*Written by Tho Bishop, a new contributor and writer for TheSwash.com.
“Thoughts and ideas are not phantoms. They are real things. Although intangible and immaterial, they are factors in bringing about changes in the realm of tangible and material things.” - Ludwig von Mises
Ideas, we are often reminded, have consequences. Television, space travel, Disneyland – these were the results of good ideas, as are any advancement that results in innovation and progress. Mankind has nothing to fear from good ideas.
But what about bad ones?
Lets take a second to turn back time and arrive in 17th Century France under the reign of Louis XVI, the Sun King. Though he famously proclaimed that “I am the State”, his economic policy was handled by his Minster of Finance, Jean-Baptiste Colbert. Colbert believed that it was his duty as the nations leading economist to guide Frances economy in order to meet his desired ends, mainly the development of a French glasswork, French industry and the promotion of national glory. His plan? High taxes on foreign imports (making imports more expensive than they should be in order to encourage French citizens to buy domestically), the Manufacture Royale de Glaces de Miroirs (a government subsidized glass and mirror manufacturer which enjoyed a state mandated monopoly of glasswork) and control of the French money supply.
The results? By artificially increasing the costs of foreign goods, the prices of goods went up. The Manufacture Royale was never profitable during the 23 years it enjoyed it’s state granted privileges and resulted in rising the cost of timber (the 17th Century equivalent to oil). By controlling the money supply, France was able to wage war without considering the costs. Though Louis XVI benefited from Colbert’s policy, the French economy did not. Colbertism failed.
Now lets look at 19th Century Britain. Influenced by Adam Smith’s magnaum opus The Wealth of Nations, post-American Revolution Britain moved from mercantilism reminiscent of Colbertism to Free Trade as advocated by economic liberalism. Smith saw the creations of colonies as primitive and inefficient and instead understood that the unique qualities of nations, like the unique qualities of human beings, gave each country natural economic strengths and weaknesses. For example, Britain climate made it ideal for sheep herding, but poor for sugar cane. Smith understood that instead of raising the prices of Caribbean sugar in hopes that it will encourage a British sugar industry, it was more efficient to exchange wool for sugar.
Instead of believing that he could manage the economy himself, Adam Smith believed in the “Invisible Hand” of the market. Instead of looking at economics on a national level, Smith understood that every economic decision came down to the actions of individuals, acting in their own self interest. Adam Smith would have told Jean-Baptiste Colbert that it takes more than national pride to develop an industry, it requires capital, natural resources and knowledge of the craft. France’s lack of glass industry was the result of French entrepreneurs understanding it’s inability to be profitable at the time. Putting Smith’s philosophy into action, the British Empire rose from the humiliation of American Independence and succeeded in rising to new heights.
The lesson? Government regulation of the economy is a bad idea. Economic freedom is a good idea.
Unfortunately one American disagreed. Alexander Hamilton was a Revolutionary war hero, America’s first treasury secretary and founder of what is referred to as the American School of Economics. Though it is often understood that America was founded upon the idea of individual liberty, the American School advocated a return to pre-Enlightenment mercantilism. In spite of fierce opposition from Thomas Jefferson and James Madison, Hamilton fought for the American Federal government to impose protective tariffs, the subsidization of domestic industry and control of the money supply through the creation of a national bank. The results? A failed attempt to cultivate a government subsidized industrial town in New Jersey, tension between the agrarian South and the industrial North due to the tariffs and massive inflation (prices from 1791 to 1796 went up 76%).
The election of 1800 led to the removal of Hamilton’s Federalist Party in favor of Jefferson’s Republican Party. Jefferson adhered to the philosophy of individual liberty in all areas, especially economics. Where Hamilton favored taxes, Jefferson sought to eradicate them. Where Hamilton saw benefits in a national debt, Jefferson sought to eliminate it. Where Hamilton wanted the government to control the currency, Jefferson wanted it made stable. Where Hamilton wanted to protect manufactures at the expense of consumers, Jefferson wanted free trade for all. Jeffersonian Liberalism was so successful that the Federalist Party was eliminated completely.
Unfortunately Jefferson wasn’t an economist (as shown with his imposition of the disastrous Embargo of 1807) and his economic policy was a product of his passion for individual liberty, not a comprehensive understanding of the market. Though this did not falsify Jefferson’s economic logic, it did allow for future American leaders to adopt Alexander Hamilton as the true economist of the Revolution. Abraham Lincoln, Teddy Roosevelt, Woodrow Wilson, FDR, LBJ, George W. Bush and Barack Obama, just to name a few, would all endorse economic policy that advocated protectionism, manipulation of the money supply and the subsidization of industry. The American School of Economics defeated Jeffersonian Liberalism. Hamiltonianism wouldn’t be limited simply to America. German Economist Frederich List became a devout Hamiltonian during a visit to America in the 19th Century. List would inspire the German Historical School as well as such prominent German leaders as Otto von Bismark and Adolf Hitler.
Though the 20th Century saw Hamiltonianism come to dominate Western Civilization (culminating the economic distress we all suffer from today), it would give rise to the greatest Jeffersonian intellectual since the man himself: Ludwig von Mises. Mises understood what Jefferson and Smith did before him, that economics relied upon the interaction of individuals and, as such, any economic system that did not take individual human action into account would be fundamentally flawed.
Where as the most prominent 20th Century economist, John Maynard Keynes, believed that governments could regulate the economy more efficiently than individuals, Mises understood that markets were naturally occurring and that any manipulation would result in unforeseen consequences. Armed with a knowledge of the science of praxeology, Mises recognized that a government bureaucrat spending someone else’s money would never be as efficient as individuals risking their own capital in search of profit. Keynes saw savings as a destruction of wealth, Mises understood savings was the only way to accumulate wealth. Keynesian economics increased the power of politicians and economists (who would be relied upon to guide his regulated economy), Mises advocated empowering the consumer. Is it any surprise that Keynes became the favorite of those in power?
Economics today continues to pit Keynesians v. Misesians, Hamiltonians v. Jeffersonians. While Keynesians like Paul Krugman advocated the artificially low interest rates that created the Housing Bubble, Misesians were warning of it’s dangers. As the Federal Reserve continues to increase the money supply, Misesians warn of it’s inflationary consequences. As Barack Obama advocated subsidizing green jobs and car sales, Misesians advocate allowing consumers to decide which industries succeed.
If Americans wish for their government to continue a policy that gives politicians greater control over what happens with their money, then they should continue to allow Hamiltonianism mark its claim to the American School; but if Americans prefer economic freedom, then I propose a Misesian revolution.