Abstract
The basic argument of this article is that you need financial incitements to get production moving. After a brief introduction to the Western debt crisis, it proceeds to List’s criticism of Adam Smith. List criticised Adam Smith for not understanding the largely immaterial nature of capital nor understanding growth, and therefore adhering to a counterproductive policy of saving and austerity. Some of Smith’s mistakes have been inherited by modern economics. Although List does not excel in the details of monetary theory, he explains the core principles of mobilising capital for productive purposes in practice. Core tools in this pursuit were public measures such as protective tariffs; targeted investment in public goods like education, infrastructure, energy, and machine tools; and a financial system serving productive purposes, all contributing to stable growth. With thoroughness List explains the principles—of how a nation must prioritise in her investment strategy, strategically using its human and material capital productively, all in order to restructure the national economy in a productive direction, and thus elevate Labour and Civilisation. This article also elaborates on the financial side of the matter: mobilising capital for productive investment, through the money creation process.
This chapter is based on my 2011 dissertation, Friedrich List’s Heart, Wit and Will: Mental Capital as the Productive Force of Progress (Daastoel 2011)
Presented at the 24th Heilbronn Symposion in Economics and the Social Sciences; “Great Nations at Peril” or „Große Nationen vor dem Abgrund“, 16–19 June 2011.
The natural course for overcoming economic and financial emergency in a capitalist economy is not to limit economic activity, but to increase activity.
Wilhelm Lautenbach (1931, Sect. IV)
I was criticized for using “artificial means” in promoting industry. What does this stupid word mean?
Sergei Witte (1921, p. 323).
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Notes
- 1.
Excepting aid to the auto industry in the USA and Germany.
- 2.
- 3.
One example is Nobel Laureate Paul Krugman, who while arguing that J.M. Keynes’ insights are as valuable today as in the 1930s, argues that governments need to get deeper into debt by running deficit creating work programs. Krugman also argues that governments need to get deeper into debt ‘temporarily’ by running stimulus packages: What we need to do right now, while the private sector is trying desperately to work down its debt levels, is … temporarily, the public sector need to step in there and do the spending. … You can take things Keynes wrote, … and read about events today, his recipes for recovery is every bit as relevant today as then (Krugman 2012).
- 4.
Resulting e.g. in more import—granted that the propensity to import differs among nations.
- 5.
1. Droz ( Econ. polit., introduction vi) vigorously criticises those who do not take the trouble to distinguish between what is known and what is not known -and this is the only way to arrive at the truth. [The full reference is Joseph Droz, Economie politique ou principes de la science des riches (Droz 1829).] [List’s note].
- 6.
Literary translated as ‘spiritual capital’.
- 7.
6. Page 196. (6) Capital of matter… slowly. Smith, “Wealth of Nations,” II. Chap.iii. “The progress is frequently so gradual that, at near periods, the improvement is not only not sensible, but… there frequently arises a suspicion that the riches and industry of the whole are decaying.” Also say, “Principles,” I. Chap. ii. The increase of capital is naturally slow of progress; for it can never take place without actual production of value, and the creation of value is the work of time and labour besides other ingredients. (List’s note).
- 8.
- 9.
‘National pensions saving’ illustrates well, since future retirees can only live from future production, not from savings as such. The task is therefore to invest wisely today in order to secure future production and pensions. The pension funds, however, do not act accordingly—nor do governments—they rather act quite contrary to national common sense.
- 10.
Smith must either assume away time needed for saving enough capital, or he must assume that the saved capital can be immediately used to buy suitable fixed capital, meaning that the extra capital needed is infinitesimally small, and that this is so for all producers. Obviously either assumption is empirically wrong, time exists, and some investments are large. Therefore, some purchasing power is always and in an increasing degree withheld from demand, thereby creating increasing deflation. This relation tends to make underconsumption (and deflation) a chronic state. Other factors pull in the opposite direction, creating inflation, such as unproductive creation of credit. An effective financial sector may, however, only partly ameliorate the problem, by lending ‘our’ manufacturer’s saved capital to other users until he has enough capital to make the purchase.
- 11.
Keynes’ argument is the theoretical foundation for the massive Norwegian Oil Fund, and through the IMFs advocacy it had become the model for many smaller sovereign wealth funds (SWFs) in raw material-exporting nations. Thus, Keynes is serving many a financial broker well, but not the engineers.
- 12.
List fails to quote correctly, but this may be due to the translation into German and then back into English, and also due to differences in the handful editions of Smith’s WoN. In any case the meaning is correct. This is Smith’s original text: “The industry of the society can augment only in proportion as its capital augments, and its capital can augment only in proportion to what can be gradually saved out of its revenue.” (Smith 1776, book IV, ch. II)
- 13.
The original text is: “Ein geschloßner Handelsstaat, dessen Bürger mit dem Ausländer keinen unmittelbaren Verkehr treibt, kann zu Gelde machen, schlechthin was er will, wenn er nur deklariert daß er selbst nur in diesem Gelde, und schlechthin mit keinem anderen sich werde bezahlen lassen.”
- 14.
This claim is also noticed by Gustav Cohn in his major The Science of Finance, 1889, p. 782. Fichte therefore precedes the often claimed inventor of the so-called State Theory of Money, of Georg Knapp (Knapp 1905), with more than one century. Knapp (1905) himself has no references to Fichte. It is noteworthy that Fichte, this favourite disciple of the great Immanuel Kant, regarded his The Closed Commercial State, as his “best, most thought-through work”. Another predecessor of List regarding fiat money was the statesman and economist Adam Müller (1816) and thereafter, for example, Otto Heyn (1894), Georg Simmel (1900), Silvio Gesell (1904) and Rudolf Steiner (1921).
- 15.
This was acknowledged even by Jacob Viner, Studies in the Theory of International Trade, p. 4. (Hudson’s note).
- 16.
26 (Werner’s note with references).
- 17.
On the other hand, in those days, and even more than today, international trade was short of a reliable common standard for payments, and gold ended up as the most convenient tool. In a more stable, trustful, and better regulated world, other tools like “commercial bills of exchange” might be a better choice (as suggested to me in an email from Geoffrey Gardiner, formerly at Barclays Bank).
- 18.
The title of Law’s book describes his intention, Money and Trade Consider’d with a Proposal for Supplying the Nation with Money (Law, 1705).
- 19.
8 John Law, Money and Trade Considered as a Proposal for Supplying the Nation with Money, Glasgow,1760 (first published at Edinburgh 1705); Memoires sur les banques and Lettres sur les banques, 1717. Cf. Faire, ed.r Economistes financiers du dix-huitieme siecle, Paris 1843. (Hahn’s note).
- 20.
9 Charles Rist, History of Monetary and Credit Theory, New York. First printed in English in 1940. (Hahn’s note).
- 21.
11 Law, Money and Trade… p. 110 (Hahn’s note).
- 22.
12 Ibid., p. 21 (Hahn’s note).
- 23.
See Moniteur, sitting of April 10, 1790. (White’s note). Mr. Matrineau obviously did not have any experience with democratic populists and their light-hearted treatment of excessive money issuing.
- 24.
- 25.
And in times of expansion, money supply is also expanded, as a concealed form of taxation called seigniorage. The difference between publicly (government) and privately (banks) created money thus corresponds to taxes paid to the government versus to the private banks—in other words transferral of claims to resources from the taxpayer to the government or to private banks, in the first place in the shape of seigniorage and in the second place if the shape of interest payment. Or, if the government institutions create loans to the public rather than printing money for procurements, the above seigniorage is substituted by interest payments to government institutions. The difference taxation-wise between seigniorage and interest payment to public institutions, is that the first act as a lump-sum tax and the latter is temporally distributed.
- 26.
27 (Werner’s note with references).
- 27.
1. Wealth of Nations, Book IV. Chap. ii., List’s note.
- 28.
The meeting took place in Berlin, in the Reichsbank’s building, at the request of State Secretary Deputy Minister of Economics Ernst Trendelenburg and Reichsbank head Hans Luther. The topic was work-creation plans. All 30 participants were members of the Friedrich List Society, and also counted deputy minister of Finance Hans Schaeffer as well as other leading economists, politicians, and bankers.
- 29.
For the argument, leave aside the issue of private vs. state entrepreneurs.
- 30.
Such as the thorough physical devastation of most of Norway’s populated regions in 1368 (the coast south and east of Bergen in the west to the Swedish border in the east, by today’s Gothenburg). Norway was the former dominating sea power outside the Mediterranean, in the North Sea and the Baltic. Norway had itself used its powers against client states and competing regions, such as the major retaliation mission against Danish and North German trading towns in 1284. But Norway’s power was utterly broken by the Black Plagues in 1349 and 1363. And the Hanse League made an easy killing of a former competitor, and secured her power in northern Europe for centuries to come. (Cf. Gierløff 1945).
- 31.
The cost incurred in making an economic exchange. Transaction costs, in the sense of Steven N. S. Cheung, however, are related to costs that arise due to the existence of institutions, and therefore according to Cheung should be called ‘institutional costs’. The question immediately arises whether Cheung ever saw an economy without institutions … (Cf. Cheung 1987).
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Daastøl, A. (2015). Austerity Versus Productive Investment: Two Traditions in Capital Formation and Growth. In: Backhaus, J. (eds) Great Nations at Peril. The European Heritage in Economics and the Social Sciences, vol 17. Springer, Cham. https://doi.org/10.1007/978-3-319-10055-5_5
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