‘Concrete Economics: The Hamilton Approach to Economic Growth and Policy’ reviewed by Hans G Despain

A specter of secular stagnation is haunting capitalist nations (DeLong 2015; Despain 2015; Despain 2016b). Neoliberal policies have derided government intervention as antagonistic to economic growth and capital formation. Neoliberalism proclaims that whatever the comparative advantage of a country, it should be pursued, be it agricultural, consumer, or service sectors. The state should be shrunk and its actions minimized to promote efficiency and reduce rent seeking and corruption. There is only one problem. It tends to arrest growth entirely.

In a new book, Concrete Economics, UC Berkeley professors Stephen S. Cohen and J. Bradford DeLong demonstrate that U.S. economic development and industrialization benefited from “concrete” roles played by the government. Likewise, recent 20th century ‘Asian economic miracles’ have been well-orchestrated cooperation between corporate entrepreneurial activity seeking profits and governments promoting capital formation, full-employment, and economic growth. “There are things that matter immensely for an economy that only government can do” (7).

Concrete Economics is an ambitious little book. It is a book of socio-political philosophy, economic history, theory, and policy. In less than 200 pages it attempts to cover the U.S. history of economic policy, late 20th century international development, and the hypertrophy of finance and the Great Financial Recession. The authors’ intend to be accessible for lay readers, at which they succeed brilliantly while maintaining a depth of purpose. Their primary purpose is to argue that in the 1970s and 1980s there occurred in the American economy structural shifts and policy changes that disrupted the “pragmatic” balance of partnership between corporate and public leadership to promote stable economic growth, and widely share its benefits.

The result was a demotion in the necessary and progressive role of government for promoting the social wellbeing of citizens, capital formation, and public infrastructure development. Instead, government has been ideologically portrayed as incompetent, corrupt, and predatory. In a neoliberal environment the only legitimate role of government is to assure high corporate profitability.

Marxian political economists have long recognized the ‘anarchy of production’ of capitalist development desperately requires government guidance to promote capital formation, to build public economic infrastructure such as roads, bridges, education, etc, and to protect the income and safety of workers. Maurice Dobb contended that economic development under free market capitalism was contradictory. Over-accumulation, sectoral disproportionalities, overcapacity, underemployment, and stagnation are tendencies all too normal in capitalist development (Dobb 1946; Baran and Sweezy 1966).

An underappreciated contradiction is the tendency toward “underinvestment” (Dobb 1937, 279), hence underdevelopment (Dobb 1951; Baran 1957). Dobb maintained if the comparative advantages of a country were in the wrong sectors, e.g. agriculture and consumption goods, global competition “may so inhibit investment decisions as to arrest growth entirely” (Dobb 1960, 8).

While underinvestment in capital goods sector prevails, overproduction in the consumption goods sector remains a general problem. As Marx (1867) and Schumpeter (1942) recognized, the excess supply puts pressure on firms to lower costs and open new export markets. Joan Robinson (1966, 5) maintained the excess supply of consumption goods gives rise to “new mercantilism,” where “every nation wants to have a surplus in its balance of trade.” However, for Robinson (1966) and Dobb (1946), mercantilism is misunderstood when understood as merely a set of archaic policies such as hoarding gold and silver and simply maintaining trade surpluses; new mercantilism is better understood as a set of policies to promote full employment, capital development, and economic growth. In new mercantilism, the state becomes a progressive agent to forge trade relations that achieve profits for corporations, protect wages of workers, maintain full employment, promote capital formation in the means of production, and achieve economic growth.

Cohen and DeLong demonstrate the first U.S. Treasurer, Alexander Hamilton, understood economic prosperity required a type of new mercantilism, what Cohen and DeLong call the “Hamiltonian system” (38-52). Once in place “it proved remarkably durable” (48) and fully capable of rapid industrialization (33). In his famous Report on Manufacturers (1791) Hamilton underscores the important role of government in promoting economic prosperity (33-5). Hamilton argued that a Union with a strong federal civic state was more economically sound and more capable of producing prosperity than a confederate civic state. Hamilton argued that: “Civil power, properly organized and exerted, is capable of diffusing its force to a very great extent” to help industrialize the American economic system and guard “against illicit trade” (Hamilton 1787 [2003], pp. 92 – 4)

The Hamiltonian system was “pro-industrialization, high-tariff, pro-finance, big-infrastructure political economy, and that […] set in motion a self-sustaining process” of expanded reproduction (35). Hamilton’s purpose was not simply to promote the existing comparative advantage of cheap natural resources of the young and fragile nation, but “to shift that comparative advantage” (39). The shift was toward accumulation of Department I goods to promote industrialization.

In volume II of Capital Marx develops a model of “reproduction schemes” that leaves no doubt that expanded reproduction or economic growth requires a Department I (capital goods) to lead and balance proportionally with Department II or consumption good development. Dobb (1973, 163) would contend that given the “anarchy of production,” balanced capitalist growth could only be achieved by “miraculous accident.” Baran and Sweezy (1966) argued that in the oligopoly phase of capitalist development, some sort of balanced development could be achieved, but excess capacity, underemployment, and stagnation became the general tendencies that would need to be overcome, and impossible to achieve without a public sector to guide it.

At the center of Hamiltonian pro-Department I economic development, was a commitment to a high tariff, targeted mainly against the industrial sector of Britain. The tariff helped to provide an incentive to invest and develop manufacturing technologies. It furthered provided revenue to the federal government to assume the debt of states incurred from the Revolutionary war and to pursue various civic infrastructure projects. Rich financiers bought state debt for pennies on the dollar. This gave rise to a new and vigorous financial market that enriched financial speculation and gave the rich a financial interest in the young nation and the success of Hamiltonian political economy.

At the center of the Hamiltonian financial system was the (in)famous First Bank of the United States (40). James Madison was critical of the bank charter. “But when Madison was president, he sponsored and signed the bill creating the Second Bank of the United States” (28). The Bank and the financial system more generally simply proved indispensible for capitalistic growth. Cohen and DeLong fail to mention how the Second Bank became plagued with poor management and corruption (Schlesinger 1945, 74-87), and in 1833-4 the Bank was divorced from the state, its charter finally expired in 1836 (Schlesinger 1945, 227-41).

Their larger point is that the Hamiltonian system established the institutionalization of an activist public sector that promoted infrastructure development and industrialization. The activist public sector gave a great advantage to United States economic development, far out industrializing all other areas of the globe (54). By 1836, the Hamiltonian system was institutionally in place and industrialization well underway.

In opposition to American farmers and agricultural plantations of the slave South, high-tariffs were continually renewed to protect infant industries (9). Jackson was successful in his war against the Bank, but infrastructure development became more ambitious in The Age of Jackson (Schlesinger 1945,

334-49). The Civil War emancipated slaves, and further established “that free labor deserved all possible government support” (56). The Homestead Act (1862) meant that ordinary citizens could claim ownership of land. Eventually over 1.5 million Americans were granted 270 million acres (63). The Morrill Act (1862) established land-grant college educational system (64). Railroads expansion was massive, although railroads would remain privately owned, almost all the railroad development reshaping the American economy and society was “publically subsidized” (58-60).

Americans would eventually abandon high tariffs in the mid-twentieth century. The Hamiltonian inspired economic pragmatic experimentalism would become an American institution. Teddy Roosevelt would address the over-monopolization of the Gilded Age, progressive policy was implemented between 1890-1925 to address immigration, inequality, banking crises, consumer protections, and much more (68-74). The New Deal policy was “the least ideological response” (11) and successful reaction of “pragmatic expediency” (80) of a nation confronting an economic disaster. Regulations were expanded, jobs created, spending increased, and infrastructure development hastened (74-82). New relationships between government and citizens, employers and employees, and private and public investment was the structural accomplishment of the New Deal.

Cold war politics, Pentagon spending and research, suburbanization, highway expansion, education extension, etc. (83-119) were expressions of the “legitimization of the New Deal” institutional accomplishments. The American Dream was a real pursuit, inequality low, and technological innovations rapid, all of which enhanced the quality of life for the country and its citizens. The “long age of Ike is a splendid example of American’s recurrent history of government using whatever means it can muster that fit the situation” (118). It was a 30-year political consensus of New-Deal-like pragmatic economic policy. “It dried up in the desert when the Reagan Revolution dammed” the New Deal river flow of widely share prosperity and stable growth (87).

The long U.S. history of the government “reshaping the economy by prodding, protecting, and enabling private enterprise to surge into new economic spaces” had been dammed and damned in the U.S., the lessons were not lost to other countries (119). East Asian countries, Japan, Hong Kong, Singapore, South Korea, Malaysia, Indonesia, Thailand, and China (140) “steer investment” into the development of Department I and implement analogous Hamiltonian economics that have been pragmatic for the particular situation and “pay over the long run” (122).

Cohen and DeLong tell some specifics of the cases of Japan (129-40) and China (140-156). The overarching lesson is governments got involved to steer the flows of development and protect particular interests. These economies are not without their own paradoxes and contradictions, however, the rapid industrialization and the increase in citizen wellbeing has been most impressive. As John K. Galbraith (1973) argued just before the Reagan “damming,” economic growth, full-employment, and shared prosperity, market economies need both government involvement with public purpose.

The U.S. and other countries accommodated the East Asian development by absorbing exports, accumulating massive debt, and tolerating a shrinking of manufacturing (140-1). This contributed to the structural shifts in the U.S. These shifts were sold as “liposuction, fat removal,” but plenty of muscle was cut away as well (4). Whatever fat was removed, grew back with the explosion in finance, insurance, and real estate (FIRE). With Hamiltonian political economy damned by the neoliberal revolution there emerged an imbalance in private/public partnership.

The ideology of deregulation dominated policy (171-83). The FIRE sector grew from 3 percent of the economy to 9 percent (169). The FIRE sector accounted for 10 to 15 percent of profits from 1945 to 1985, it spiked to 16 percent in 1986, by 2002 40 percent, and nearly 50 percent in 2007 (162). FIRE was ideologically understood as the new growth sector and a source of U.S. exports. However, in addition to generating sector disproportionalities and massive macroeconomic instability, significant research has shown “that a fast-growing financial sector is detrimental” to growth.

Cohen and DeLong conclude that after nearly 40 years of ideological voodoo economics, it is time for a pragmatic Hamiltonian redesign (192). However, they lament that instead we have a double down on ideology. Finance has been reflated and is “now ever more powerful,” now ever more politically “dominant.” “To say the very least, this is most unfortunate” (186). Really? Unfortunate! I appreciate this is to “say the very least,” but the power and dominance is a disaster for the American and global economies and devastating to the wellbeing of American and world citizens.

Cohen and DeLong conclude we “need to recover that American tradition of pragmatic engagement” (191). “Pull it out from the speculative realms of ideology and its handmaiden theoretical abstraction” (192). “We do not propose the content of such redesign […] New directions were not the bright ideas of clever economists or blue-ribbon commissions. It is not the way for today” (192). So where do the ideas come from? Cohen and DeLong don’t say. New Deal policy didn’t come out the blue, it was thought up by “clever economists,” cadres, and activists, put in place by progressive and pragmatic politicians.

The main thesis of this book is right on. Public leadership and policy matter. The emphasis on the balance between protecting and nurturing what pays off in the long run, Marxian Department I development, in balance with other sectors of the economy (i.e. Department II, leisure, and finance) is an important insight that needs to be better understood. Imbalances and disproportionalities manifest crises and secular stagnation. The civic sector needs to encourage and guide the balanced development. It is for these reasons I have assigned this book to my introductory economic courses.

The book’s weaknesses include a lack of boldness in what should be done concretely. Moreover, there is a lack of mention of the role of the working classes in motivating and initiating change, and the effect of what the government does and doesn’t do on the quality of life for especially labor. Hamilton’s bank was spectacular example of class interest and class power. Cohen and DeLong only see that he maintained the Union. My fear is, lacking a deeper understanding and appreciation of economic development and analysis of workers is the first and big step away from concrete pragmatic policy. Nonetheless, this is a powerful little book with important messages to be debated.

14 July 2016