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Thursday, June 12, 2014

A nation founded on debt (rethinking liberalism)

by John MacBeath Watkins

There is an email making the rounds of elderly white conservatives that quotes the Founding fathers on "economics, capitalism, and banking."

A sampling:

#1 "A wise and frugal government… shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government." — Thomas Jefferson, First Inaugural Address, March 4, 1801

#2 "A people... who are possessed of the spirit of commerce, who see and who will pursue their advantages may achieve almost anything." - George Washington

#3 "Government is instituted to protect property of every sort; as well that which lies in the various rights of individuals, as that which the term particularly expresses. This being the end of government, that alone is a just government which impartially secures to every man whatever is his own." – James Madison, Essay on Property, 1792

#4 "Banks have done more injury to the religion, morality, tranquility, prosperity, and even wealth of the nation than they can have done or ever will do good." - John Adams
And 11 more along those lines. One problem is that in practice, the founding fathers borrowed a great deal of money, much of it from the Dutch, to finance the war. After we'd won our independence, they followed Alexander Hamilton's advice and funded the debt, creating a stable market for securities which private companies could tap when they needed money.

Hamilton argued that public debt would be a blessing if it didn't become too large, and so it has been. We've eliminated the national debt once in our history during Andrew Jackson's administration, and this was followed by an economic disaster.

Another problem with the chain email is with the headline. Capitalism hadn't been invented yet, which is why the founding fathers never used the word (which was invented by Karl Marx in about 1850.) They were talking about the economy, but not about capitalism.

Yes, markets and private property had existed since antiquity, but there is a great deal more than that to capitalism. In pre-capitlist societies, wealth was viewed as pretty much a zero-sum game -- I get my wealth by taking it from you. There might be resources not being used, fields not tilled, mines not dug, but the wealth was there waiting to be taken. The means of production, such as plows and spinning wheels, were usually owned by those who used them. The rich did not invest in looms or spinning wheels, those were for the peasants. You might do well as a merchant, but wealth was closely tied to power, because in a zero-sum game, wealth flows from the ability to decide who gets it.

Capitalism broke the relationship between the artisan and their tools. The capitalist was not an artisan who owned his tools, he was an investor in the means of production, and investment in constantly improving capital stock was the major source of growth. He hired artisans and laborers to use the means of production he owned (and in the early days, property laws insured this would be a "he.)

In Confucian thought, all wealth came from the land, and merchants just moved it around, artisans just re-arranged it. Physiocrats, a system of thought that started in France, thought the same. At the time of the American Revolution, the main alternative system of economic thought was mercantilism.

The concept that capital could lead to growth is a concept that was still being invented when this country gained its independence. The Wealth of Nations was published in 1776, and the modern theory of value was invented about a century later in the marginal revolution.

The founding fathers fell mainly into two groups, the merchants and the planters. The planters, such as Jefferson, tended to be physiocrats. They believed in laissez faire capitalism, which was rather convenient in that the abolitionists were already proposing that the government should interfere in their slave markets (Jefferson made a lot of his money selling slaves: "I consider a woman who brings a child every two years as more profitable than the best man of the farm," Jefferson remarked in 1820.) Physiocrats also believed that all real value came from the land, another convenient thing for a planter to believe.

The merchants, such as Alexander Hamilton, tended to be mercantilists. They believed in trying to capture as much wealth as possible for their country. This meant high tariffs on imported goods, substantial government projects to develop the country, like the Erie Canal and the post roads, and if possible, colonies from which wealth could be extracted.

Both of these systems of thought were built on the notion that the wealth of the world is a zero-sum game. Capitalism is not a zero-sum game. David Ricardo wrote about the theory of comparative advantage in 1817, suggesting that if each country focused on doing what it does best and purchased from other countries what they could produce more cheaply, everyone would be better off. The mercantilists, though they were focused on developing the wealth of the nation, had at least some notion that investment could increase wealth. They came up with the American Way, a program for public and public-private investments for the development of the nation, but had not realized what a mechanism of growth private capital could be.

It is all too easy to impose our modern framework of thought on people long dead, but they had a different set of tools to work with. I don't think capitalism really existed until the idea that free trade and investment in the means of production were seen as essential to the creation of wealth. The physiocrats, such as Jefferson, were in favor of the former, the mercantilists, such as Hamilton, were in favor of the latter, but almost no one at the time the constitution was written was in favor of both.

More on physiocrats and mercantilists here, on the nature of capitalism here.

Now you can see that the founding fathers' quotes presented here were, in fact, not about capitalism, but about a physiocrat's view of government. However, in practical terms, what they actually did about government debt was based on a mercantilist's point of view, and it's a very good thing that happened.

This country was deep in dept by the time it had won its independence. The physiocrats in congress were generally in favor of screwing the investors, but Alexander Hamilton realized that the national debt could be a tremendous asset.

From this source:

His 1790 Report on the Public Credit proposed funding the debt, thereby creating a stable market in bonds in this country that enabled businesses to borrow more cheaply than they could have otherwise.

It is all very well to quote the physiocrats among the founding fathers on the subject of public debt, but their understanding of banking and debt generally was fairly primitive. They were wise enough to follow the advice of a mercantilist on the actual handling of the debt -- that "if it is not excessive, will be to us a national blessing."

Now, you might think mercantilists were really capitalists, but you'd be wrong. Mercantilists advocated the development of the nation, and wanted to get as much of the world's wealth in their country as possible. They were empire builders. Cotton grown in India would be shipped to England to be made into cloth, then shipped back to India, even though the shipping costs and the cost of English labor made the cloth more expensive.

Capitalism broke that bond as well, dooming multinational empires. Once global capital was able to move production to undeveloped countries where the labor was cheap, and avoid paying the taxes that had supported the empire, the feedback loop that supported empires was gone. It is in the nature of capitalism that empires don't pay, and the new world order is one built on alliances within trading blocs.

Rethinking liberal theory 1: Thomas Hobbes, blasphemer and patriot
Rethinking liberal theory 2: The outlaw John Locke, terrorist, liberal, and advocate of freedom
Rethinking liberal theory 3: A compact to protect property, or a conspiracy to create meaning?
Rethinking Liberal Theory 4: John Milton and the many shapes of truth
Rethinking Liberal Theory 5: Adam Smith, moral philosopher of the marketplace
Rethinking Liberal Theory 6: Mythmaking and manufacturing
Rethinking liberal theory 7: Hegel, the end of history, and the triumph of the liberal idea
Rethinking liberal theory 8: Liberalism and individualism: The invention of the Util and the way west
Rethinking liberal theory 9 Property and freedom: Why language is the basis for the social contract 
Rethinking Liberal theory 10: Physiocrats & mercantilists: The economic philosophies of the founding fathers
Rethinking Liberal Theory 11:Stateless income, global capital, and the death of empires
Rethinking Liberal Theory 12:Capitalism:So much more than market
Rethinking liberalism 13: What is money? 

Rethinking Liberalism 14: Tribalism and the emerging new world order
Rethinking liberalism 15: The poverty of neoconservative philosophy
Rethinking Liberalism 16: More on the poverty of neoconservative philosophy

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