Henry Hazlitt, one of the few economists who could write well, claimed economics is haunted by more fallacies than any other discipline. He made his case in Economics in One Lesson, the greatest introductory book to sound economics ever written. Read it, and you can talk more sense in fiscal policy than Paul Krugman. Then read Man, Economy & State by Murray Rothbard and you can talk more sense in every field than Paul Krugman. Hazlitt’s thesis on why the economics profession succumbs to such idiocy is not relevant here – but his sentiment at the time of writing that great book I can certainly channel this evening.
James Surowiecki has by any standard reached the dizzying heights of economic journalism, having contributed articles for the New York Times, The Wall Street Journal and Fortune magazine, among others. He now has a regular column in The New Yorker (I’m really picking on those guys a lot here so far) and has published a bestselling book called The Wisdom of Crowds. He is a statist, but clearly an intelligent and erudite one. I admit to enjoying a lot of his articles on the corporate scene, though I have little taste for the economic policies he advocates.
This year happens to be the 150th anniversary of the official beginning of America’s Second War of Independence, most often incorrectly dubbed a Civil War. This fact will become more relevant in a minute. It’s an era I have much interest in. Those familiar with the politics of pre-1861 America might be surprised to find Surowiecki coming out with this very brazen statement when he advocates massive government spending on R&D and infrastructure:
‘’Historically, at least, this was a bipartisan position. Alexander Hamilton argued for the “encouragement of new inventions and discoveries” by government. In the nineteenth century, an era of limited government, one of the few things that people were willing to spend money on was “internal improvements”—canals, railroads, and the like—and Abraham Lincoln supported these as being of “general benefit’’.’’
This is one of the most misleading comments I have ever seen in the mainstream media. Even the Guardian might think twice about printing such clear distortion unless it was in covering Israel affairs.
I am going to make three distinct arguments on why Surowiecki’s statement is incorrect, to put it mildly. Economic wisdom is a side issue here, as this just concerns matters of historical record.
Argument One: There were vastly different attitudes towards ‘Internal Improvements’ among the Founding Fathers and American policymakers prior to the Civil War.
Surowiecki attempts to demonstrate that internal improvement policies were supported across the political divide by quoting Founding Father Alexander Hamilton. This is specious reasoning. Hamilton was the leader of the Federalist Party whose policies were formed largely around his own views. These policies included support for internal improvements, a strong Executive Branch, protectionist tariffs and close ties with Britain. Yet Hamilton’s agenda was fiercely opposed by fellow Founder Thomas Jefferson and his Democratic-Republican Party, which advocated strong states-rights policy, support for France (for a while) as well as opposition to virtually all Hamiltonian economic policies like a national bank. ‘Jeffersonian Democracy’ largely won the day in the early years of the American Republic. After Jefferson, Presidents Madison and Monroe took up the mantle against Hamilton’s ideological heirs, namely the Whigs of Henry Clay. Surowiecki’s approach is like a writer quoting Barack Obama’s support for universal healthcare plans one hundred years from now and saying it was never a contentious issue in his first term. Indeed, one need only quote James Madison when he vetoed a bill for $1.5 million for railroad and canal subsidies. According to biographer Robert Rutland:
‘‘… [I]t was time to teach the nation a lesson in Constitutionalism… The bill… failed to take into account the fact that Congress enumerated powers under section eight of the first article of the Constitution, ‘’and it does not appear that the power to be exercised in the bill is among the enumerated powers, or that it falls by any just interpretation within the power to make the laws necessary and proper’’ for carrying out other constitutional powers into execution’’.
Sixteen years later, Andrew Jackson vetoed every internal improvement bill that landed on his desk, bills sponsored by Whig leader Henry Clay, which Jackson claimed were:
‘’…[S]addling upon the government the losses of unsuccessful private speculation’’.
Ever the tough guy, Jackson would boast of his stance against internal improvements in his Farewell Address, and stated his only regret (other than not hanging his Vice-President, Calhoun!) was refraining from shooting Henry Clay.
Prior to Abraham Lincoln, federal subsidies had never appeared for internal improvements. It was left up to the State governments alone to experiment with. It is amazing that Surowiecki is so confident the policy had massive support, when by 1860 no bill granting Federal Government aid for the purpose of building a railroad to the Pacific ever materialised, despite massive support from the Whigs and many Republicans. The Democratic Party at the time was fiercely opposed to all such policies, proving Surowiecki’s point about the existence of bipartisan support for internal improvements to be pure fantasy.
Argument Two: Experiments amongst the States in ‘Internal Improvements’.
Moving from the Founders and Federal Government to local state governments, the story of internal improvements appears to be a bleak one. Since Surowiecki offered Lincoln as an example, looking at Lincoln’s record in Illinois, a state which experimented with internal improvements in a major way in the 1830s and 1840s would be pertinent. Lincoln was an open admirer of Alexander Hamilton’s policies for governance, but even more so of the great supporters of big government that were Henry Clay and the Whigs. Lincoln famously delivered a hagiographic eulogy at Clay’s funeral. The Whig agenda was taken up later by the Republican Party, the first President to win office on the Republican ticket being Abraham Lincoln.
When first running for office in Illinois in 1932, Lincoln, already a famous lawyer, proclaimed:
‘’I presume you all know who I am. I am humble Abraham Lincoln. I have been solicited by my friends to become a candidate for the legislature. My politics are short and sweet, like the old woman’s dance. I am in favour of a national bank… in favour of internal improvements and a high protective tariff’’.
By 1837, Lincoln was powerful enough to help the Illinois Whigs approve over $12 million dollars for multiple ‘internal improvement schemes. Other states had also caught onto the vibe. I will be blunt and say here that the programs lead to atrocious results, which by the 1840s were similar to the effects of Ireland’s recent crash from a Central Bank funded boom: massive state debt and useless, often non-complete pet projects. Lincoln’s own law partner and best friend was able to say:
‘’The gigantic and stupendous operations of the scheme dazzled the eyes of nearly everybody, but in the end it rolled up a debt so enormous as to impede the otherwise marvellous progress of Illinois… [I]t is little wonder that at intervals for years afterward the monster of (debt) repudiation often showed its hideous face above the waves of popular indignation’’.
Lincoln made fantastic promises that the policies would make Illinois the ‘Empire State of the Union’. Every river in the state was to be widened, deepened and made navigable. Cities were promised to ‘spring up everywhere’. Two men who worked in Lincoln’s law offices in Springfield, Illinois were George Nicolay and John Hay. They later had jobs as administrators in the Lincoln White House. At the time of the internal improvements fiasco they were able to report that nothing came of the schemes other than:
‘‘… [a] load of debt that crippled for many years the energies of the people, a few miles of embankments that the grass hastened to cover, and a few abutments that stood for years by the sides of the leafy rivers, waiting for their long delaying bridges and trains’’.
These men were Lincoln loyalists!
Some examples are always held up as successful projects during this national infatuation, such as New York’s Erie Canal, but even that became obsolete very quickly with the advent of railroad transit. The subsequent public attitude towards internal improvements can be summed up in one word: revulsion. Revulsion at the massive corruption brought about between the integration of government and big business, and revulsion at being saddled with the debt of failed industries. This can be clearly proven by the fact Illinois actually amended its state constitution in the late 1840s to forbid transfer of government moneys to corporations for internal improvements. This was followed by Ohio in 1851, which was in an even worse state than Illinois. Indiana and Michigan were next in passing popular amendments, as they were also bankrupt from internal improvements. The states of Wisconsin and Minnesota would enter the Union in 1848 and 1858 respectively. They saw the disaster internal improvements had caused and prohibited them in their state constitutions from the beginning. They went further in banning loans to private businesses. State Supreme Courts suddenly began to deem internal improvement policies unconstitutional. This occurred in Iowa. By the beginning of the ‘Civil War’, 13 states forbade by amendment internal improvements in their constitutions.
Argument Three: ‘Internal Improvements’ and the Confederacy.
Jefferson, very wrongly overlooked by Surowiecki, was a Virginian, and a man who idolised the yeoman farmer as superior citizens than the captains of industry in North Eastern cities. It is not surprising that the Southern states became fierce defenders of the Jeffersonian anti-internal improvements tradition when Northern Whigs and Republicans threatened to take their moneys, to finance projects which would primarily benefit California, Illinois and especially the North East. Therefore, at the Federal level Southern Senators and Congressmen were vital in preventing internal improvement subsidies, to the constant ire of Northern political classes. It was a sure thing that Article 1, Section VIII, Clause III of the Confederate Constitution would state:
‘‘Neither this, nor any other clause contained in the Constitution, shall ever be construed to delegate power to Congress to appropriate money for any internal improvement intended to facilitate commerce’’.
If the Confederate States, making up 9 million out of 22 million of the American population prior to secession saw it fit to enshrine opposition to internal improvements in its supreme law code, there is little justification indeed for Surowiecki’s blatant revisionism in the service of neo-Keynesian ideology. It is only prudent to warn Mr. Surowiecki of the role internal improvement subsidies played in a very human tragedy beyond state bankruptcies.
Tariffs were a much more important way of raising revenue before the income tax was introduced in 1913, and this disproportionately affected the agrarian states of the Deep South. These states had a small manufacturing base, and relied on imports from Europe or the North for which they exported massive amounts of cotton annually. One of the most significant laws in American history was introduced in 1860, known as the Morrill Tariff Act. This massively increased the tariff from 20% to 47%. The Cotton States were now shouldering 80% of the nation’s tax burden, despite constituting 30% of the population. Lincoln in his Inaugural Address threatened war on any state that refused to pay federal tariffs, while at the same time, Lincoln committed himself to subsidising transcontinental railroads. The most destructive war in history up to that time followed the next year.
Confederate bodies lie where they fell in the immediate aftermath of Antietam
Read more http://www.newyorker.com/talk/financial/2011/02/14/110214ta_talk_surowiecki#ixzz1E4ObvM76