Concrete Economics: The Hamilton Approach to Economic Growth and Policy

By Gordon, David | The Quarterly Journal of Austrian Economics, Winter 2016 | Go to article overview

Concrete Economics: The Hamilton Approach to Economic Growth and Policy


Gordon, David, The Quarterly Journal of Austrian Economics


STEPHEN S. COHEN AND J. BRADFORD DELONG CAMBRIDGE: HARVARD BUSINESS REVIEW PRESS, 2016, XI + 223 PP.

Cohen and DeLong are well-known economists, but they indict their fellow economists for an overemphasis on theory. Away with models that have little relation to reality, our authors say. Instead, we need to grasp a simple lesson about the source of America's prosperous economy

What is this simple lesson?

In successful economies, economic policy has been pragmatic, not ideological. And so it has been in the United States. From its very beginning, the United States again and again enacted policies to shift its economy onto a new growth direction.... These redirections have been big. And they have been collective choices.... Government signaled the direction, cleared the way, set up the path, and, where needed, provided the means. And then the entrepreneurs rushed in, innovated, took risks, profited, and expanded that new direction in ways that had not and could not have been foreseen.

The heroic leaders include, first and foremost, Alexander Hamilton; Hamilton's nineteenth-century successors, who continued his high tariff policies; Teddy Roosevelt and FDR; and Dwight Eisenhower. Hamilton, a "major economic theorist," favored "high tariffs, high spending on infrastructure, assumption of the states' debts by the federal government [and] a central bank." The rationale for this ambitious program was to reshape the economy "to promote industry... the aim was not to shift the new and fragile economy to its comparative advantage, but rather to shift that comparative advantage."

Hamilton's policy is open to an obvious objection, but Cohen and DeLong stand ready with an answer. The objection is that free trade benefits everyone engaged in it. If, by contrast, the government picks "winners," such as industries it wishes to support, there will be losers as well. If so, do we not have here a case in which the value preferences of the policy makers have been substituted for the freely expressed wishes of the consumers?

The authors answer in this way:

The textbooks tell us that the operations of a free trade system produce a positive sum game: all sides gain. But in industries of substantial economics of scale, of learning and spillovers, there is a major zero-sum element to the outcome. Few governments, if any, place the welfare of the rest of the world above that of their own citizens--my gain can well be your loss.... In terms of the structure of production and employment, the gain of one side comes at the expense of the other side, unless ...the other side (in this case, the United States) can move its resources and people into still higher-value-added activities, industries of the highvalue future.

This response blatantly begs the question. Of course, they are right that if an industry subsidized by the government drives out of business a competing industry from another country, the subsidized industry benefits and the losing industry suffers. It hardly follows from this, though, that a free trade policy puts the welfare of the world above that of its own citizens. Why do the losses to the unprotected industry outweigh the gains of consumers in one's own country now able to buy products more cheaply from the foreign firm? Of course, if one assumes that a prosperous economy must be heavily industrialized, our question can be answered; but this is just what is at issue. Why not let the balance between industry and non-industrial products be settled by the freely expressed wishes of consumers?

Cohen and DeLong cannot yet be forced from the field of battle. They say about the "East Asian Model,"

The objective was to steer investment into industries that would pay off over the long run. It is not to direct resources into industries that earn the largest immediate profits for businesses at some set of [Adam] Smithian free-market prices. The object is to direct resources to industries that will pay off in terms of economic development. …

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