Adam Smith vs Alexander Hamilton on Manufacturing

[jrmu <jrmu@xxxxxxxxxx>]

Greetings,

This is a debate between Zinov and jrmu on Alexander Hamilton's Final
Version of the Report on the Subject of Manufactures.

>> My response is preceded with >>.

First, Hamilton spends a while discussing the relative productivity of
agriculture versus manufacturing. I do not think that the case against
tariffs/subsidies really relies on this. The main case against such economic
intervention is that presumably the most productive industries are also the
most individually profitable industries, and presumably the most individually
profitable industries are already being invested it, and so the intervention
simply redistributes the capital towards a less or approximately equally
profitable industry; and, in any case, even if the two employments are around
equally profitable, the costs involved in implementing the government measures
can lower overall wealth, since labour is being used unproductively. But I
will somewhat try to defend what Smith says about the productivity of
agriculture.

In the case of agriculture, since there is a greater direct
reliance on land/natural resources, a greater part of the revenue will be
directed towards rent; this could mean that the wealth produced by agriculture
is greater than is suggested by the profit to the capitalists, which would
strengthen the case against government subsidies or tariffs to favour
manufacturing.

Hamilton claims that the distinction between rent and others profits is purely
verbal, and that land is just another sort of 'capital', but I do not think
that this objection works. First, consider the case where only that which
can employ human labour is considered capital: the question is what is the
most valuable use of human labour. If human labour of equal value can be
employed in agriculture and manufacturing such that it produces equal profits
for the people who provide the money used to employ the labourers, while also
producing enough to cover the greater cost in rents (since agriculture is more
land-intensive), then clearly the former is producing greater revenue. Even if
you consider the land to be capital, note that the result of subsidies
preferring manufacturing would be that some capital goes unused. So depending
on what you want to call 'capital', either less value is being produced
because less capital is being used, or less value is being produced because
equal capital would have generated greater value to cover the rent.

However, it is important to note that this only applies to _actual_
employments of capital (equal non-rent profit to the capitalist is being
assumed). It does not imply that it is the case that all employment of capital
would produce more revenue if used in agriculture.

>> I don't follow this logic. Can you give an example with numbers? like $100 rent, $200 in factory equipment, $300 in revenue, etc.

Next, I will address what Hamilton says about the main argument against
artificial encouragements.

Hamilton has three sorts of objections:

'Against the solidity of this hypothesis, in the full latitude of the terms,
very cogent reasons may be offered. These have relation to—the strong
influence of habit and the spirit of imitation—the fear of want of success
in untried enterprises—the intrinsic difficulties incident to first essays
towards a competition with those who have previously attained to perfection
in the business to be attempted—the bounties premiums and other artificial
encouragements, with which foreign nations second the exertions of their own
Citizens in the branches, in which they are to be rivalled.'

One objection is basically that people are not entirely rationally
motivated to maximise profit and might abstain from making the most profitable
investment due to habit or risk-aversion. However, note that the government
interventions do not change people's dispositions, they merely make certain
investments more profitable to the investors. It is possible that the
increased profits to the capitalists could be enough to push them towards the
investments, but we should not assume that that is the case. Tariffs on
foreign imports would not remove the risk involved in investing in a new
industry, so if someone is strongly risk-averse, this is unlikely to do much.
I suppose you could propose that the government offers some sort of insurance
to investors. Although if the investment is so profitable, perhaps this
insurance could be offered by a private company.

>> Tariffs can definitely offer enough incentive to overcome averseness to risk. Imagine the USA imposed a 1-million percent tarriff on clothing, so that a T-shirt that would normally import for $10 now costs $100,000 per shirt. A lot of investors who previously would have been averse to manufacturing T-shirts in America, because of high costs of labor and strict regulations, would probably now be willing to do so given this virtual monopoly. Almost anyone can beat a competitor who has to pay a million percent tariff.

Another objection is that foreign countries have their own artificial
encouragements, allowing foreign companies to undersell domestic companies,
which explains why investments are not made in the otherwise more profitable
industry. Unlike the first objection, this one does not really seem to address
the basic argument. Keep in mind that the basic argument was that people
generally will invest in what is most personally profitable, and what is most
personally profitable is generally most wealth-producing in absence of
government intervention, and so it is assumed that the investments that happen
in the absence of tariffs and other interventions also produce the most
national wealth. The first objection offered by Hamilton addresses the first
premise (that people will invest in what is most personally profitable), but
the second objection does not dispute either premise. Since this objection
does not address either premise, we can continue with the assumption that in
the absence of government intervention, what is being invested in is already
more or around equally productive of value.

It might well be the case that the reason that something is not more
personally profitable is because there are foreign imports that can undersell
domestic competitors due to the artificial encouragements of foreign
governments. But note that by introducing domestic artificial encouragements,
the original foreign ones are not eliminated. If we grant that artificial
encouragements would not produce more wealth in the case where the foreign
imports are cheaper for some other reason (say because the foreign country has
a climate that can better grow something), it is unclear why the same would
not apply in this case. On the domestic market, you can raise the price of the
foreign import by tariffs. This would temporarily raise the domestic price,
before lowering it due to increased investment in this industry. But the
increased investments in this industry are at the expense of reduced
investments elsewhere, which presumably were more or approximately equally
productive. Some people might be made richer due to this, but it does not seem
that national wealth would increase.

>> Imagine for a moment you are the ruler of a desert kingdom that is rich in oil and other precious minerals like silver. Your country is very good at mining and exporting raw materials, but not good at agriculture. Fortunately, you have a trading partner, the Republic of Farmland. In Farmland, the government taxes its own citizens to subsidize farms. Their subsidies are so great that your country receives basically *unlimited free food*.

>> For a while, all is well. One day, however, Farmland declares war in the desert, and suddenly you have no food because all trade is halted due to war. No investor bothered to spend money on Desert Kingdom's agriculture. Farmland produces enough of its own oil supplies, so Farmland can weather the storm. Desert Kingdom, relying entirely on foreign trade for food, is starved into submission.

Hamilton also claims that competing against an established foreign country
could be difficult. This might be true, but it also fails to address the
argument. Maybe the reason that investing in that industry is not profitable
is that the industry is already well-established in a foreign country. But
that does not dispute that it would also be less or equally as
wealth-producing as the alternative investments would be. Presumably either it
will eventually be the case that circumstances are such that even with the
initial difficulties, the industry will be profitable enough to invest in, or
else there will always be some industry to invest in that will be more or
equally profitable and more or equally wealth-producing. If the wealth to be
made after the initial difficulties are great enough to make up for the
initial expenses, why would the profits also not be great enough? You could
suggest that this happens over such a long time-scale that even though it
would benefit society long-term, it would not benefit individual investors.
But that would need to be argued for, and I think that it is fair to stick
with the initial presumption.

>> Because some critical manufacturing industries require enormous amounts of capital that only government can facilitate. For example, semiconductor foundries, aerospace manufacturing, automotive factories, and weapons defense systems. These industries often require more capital than any single man can personally invest.

>> None of the world's biggest projects (construction of continental railroad systems, interstate highways, global ocean shipping networks, space exploration, etc) ever happened spontaneously without government intervention.

Hamilton offers some reasons in favour of encouraging manufacturing.

One is that the merchants of a foreign country will make greater use of a
market with more diverse commodities. It might be true that an individual
country will make greater use of the market of a country that offers diverse
commodities, since it can only make use of so much of a specific sort of
commodity. However, there is no need to export to a single country. Suppose
that a country specialises in sugar. It might be the sugar exporter for all
countries in the world. Even though the export revenue to a single country is
less than it would be, it might be that the total export revenue to all
countries is greater. And of course, if a certain commodity was already well
supplied, then people would start making some other sort of commodity. If the
lack of commodity diversity does lead to less revenue for some reason, then
presumably the market will diversify without the government intervention. Is
there a situation where it leads to less national revenue without leading to
less revenue to some individual?

That being said, I am not disagreeing that a diverse economy is beneficial;
but if it is, I do not see why government intervention is necessary. Hamilton
mentions that agricultural products are subject to fluctuations in demand,
since foreign countries might grow their own products and rely on imports when
they must do so, and also mentions how in general demand for certain
commodities might stagnate. Domestic private investors might want to diversify
their investments for this sort of reason. Why does the government need to
encourage them to do so? If, on the other hand, they do not diversify their
investments more, then if they are good investors, they would have considered
the risk of fluctuations in demand, and still considered it worthwhile to
stick to the limited investments. Why think that the government will come to
better conclusions? Perhaps it could be beneficial for people in general, even
though it is not beneficial for individual investors to diversify their
investments.  But I do not think that Hamilton offers a reason to think that
that is the case.

Next, Hamilton argues that it is better for the 'independence and security of
a Country' to encourage manufacturing. I do not entirely disagree here. At
least, we would not want to rely on an enemy or unreliable ally to supply
weapons, for example. However, if we rely on a variety of countries, and some
of those countries are very unlikely to go war with us, at least at the same
time, then there is less reason for concern. Also note that in times of war,
the government could redirect some capital. Maybe there are some cases where
it would be too difficult to do this on short notice. If there is already
adequate supplies within a country for say a year, then it might be possible
to redirect the capital after the war has started to ensure national
self-sufficiency. Of course, national self-sufficiency might not be necessary
anyway.

>> Consider the Confederate States of America. They exported raw agricultural goods but relied upon foreign imports for manufactured articles. During the Civil War, they were blockaded by the Union, and unable to import from friendly allies. By then, it was too late to begin manufacturing the needed weapons, clothes, machinery etc. Diverting capital during wartime was too late, and it failed.

There is another sort of scenario where subsidies could plausibly be justified
(I do not think that this sort of case was addressed by Hamilton). If
something is a public good, meaning that you cannot feasibly provide it to
only paying customers. For example, military defence; if one person is
adequately protected from bombings, other would also be, and so it is not
possible to charge only the people who benefit (except through taxation or
voluntary donations). This could also apply to certain kinds of research.
People who pay for the research into a new drug would not be the only ones who
benefit, since other people could make use of the research results as well.
Although, in some cases, a company might fund the research and keep the
results secret. Or they could patent the drug, but that would be an artificial
monopoly, so still a form of government economic intervention (I am not
convinced that patents are generally beneficial, but I do not know).


I do not think that Hamilton refuted Smith. The main argument against economic
intervention seems to stand. Even Smith's claim about agriculture seems to be
correct about the actual investments of agriculture, although Smith might have
overstated things.


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