“Recent thought in economic and social theory such as institutionalism, evolutionism, and communitarianism can be conceived to have originated in the Historical School (…)The importance of the German Historical School cannot be overemphasized in its historical role alone. (…)Its thought was partly implanted in other countries e.g., Great Britain, the United States, and Japan…”
Yuichi Shinoya
The German Historical School (GHS), which was born in mid-nineteenth century, is not a currently popular school of economics in Western universities GHS is controversial due to its links with German Romanticism, which is considered the source of Nazi ideology). This does not mean, however, that it did not influence the economic policy of parts of the world. It also shaped a certain way of thinking about the national economy, which is now returning in the international debate on the new order of the global economy as a result of Donald Trump’s specific views. But is the concept of this order new? Certainly not.
GHS was an alternative to British classical economics treated as universal (I’m leaving aside methodological issues here), but in the eyes of thinkers from less developed countries, such as Germany, considered a tool for promoting the interests of industrialized Great Britain. An important role in the creation of GHS was played by Friedrich List (it is worth emphasizing that he is considered a father of American protectionism and a continuator of Alexander Hamilton’s concept of economic nationalism), who questioned the existence of universal economic laws formulated by the classics. He claimed that these laws were only applicable to explaining the economic phenomena of an industrialized country (Great Britain). Recommendations for economic policy arising from classical economics, such as the removal of barriers to international trade, could also be applied only in Great Britain. The Ricardian Theory of Comparative Advantage, according to which free international trade benefits both agricultural and industrialized countries through specialization, was rejected by List. He believed that Germany (before unification in 1871) and the United States, as less industrialized countries, should have made sure to match the development of Great Britain by protecting the infant industry in order to be able to abandon customs barriers in the future.
Is the situation in the United States today similar to its situation in the 19th century? Back then, United States was less industrialized than Great Britain, today its main competitor is China, which is accused of causing deindustrialization in the US. Even though the United States is richer than China, China’s faster economic growth is a cause for concern (there is also the issue of the unfavorable balance of payments of the US). Despite differences in circumstances (I leave precise comparisons of these eras to economic historians), Donald Trump’s views are consistent with Friedrich List’s beliefs, which is evident in Trump’s 2016 speech.
In his speech, Trump recalled Washington and Hamilton, who emphasized the need to promote domestic production: “George Washington said that the promotion of domestic manufacturing will be among the first consequences to flow from an energetic government. Alexander Hamilton spoke frequently of the expediency of encouraging manufacturing in the United States (…)America became the world’s dominant economy by becoming the world’s dominant producer.” Similarly, List wrote about the awareness of world leaders of the need to support industry: “The great statesmen of all modern nations, almost without exception, have comprehended the great influence of manufactures and manufactories on the wealth, civilization, and power of nations, and the necessity of protecting them. Edward III. comprehended this like Elizabeth; Frederick the Great like Joseph II., Washington like Napoleon.” Hamilton and List lived during the first industrial revolution, and Trump lives on the threshold of the fourth. The focus on the growth of industrial production in the case of the first two people who did not experience the negative effects of industrialization, is understandable. In Trump’s case, this means disregarding the challenges of today, which, thanks to references to the mythical great past, allows the needs of the nation to come to the fore. He said: “It will be American workers who are hired to do the job. Nobody else — American workers.” These words express the essence of List’s beliefs: “ Each nation, like each individual, has its own interests nearest at heart.” You may ask yourself what times we are returning to?
List noted that there is a relationship between the wealth of nation and the export of industrial production: “It may be stated as a principle, that a nation is richer and more powerful, in proportion as it exports more manufactured products, imports more raw materials, and consumes more tropical commodities.” Great Britain was such a country in List’s time, the United States for almost the entire twentieth century. Trump would like to go back to those times: “So today I’m going to talk about how to make America wealthy again. We have to do it. With 30-miles from Steel City, Pittsburgh played a central role in building our nation.”
A break with liberalism in international trade (necessary according to List and Trump) means departure from the foundations of the classical paradigm, which, in accordance with Ricardo’s theory, assumed the existence of benefits from international trade for all its participants. We are observing a transition to the paradigm of the GHS. List said: “But this protection is useful not only because it awakenes the sleeping energies of a country and puts in motion its productive power, but it attracts the productive power of foreign countries, including capital, both material and moral, and skilful masters as well as skilful men.” Trump believes in the effectiveness of tariff barriers in stimulating domestic production, but this must be accompanied by economic freedom within the country: “We will make America the best place in the world to start a business. We’ll hire workers and we’ll open factories and we’ll get rid of these horrible regulations that make it impossible to do business in this country.” List thought the same: „History informs us that arts and trades have travelled from city to city and from country to country. Persecuted and oppressed in one country, they have fled to cities and countries where they were assured of liberty, protection, and assistance.”
Are protectionism in international trade and economic liberalism within the country effective from the point of view of a country’s economic growth? History shows that it happens. According to Bartkowiak, the conclusions drawn from economic theory are relative. A laissez faire policy made sense in the case of Great Britain, but in the case of Germany or the United States in the 19th century, protectionism was necessary to allow them to catch up with more developed countries. However, it is worth remembering that international trade is a huge value for the entire international community, as List wrote:„International trade by rousing activity and energy, by the wants it creates, by the propagation among nations of new ideas and discoveries, and by diffusion of power, is one of the mightiest instruments of civilization, and one of the most powerful agencies in promoting national prosperity.”
Bibliography:
Bartkowiak R. “Historia Myśli Ekonomicznej” (History of Economic Thought), PWE, Warszawa, 2008.
List F. , “National System of Political Economy”, Longmans Green & Co., New York 1909.
Shionoya Y., “The German Historical School. The historical and ethical approach to economics”, Routledge, New York 2014.
https://time.com/4386335/donald-trump-trade-speech-transcript/