Sunday, December 26, 2010

Ha-Joon Chang: Kicking Away the Ladder -- Neoliberals Rewrite History

Kicking Away the Ladder: Neoliberals Rewrite History
By Ha-Joon Chang
Monthly Review

There is currently great pressure on developing countries to adopt a set of “good
policies” and “good institutions”—such as liberalization of trade and investment and
strong patent law—to foster their economic development. When some developing
countries show reluctance in adopting them, the proponents of this recipe often find it difficult to understand these countries’ stupidity in not accepting such a tried and tested recipe for development. After all, they argue, these are the policies and the institutions that the developed countries had used in the past in order to become rich. Their belief in their own recommendations is so absolute that, in their view, they must be imposed on the developing countries through strong bilateral and multilateral external pressures, even when these countries don’t want them.

Naturally, there have been heated debates on whether these recommended policies and institutions are appropriate for developing countries. However, curiously, even many of those who are skeptical of the applicability of these policies and institutions to the developing countries take it for granted that these were the policies and the institutions that were used by the developed countries when they themselves were developing nations.

Contrary to the conventional wisdom, the historical fact is that the rich countries
did not develop on the basis of the policies and the institutions that they now recommend to, and often force upon, the developing countries. Unfortunately, this fact is little known these days because the “official historians” of capitalism have been very successful in rewriting its history. Almost all of today’s rich countries used tariff protection and subsidies to develop their industries. Interestingly, Great Britain and the United States, the two countries that are supposed to have reached summit of the world economy through their free-market free-trade policies, are actually the countries that have most aggressively used protection and subsidies.

Contrary to the popular myth, Britain was an aggressive user, and in certain areas
a pioneer, of activist policies intended to promote its industries. Such policies, although limited in scope, date back to the fourteenth century (Edward III) and the fifteenth century (Henry VII) in relation to woolen manufacturing, the leading industry of the time.

England was then an exporter of raw wool to the Low Countries, and Henry VII, for
example, tried to change this by taxing raw wool exports and poaching skilled workers
from the Low Countries. Particularly between the trade policy reform of its first Prime Minister, Robert Walpole, in 1721 and its adoption of free trade around 1860, Britain used very state-directed trade and industrial policies, involving measures very similar to those used later by countries like Japan and Korea to develop their industries. During this period, it protected its industries more than did France, the supposed counterpoint to its free-trade free-market system. Friedrich List, the leading German economist of the mid-nineteenth century, argued that given this history, Britain preaching free trade to less advanced countries like Germany and the United States was like someone trying to “kick away the ladder” with which he had climbed to the top. List was not alone in seeing the matter in this light.

Many American thinkers shared this view. Indeed, it was American thinkers like Alexander Hamilton, the first Treasury Secretary of the United States, and the now-forgotten economist Daniel Raymond, who first systematically developed the infant industry argument. List, considered the father of the infant industry argument,
started out as a free-trader (ardently supporting the Zollverein, a customs union which eliminated trade barriers among German states) and learned about this argument during his exile in the United States during the 1820s.

Little known today, the intellectual interaction between the United States and Germany during the nineteenth century did not end there. The German Historical School—represented by people like Wilhelm Roscher, Bruno Hildebrand, Karl Knies,
Gustav Schmoller, and Werner Sombart—attracted a lot of American economists in the
late nineteenth century. The patron saint of American neoclassical economics, John Bates Clark, in whose name the most prestigious award for young American economists is given today, went to Germany in 1873 and studied the German Historical School under Roscher and Knies, although he gradually drifted away from it. Richard Ely, one of the leading American economists of the time, also studied under Knies and influenced the American Institutionalist School through his disciple, John Commons. Ely was one of the founding fathers of the American Economic Association (AEA); to this day, the biggest public lecture at the Association’s annual meeting is given in Ely’s name, although few of the present AEA members would know who he was.

Between the Civil War and the Second World War, the United States had the most heavily protected economy in the world. Abraham Lincoln was a well-known protectionist who cut his political teeth under the charismatic politician Henry Clay in the Whig Party, which advocated the “American System” based on infrastructural development and protectionism. They understood that free trade was in the interests of Britain, but not the United States. One of Lincoln’s top economic advisors was the famous protectionist economist, Henry Carey, who was described as “the only American economist of importance” by Marx and Engels in the early 1850s but has now been almost completely airbrushed out of the history of American economic thought.

In protecting their industries, the Americans were going against the advice of such
prominent economists as Adam Smith and Jean Baptiste Say, who saw the country’s future in agriculture. However, the Americans knew exactly what they were doing. They
understood that Britain had reached the top through protection and subsidies, and they needed to do the same if they were going to get anywhere. Criticizing the British preaching of free trade to his country, Ulysses S. Grant, the Civil War hero and U.S. president from 1868 to 1876, retorted that “within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.” When his country later reached the top after the Second World War, it too started “kicking away the ladder,” preaching free trade to the less developed countries and forcing them to accept it.

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