N.B. I started this speech before realizing it was a panel session! Made many of the same arguments in the discussion at FreedomFest Memphis 2023.
Obviously, the question is a trick or trap because the clear winner is Alexander Hamilton.
I realize that might be a dangerous proposition to espouse at a libertarian convention but several other
classical liberal scholars, like Richard Salsman, also have lauded Hamilton’s grasp of economics.
In fact, I learned just yesterday that Salsman has an article on Hamilton as economist forthcoming in
The Independent Review. Interestingly, except on international trade, Salsman makes different points from what I will here today.
The difference between Hamilton’s advocates and critics is that his advocates have actually studied
what Hamilton said and did in its totality and do not simply follow old canards, most of which stem from attempts to leverage Hamilton’s genius for partisan gain.
So please keep an open mind. You can find minute documentation of all of this in several of my books
and articles as well as those of Salsman, financial historians Richard Sylla and David Cowen, and
international trade economist Doug Irwin.
One might protest that Hamilton was not an economist but in fact he was one heck of an economist
and was able, as Treasury Secretary, to test many of his ideas in the real world. He was, in that respect, more of an empirical or scientific economist than most, who were mere scribblers or, worse, professors.
The mature Hamilton, as Treasury Secretary, was not so much a critic of Adam Smith
as he extended some of Smith’s ideas to new realms. Aaron Burr assassinated him before he could
formalize his ideas but nevertheless he made numerous key contributions in the areas of asymmetric
information, particularly moral hazard in bailouts and corporations; international trade, specifically in
what would later be called Harberger Triangles; administrative efficiency; the economics of slavery;
and the limits of sovereign debt.
Hamilton was long gone before Marx or Keynes came along but he sure as heck was no communist
and he debunked the notion that deficit financing could smooth out the business cycle before Keynes
revivified it.
Smith infamously disdained corporations due to their high agency costs. Instead of trying to squelch
corporations in America, Hamilton sought ways to reduce principal-agent problems within corporations
by authoring at least four corporate charters, three for banks and one for a manufacturing company,
with built in checks and balances. They proved incomplete in the case of the manufacturing company
but the problem was corrected and the banks did extremely well.
Three of those charters moved the country towards general incorporation statutes by showing it was
possible to create a joint-stock company, with limited liability and entity shielding, without a formal state
charter. Although adopted slowly, general incorporation helped to ensure that America’s economy
remained open access and entrepreneurial.
Hamilton believed in economic freedom, including the right to form non-profit voluntary associations to
alleviate social issues and what we now call sound money. He was responsible for defining the US
dollar in terms of gold and silver and ensuring that bank notes and deposits were convertible on
demand into specific amounts of precious metals. He also helped to ensure that inconvertible bills of
credit or other forms of fiat money issued by state governments were made unconstitutional.
In terms of the moral hazard involved in bailouts, Hamilton in 1791 and 1792 developed what would
later be called Bagehot’s Rule, which states that the lender of last resort should lend freely at a penalty
rate to all who could post sufficient good collateral. That rule stops panics by protecting solvent
borrowers but denying subsidies to insolvent ones.
Hamilton was an abolitionist, pushing to rid New York of the peculiar institution, which he understood
was profitable for enslavers but ultimately bad for economic growth and development. Had he lived, he
almost surely would have written an analysis like that of Hinton Helper by the mid-1820s.
His views on the national debt and international trade are perhaps the most important to discuss
because they are so often misunderstood.
Unlike Smith, who deprecated all state debts, Hamilton was a debt realist. He held that governments
should borrow to fund wars and other major state functions, like the acquisition of territory. During
peacetime, it should repay its previous borrowings to the extent possible, borrowing on net if
necessary during downturns but simply to fund normal government operations, not to stimulate the
economy. Debt repayment could hurt the economy, so it should not be rapid but rather aided by growth in population and productivity. And any increase should be linked to new taxes to mute the “borrow and
spend” habit that politicians find so alluring.
In short, Hamilton did not believe in a large, permanent national debt as his critics claim by eliding his
correct assertion that the national debt is a blessing QUOTE if it is not excessive UNQUOTE. He even
detailed what he meant by an excessive national debt and I’m chagrined to report that the US national
debt has been excessive by Hamilton’s measure since the great bailouts following the Global Financial
Crisis of 2008.
The national debt helped the economy, he correctly noted, because it helped to create loyalty to the
new government, thus unifying the country and reducing policy uncertainty. It also helped by providing
businesses and banks with a liquid security in which they could safely stash cash. The market for
government bonds helped the development of markets for corporate bonds and equities, which
provided entrepreneurs with external funding options outside of the banking system.
Critics also like to claim that Hamilton implemented a protective tariff though the notion has been
exploded by numerous scholars, including Dartmouth’s Doug Irwin. Hamilton put in place a revenue
tariff carefully geared toward maximizing government revenue by charging a higher rate on luxury
items, like imported liquor. Hamilton infamously taxed domestic whiskey production in part to
discourage domestic liquor production.
Confusion arises because later protectionists used and abused Hamilton’s Report on Manufacturers to
claim that Hamilton was a protectionist. He was not. His Report was didactic, explaining the options
open to Congress. So he discussed rather than espoused so-called infant industries. In his discussion
of the relative costs and benefits of protective tariffs and bounties, he clearly noted that tariffs created
two deadweight loss triangles while bounties created only one, which is what international trade
textbooks still argue.
Hamilton understood that taxes of all types should be minimized because of the distortions and tax
wedges they cause. But the national debt had to be serviced and paid down. Hamilton preferred
revenue tariffs over other types of taxes because they were relatively easy to collect at ports of entry
and were embedded in prices.
As the federal government learned twice in the 1790s, internal taxes threatened liberty and
insurrection but they had to be established lest tariffs failed to produce the needful during war or
economic downturn. Tariffs indeed served as the government’s largest peacetime revenue stream, with
excise taxes like the whisky excise a close second, until implementation of the income tax in the 20th
century.
In sum, Hamilton extended Adam Smith to the real world of policy and passed with flying colors. The
other two guys aren’t even close as Marx wanted to enslave all to the state and Keynes wanted to
deficit finance to smooth business cycles and to a large extent has gotten us into the excessive debt
mess we are currently in.
No comments:
Post a Comment