The Confounding Cliché of Economic History

Written by William Shaub

Understanding economic theory, in law and in principle, requires a certain perception of the world. One perception requires a thorough understanding of the world as one would like it to be. The other, which is perhaps more in touch with reality, requires an acceptance of the world as it actually is, and for that, one must look to cases and examples in history.

Similarly, we find that a close look at the realities of economic history in the United States and elsewhere requires major adjustments to what is called ‘free market theory.’ These modifications lead to what should be called ‘really existing free market theory’, and this is the economic theory that is actually applied in practice.

For this, we can take a look at a rather perplexing example – a country that supposedly developed based on market principles and free enterprise – namely the United States. In the mid-18th century, the U.S. was one of the richest societies (in terms of resources) in the world, yet it was pre-industrial.

[pullquote]

Thus far, American society has clearly industrialized in opposition, not supposed adherence, to market principles.  

[/pullquote]

Adam Smith, the supposed father of modern economics, had advice for the 13 colonies. Smith requested precisely what today’s economists recommend to the third world, essentially advocating that the U.S. keep to its comparative advantages and produce what it’s best at producing. At the time, the U.S was most capable of catching fish and hunting fur, and then exporting it to England, all while importing superior British manufactured goods.

Perhaps unpredictably in the eyes of Smith, the U.S. gained its independence from Britain, and proceeded to completely ignore Smith’s free market advice. Under Alexander Hamilton, the liberated colonies immediately set up high protective barriers (such as tariffs) to try to bar superior British textiles, then later, British steel. This allowed the new country to construct its own manufacturing base under specialized protective barriers and by other forms of incredible state intervention.

A staple in American manufacturing in the 19th century was cotton, which is often referred to as the fuel of American industrialization. The U.S produced cotton and became the world’s leading cotton exporter following its elimination of a massive indigenous population, which according to Howard Zinn, could have totalled “thousands upon thousands” of Indians.

The conquering of almost half of Mexico and annexation of Texas was also in order, which was land needed to monopolize cotton and “bring England to [their] knees,” to quote the Jacksonian Democrats. The U.S. then ramped up production of this 19th century ‘fuel’ through its development of a slave society, which was followed by the criminalization of black life for the purpose of exploiting their labor.

Thus far, American society has clearly industrialized in opposition, not supposed adherence, to market principles. Rather, by radical violation of free enterprise undertaken to develop (change) its comparative advantages.

[pullquote]

…U.S. industries would never have been able to survive international competition, innovate or develop through research without these fundamental violations in market principles.

[/pullquote]

A brief look at the 20th century also reveals exactly this revelation, or the concept that the U.S. did not develop and modernize out of a devout faithfulness to market principles.

Ronald Reagan is now considered a champion of free markets, and the 1980′s a decade in U.S. history in which entrepreneurial economics flourished.  According to a comprehensive review of the Reagan era in Foreign Affairs by Clyde Sanger, a Senior Fellow for International Finance at the Council on Foreign Relations, “The postwar chief executive with the most passionate love of laissez faire, presided over the greatest swing toward protectionism since the 1930s.”

Sanger noted some thematic irony, namely that advocation of market discipline is a tool used by those with power, who manage to avoid the ravages of the market as a result of astonishing state intervention. Those without power are then exposed to the free market discipline, and are therefore left with little, if any, protection from the subsidized structures of power. This theme is indeed quite dominant in the economic history of the past three centuries.

The Reagan administration was following a common course of action that has been in practice in the U.S. (and elsewhere) for its entire existence. However, modern neo-liberals have shed new light on the free market theory charade.  In 1995, Newt Gingrich extolled the victories of the free market and methodically issued tough lectures about the immoral culture of dependence of the American poor and working people. He did this while boasting rather proudly to the business community (the Chamber of Commerce) that Reagan had “granted more import relief to U.S. industry than any of his predecessors in more than half a century.” In a scholarly review by Patrick Low, a GATT secretariat economist, he estimates that the restrictive effects of Reagan’s policies measured at approximately three times those of other leading industrial countries.

A major piece of America’s dedication to free market principles includes the transfers of taxpayer funds to private corporations, generally hidden under the masks of ‘defense’ or ‘security.’  

However, pretending that these (purposefully) initiated transfers by the Pentagon to private industry weren’t economically effective isn’t, in fact, realistic. The U.S. automotive, steel, high-tech, fiber-optic, airline and other industries would never have been able to survive international competition, innovate or develop through research without these fundamental violations in market principles.

Whether this radical protectionism in a state-guided mercantilist system is a position worth advocating is perhaps a worthy subject for debate, but its usage is unquestionably in substantial defiance of any standard (classical) free market theory in principle. Since our analytical focus is centered on the world as it is, our attention should be focused on really existing free market theory, or the economic theory that is actually applied.

President Barack Obama, unlike his predecessor, hasn’t shied away from the belief and acceptance that protectionism is effective (and profoundly disguised). Of course, when his administration’s market interventions saved thousands of union jobs during the financial bailouts of General Motors and Chrysler in 2009, American media commentators eagerly termed them ‘free market infringements’ and ‘giveaways’ to undeserving corporations and the unions. However, when President Reagan subsidized an enormous amount of GM’s capital costs in the 1980′s to save the company’s management from a massive restructuring bankruptcy, that was simply necessary in the country’s effort to save American industry.

In 2011, President Obama handily announced a ‘new’ federal project that exemplifies exactly what U.S. free market policy has always been: “a joint effort by industry, universities and the federal government to help reposition the United States as a leader…”  In desperate need of economic growth before his re-election bid that’s just one year and half away, the U.S. President turned to the application of what existing free market economic theory has always been: an incredibly confounding cliché.

ARB Team
Arbitrage Magazine
Business News with BITE.

Liked this post? Why not buy the ARB team a beer? Just click an ad or donate below (thank you!)

Liked this article? Hated it? Comment below and share your opinions with other ARB readers!