinsichtlich Aussage und Umfang unter Quellenangabe kenntlich gemacht. Die
Arbeit hat in gleicher oder hnlicher Form noch keiner Prfungsbehrde vorgelegen
und ist nicht verffentlicht.
Ort, Datum: ___________________________ Unterschrift: ____________________

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