Friedrich List and the idea of protective tariffs

The system of protection, as much as it forms the only means of placing those nations which are far behind in civilization on equal terms with the one predominating nation, appears to be the most efficient means of furthering the final union of nations, and hence also of promoting true freedom of trade.

Friedrich List (1789-1846)

Take Away

Although Friedrich List (1789-1846) in his earlier career (while living in Wuerttemberg) firmly supported liberal ideals, he later became a proponent of a protective, nationalist economic policy and laid the foundations of the ‘older German Historical School’. Emphasizing ‘productive powers’, his economic arguments were centered around the refutation of Adam Smith or J.B. Say. In his The National System of Political Economy (1841), List developed an empirically based system, in the sense that he claimed it to be grounded on historical experience. It was not a rationally based system. Like the current US president, List favored protective tariffs and trade retaliations between industrial nations, even if they maintained free trade within each country. While in Pennsylvania (USA) he was influenced by Alexander Hamilton (the first US Secretary of the Treasury) and contributed to the heated protective tariffs debates during the presidential election campaign between incumbent John Quincy Adams and Andrew Jackson. He is also known as a railroad pioneer.

It seems quite unlikely that President Trump or his closest economic advisors ever studied, let alone drew ideas for their new tariff policy from some works by the German economist Friedrich List (1789–1846). And yet, it is interesting to briefly trace List’s astounding transformation from an early supporter of free international trade and liberal ideas to an advocate of rigorous protective tariffs and thus finding some similarities with today’s situation. The world would be in a better shape if President Trump would have been inspired by the Austrians, especially by Haberler’s Theory of International Trade (1933). With his opportunity cost approach, Gottfried von Haberler (1900-1995) radically reformulated David Ricardo’s trade theory. Emphasizing that national income and economic welfare should not be defined solely by output but also by the disutility of input he revolutionized the theory of international trade and laid the conceptual foundation of modern trade theory.

A threat to the state

Shortly after the founding of the United States of America, the ideas of the Enlightenment, especially Adam Smith’s teachings on free trade, individual responsibility, and economic and political freedom, rapidly gained political acceptance. In Europe, at the beginning of the 19^th century when some works by Hume or Smith were still on the index of banned books, the momentous ideals of Liberalism were slow to find widespread traction. However Friedrich List was among the first thinkers who earned attention with his sharp criticism of the political bureaucracy that systematically oppressed and destroyed all assumed civil liberties. He took a courageous stand against the general suppression of freedom of speech, intolerable tariffs, and the ban of any political activity. Consequently, List also began to demand the creation of a German domestic free market and campaigned for the abolition of custom borders between small states as a necessary prerequisite for the industrialization of Germany. As List often stated, to travel from Hamburg to Vienna or from Berlin to Berne, one had to cross ten different countries, understand ten custom and toll regulations, and pay ten transit tolls in different currencies, sometimes quite substantial.

In his foreign trade policy, however List always advocated retaliatory tariffs, which he believed would eventually offset the trade barriers existing for German traders abroad. He distinguished this retaliatory tariff from his later-developed idea of an educational tariff. In any case, List helped found the “Association of German Merchants and Manufacturers” in Frankfurt, worldwide the first association of free entrepreneurs. In 1820, List was elected as a liberal representative to the Württemberg state parliament, where he actively worked and lobbied for democracy, local self-government, and an independent jurisdiction. However, with his demands for greater political-, economic- and individual freedom, he made himself suspect to the royal government as a threat to the state and lost the all-important trust of King Wilhelm I. Under pressure from the king, List’s mandate was revoked and thus he lost his political immunity and was sentenced to ten months imprisonment in the Hohenasperg Fortress in Württemberg. He initially escaped this sentence by fleeing to Switzerland among other countries, but repentantly returned to Württemberg in 1824 to serve his sentence in the notorious prison.

Railway pioneer and newspaper editor

When List finally agreed to emigrate to the United States in 1825, he was pardoned after five months in prison. With several letters of introduction from General Lafayette, List had an exclusive start in the USA, but initially failed as a farmer in Pennsylvania. He soon moved to Reading (PA), where he briefly acted as editor of the German newspaper Readinger Adler and became interested in Alexander Hamilton’s (1755-1804) idea of ​​protective tariffs (Schutzzölle).  Hamilton, the first US Secretary of the Treasury who as early as 1790 called for immediate protective tariffs, in order to promote the development of domestic industries but more so, to protect infant industries from foreign competition and ultimately by achieving economies of scale. It seems that the notorious Smoot-Hawley Tariff Act, which the U.S. Congress passed in 1930 was modeled after Hamilton’s and List’s ideas and raised protective tariffs to their highest level – until Trump. However, meant to shield the American economy, these heavy tariffs quickly backfired and sparked a destructive trade war. To summon up, instead of passing this ill-fated act, the U.S. Congress should have carefully studied Gottfried von Haberler’s major book that laid the conceptual foundation of modern trade theory by freeing it from David Ricardo’s labor theory of value.

By chance, in 1826 Friedrich List discovered a large coal deposit near the Indian settlement of Tamaqua in Pennsylvania. With the help of several investors, he developed this into a thriving coal mine over the next few years. In order to transport the mined coal, he and his investors constructed a steam-powered cargo train, the Little Schuylkill Railway that carried three-ton loads twice a day over some 35 kilometers to Port Clinton. With this innovation, Friedrich List became the US East Coast’s leading railway pioneer. He also commended himself to German readers of his reports from America with detailed plans for the construction of a railway network in Germany.

Due to serious competition from leading England industries and inspired by Hamilton’s protective tariffs, List abandoned his liberal convictions in order to protect his own coal production. With a stunning intellectual agility, he began to distance himself from Adam Smith’s theory of free trade and started to promote protective tariffs for countries that, unlike England were lagging behind in industrialization. By incorporating historical examples and arguments, his work brought him closer to the academic school that later became known as the ‘older German historical school of economics’ founded by Georg Friedrich Wilhelm Roscher (1817-1894). List probably chose this historical approach and methodology to emphasize that economic policy should vary depending on the situation in individual states and that free trade as an ideal can only be practiced under the right conditions, i.e. at the right stage in a nation’s history.

List’s thesis was that prosperity should not be the goal of a nation, but that a nation should strive for power, with prosperity being a secondary consequence. In the course of his reasoning, List turned sharply against the works of Adam Smith and J.B. Say’s in particular, then the leading theorists of free trade. According to List, the development of agricultural and industrial power requires protectionism, which should be enforced through aggressive state import controls leveraging the state’s taxing power. Essentially, he criticized the liberal philosophy for placing economic activity and individual freedom at its center. Rather, a sound economy should prioritize national power and significantly de-emphasize individual interests.

American citizenship

At the suggestion of Charles Ingersoll (1782-1862), a well-known and well connected protectionist, List wrote his Outlines of American Political Economy (1827), which greatly influenced the U.S. Congress in its passage of the “Tariff of Abominations” in 1828. In this pamphlet List attempted, unsuccessfully though, to provide some theoretical support for these protective tariffs. Together with numerous US entrepreneurs, he publicly called for the immediate introduction of steep defensive taxes, and thus turned into a leading proponent of the American protective tariff movement.

During the fiercely fought protectionist debates, List intervened in the 1828 U.S. presidential election campaign with his new theories. This presidential election was dominated by the renewed clash between incumbent President John Quincy Adams (1767-1848) and his main rival, Andrew Jackson (1767-1845). List supported Jackson, who ran not only as a lawyer and war hero of 1812, but also as the founder of the “Jacksonian Democracy” which is today’s Democratic Party of the USA. After his decisive election victory, Jackson expressed his gratitude and, with one of his rare ‘executive orders’ granted Friedrich List the much coveted American citizenship in 1830. Almost three years later, Jackson even appointed him American Consul to the Grand Duchy of Baden. This permitted List diplomatic immunity that largely protect him from possible further political persecution in Germany.

Return to Württemberg

When List returned to and settled again in Württemberg in 1832, his technical experience and administrative skills in railway construction were unmatched. Ernst Wilhelm Arnoldi (1778-1841), not only the ‘father of the German insurance industry’, but also known as an early 19th-century visionary, humanist and businessman, spontaneously supported List’s railroad plans.  Together, they championed the construction of the Thuringian Railway and even succeeded in having the tracks laid through the populous cities of Weimar, Erfurt, and Gotha, with an ending in Eisenach. In 1839, the tracks from Leipzig to Dresden were put into operation. Although subsequent railway projects were also based on List’s specifications, his pioneering work brought him neither fame nor did his expositions on the subject of economics. His final attempt to establish a connection between England and the German Customs Union was also unsuccessful. After many setbacks and under severe financial pressure en route to Italy, on December 3, 1846, he committed suicide in Kufstein (Tirol, A) at the age of 56.