January 13, 2019 Reading Time: 5 minutes

What is the purpose of trade between nations? For Adam Smith and his generation, which includes most of the American founding generation, it was to further the wealth and happiness of people and to promote peace between nations.

George Washington explained it well in his Farewell Address:

Harmony, liberal intercourse with all nations, are recommended by policy, humanity, and interest. But even our commercial policy should hold an equal and impartial hand; neither seeking nor granting exclusive favors or preferences; consulting the natural course of things; diffusing and diversifying by gentle means the streams of commerce, but forcing nothing.… There can be no greater error than to expect or calculate upon real favors from nation to nation. It is an illusion, which experience must cure, which a just pride ought to discard.

You might think that would be obvious. For the most part, it has been for a long time. After the Second World War, for example, this ideal became ascendant and instantiated in multilateral trading agreements. Nations would gradually reduce barriers, and the ideal could be realized.

Call this ideal what you want: the free market, the liberal order, cosmopolitanism, globalism, libertarianism, or whatever. The point is to diminish the power of the nation-state in deference to the rights of the commercial sector so that we can all grow in wealth together. This was liberalism, a new idea that proposed we leave society alone, granting rights to individuals and getting the state out of the way.

The Counter-revolution

And yet this point of view is not so obvious. Adam Smith wrote his treatise The Wealth of Nations to oppose practices dating back hundreds if not thousands of years. Under the mercantilist doctrine, the health of the state and its connected merchants was primary, even if it came at the expense of consumers and the public generally.

Smith’s ideas won the day, most famously influencing the repeal of Britain’s cruel Corn Laws in 1846. On the Continent, the ideas of liberalism were on the rise, celebrated by Goethe in his maxim: “Which is the best government? That which teaches us to govern ourselves.” Free trade was part of this revolution. In 1828, he could say with confidence that “with regard to the German states, there is no longer any talk of domestic and foreign lands.”

But the triumph of free trade was not unchallenged. Among the anti-liberals of the 19th century, Friedrich List (1789-1846) stands out for his specialization on the theory and practice of trade. He was not an academic, but was and remains one of the most influential figures on the topic. His main book was The National System of Political Economy (1840). For generations, it was the most cited work by a German economist besides Karl Marx.

His thesis was that wealth should not be the goal of the nation. The goal of a nation should be power itself, with wealth as a secondary consequence of that. His targets were the writings of Adam Smith and J.B. Say, the leading theorists of free trade. His criticism was that the old liberal thinkers were wrong to think of economics as individuals trading on a world stage. Rather, good economics must put the nation’s power first and the interest of individuals much lower.

He claimed to favor free trade as an ideal of sorts but only under the right conditions, among which that it could only happen at the right stage of a nation’s history. The building up of agricultural and industrial power required protectionism: aggressive government controls on imports using the taxing power of the state. The state needed to slow down competitive forces so that production could be built up without facing competitive pressure from foreign nations.

His survey of history reinforced all his biases, page after page of citing cases of successful protectionism with nary a thought given to possible unseen effects of these policies:

The nation must sacrifice and give up a measure of material property in order to gain culture, skill, and powers of united production; it must sacrifice some present advantages in order to insure to itself future ones.… [A] manufacturing power developed in all its branches forms a fundamental condition of all higher advances in civilisation, material prosperity, and political power in every nation.

For this reason, he says, “the power of the State is compelled to impose restrictions on private industry.” And “the State is not merely justified in imposing, but bound to impose, certain regulations and restrictions on commerce (which is in itself harmless) for the best interests of the nation.”

To his credit, he took his logic all the way, to the point of attacking the division of labor itself, pushing equalization of trade accounts, advocating debt-based public finance, and promoting a limited form of autarky.

“The internal market of a nation is ten times more important to it than its external one,” he wrote with an implausible mathematical flourish. “It is ten times more important to cultivate and secure the home market, than to seek for wealth abroad, and that only in those nations which have developed their internal industry to a high degree can foreign commerce attain importance.”

He is popularly credited with the idea of the infant industry. Wikipedia disputes the claim and suggests that Alexander Hamilton was the first. The point here, however, is that Hamilton had a huge influence in confirming List’s thought. List had come to America to learn not from its practice of free trade but from its tariff system, which was later and rightly dismantled. As the historical section of his book demonstrates, he had a bad habit of finding in every historical case exactly what he was looking for.


Now for the controversial issue. What influence did List have on the Nazi trade policy of Lebensraum? Ludwig von Mises is right that List, though an anti-liberal, should not bear intellectual responsibility. List “did not unconditionally reject free trade; he advocated protection of manufacturing only for a period of transition, and he nowhere suggested protection for agriculture.” Mises was firm, writing in 1944: “List would have violently opposed the trend of German foreign-trade policy of the last sixty-five years.”

All of this is true, and it might even be the case that List would have rejected Trump-style trade policy as well, insofar as Trump has attempted to protect agriculture (which List would have opposed) and the administration has nowhere invoked the infant-industry argument. In fact, Trump policy is rooted in the opposite idea, that we need to protect legacy industries against foreign upstarts.

That said, List flipped the narrative in devastating ways. For him, it was not for the merchant class and consumers to decide the course of development of international trade. This was a job for the state. It should construct policies in the interest of the nation-state. What those policies would ultimately be falls to the discretion of political forces.

List posited a conflict between the interests of commercial society and the interests of the nation as a whole. In that sense, his thinking is squarely in line with the Right Hegelianism popular during his educational formation. It’s a devastating concession to turn over trade policy to the state. In the worst possible rendering, he subjected trade policy to the Fuhrerprinzip.

Here is where his influence is still felt in various degrees. What the nation consists in precisely has mutated over time. What binds a nation together? Is it language, geography, religion, heritage, or race? Or is it merely jurisdiction? It is the state that defines the interests of the nation; it is the only institution with the full power to do so and see its will imposed. But as Kant wrote in his 1795 masterpiece Perpetual Peace: “The true glory of a state lies in the uninterrupted development of its power by every possible means.” This is always and everywhere how such power will be used.

Free trade is not some distant ideal that is conditioned on all nations behaving in exactly the way the leader of one nation dictates. Free trade is the policy of one nation to decline to interfere in its citizens’ right to engage in commercial transactions according to their own lights. It means finding the best deals wherever they may be found, and sacrificing no rights of the commercial sector to any higher claim of the supposed national interest.

Jeffrey A. Tucker

Jeffrey A. Tucker served as Editorial Director for the American Institute for Economic Research from 2017 to 2021.

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