Hamilton, Harvard, and the German Historical School: a short note on a curious history.

Author:Eicholz, Hans L.
Position:Alexander Hamilton - Biography

Alexander Hamilton's reputation has waxed and waned, but one judgment appears fairly constant: his place as the American founding's leading thinker on finance and political economy. And yet, his specific efforts moved exactly contrary to the core contribution of Adam Smith; namely, Smith's refinement of the idea of the "invisible hand," where rational self-interest leads to the unintended flourishing of others. But still, generations of scholars have affirmed Hamilton's sagacity as an economic thinker (Knott 2002, pp. 6-7, 221-23). Most recently, Thomas McCraw, a prominent member of the now not-sonew "New Organizational School" of interpretation, reaffirmed that judgment (McCraw 2012, p. 93). Why is it that the Hamiltonian turn takes such prominence in scholarly circles? The intellectual connections are closer than one might think.

Hamilton was well aware of Smith's particular arguments of unintended consequences, having quoted The Wealth of Nations at length in his report on manufactures, but he was insistent that America could not wait for the off chance that markets might foster certain industries naturally. As a consequence, he crafted arguments from history and experience for the political promotion of manufactures. That effort proved important to the development of another line of thought: The German Historical School, the central tenet of which was that economic phenomena needed to be seen and understood in their concrete manifestations in time, and not primarily through abstract logical relations. Usually one hears of statist influences moving from Germany to America. In this instance, the ideas went in the other direction. Even more curiously, they returned to America by way of Harvard through the New Organizational School, of which Thomas McCraw was a late prominent member.

Thus when McCraw reviews Hamilton's career in The Founders and Finance, it is in fact Hamilton's own perspective come back to interpret itself. Reconsidering the schools' origins sheds light on the reasons why conceptualizing the unseen and unintended has proven so difficult. The spirit of Hamilton's theoretical impatience has gone hand in hand with modern academic inclinations (Lamoreaux, Raff, and Temin 2003, pp. 404-33). I. I.

  1. Hamilton's Turn to History

    Many have argued that Hamilton's break with Smith was not as profound as early protectionists had originally portrayed, and in certain particulars, this argument is true enough. Hamilton did not reject Smith in toto (Hacker 1957, pp. 150, 168; Chernow 2004, pp. 347, 376-77.) Against the French physiocrats who privileged agriculture, Hamilton found Smith's argument for the efficacy of the division of labor quite useful, even employing the very words of The Wealth of Nations (Bourne 1894, pp. 328-44; Rabeno 1895, pp. 317-18). But to emphasize this point misses a far more fundamental disagreement. The original aim that prompted Hamilton's thinking was the desire for a more powerful central government. That aim predated the U.S. Constitution and was vigorously pursued in 1781-82 in the Continentalist Essays, where he attacked directly the idea of the unplanned and the unseen (V ernier 2008, pp. 169-200).

    Smith's well-known line of argument that each "is led by an invisible hand to promote an end which was no part of his intention" illustrates how deeply important the unseen results of human activity are to the economic question (Smith 1776, p. 456). That was not an argument that fit well with Hamilton's aims. "There are some," he wrote in the fifth Continentalist, "who maintain that trade will regulate itself, and is not to be benefited by the encouragements or restraints of government. Such persons will imagine that there is no need of a common directing power." Indeed, he wrote, "This has become one of those wild speculative paradoxes, which have grown into credit among us, contrary to the uniform practice and sense of the most enlightened nations." The essence of such "uniform practice," as Hamilton emphasized, was the observable and the obvious, not the unseen and unintended. The argument that followed exuded economic nominalism: "Contradicted by the numerous institutions and laws that exist everywhere for the benefit of trade, by the pains taken to cultivate particular branches and to discourage others, by the known advantages derived from those measures, and by the palpable evils that would attend their discontinuance, it must be rejected by everyman acquainted with commercial history" (Vernier 2008, p. 187, emphasis added).

    This was all about what "exists everywhere," of "numerous institutions," of "particular branches," of "known advantages," of consequences that are immediately "palpable." And here was the initial turn to experience to counter such logical speculations as found in Smith to make the case for government policies to promote domestic industries: "And in questions which affect the happiness of these States, all nice and abstract distinctions should give way to plainer interests, and to more obvious and simple rules of conduct" (Vernier 2008, p. 192). These "more obvious and simple rules of conduct" would be the ones found in "commercial history," the time-honored rules of mercantile policies respecting trades, tariffs, and institutions adapted judiciously to specific types of manufactures. It was this idea that Hamilton set at the heart of his promotion of American policy in the 1790s. The Report on Manufactures was an extension and expansion on the themes of the fifth Continentalist.

    Starting where that essay left off, Hamilton detached Smith's argument for the division of labor from its basis in the unintended consequences of individual exchanges to the active intervention of specific political institutions of the nation and its various offices. He retained Smith's listing of the more obvious and sensible advantages to be derived from specialization, but his explanation of how such benefits came into being was anything but Smith's:

    Whatever room there may be for an expectation that the industry of a people, under the direction of private interests, will upon equal terms find out the most beneficial employment for itself, there is none for a reliance, that it will struggle against unequal terms, or will of itself surmount ... the advantages naturally acquired from practice and previous possession of the ground, or ... by those from positive regulations and an artificial policy (Syrett 1966, p. 269).

    What followed surveyed the perceptible, known barriers, both natural and artificial, that must be overcome and, more specifically, the steps governments could take that "appear to be materially connected with the prosperity of manufactures." From this perspective, the acting agency in the improvement of the economy became not the unintended consequences of private pursuits, but the intended policy interventions of nations: "It is a primary object of the policy of nations," he wrote, "to be able to supply themselves with subsistence from their own soils; and manufacturing nations, as far as circumstances permit, endeavor to procure, from the same sources, the raw material necessary for their own fabrics." He also wrote, "To secure such a market, there is no other expedient, than to promote manufacturing establishments" (Syrett 1966, pp. 257, 259).

    Not to put too fine a point on the matter, he drew special attention to the political aspects of political economy wherein the means of both defense and wealth needed to be considered together, for the "possession of these is necessary to the perfection of the body politic; to the safety as well as to the welfare of the society. The want of either is the want of an important organ of political life and motion; and in the various crises which await a state, it must severely feel the effects of any such deficiency" (Syrett 1966, p. 291).

    The key move was to counter Smith's narrative by limiting the salience of unintended consequences. Once a nation reached an advanced state of commercial development...

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