In the spring of 1825, a 35-year-old German political exile arrived in the port of New York with little money, no connections, and a prison record.
His name was Friedrich List. He had been a professor of political science at the University of Tübingen, a member of the Württemberg parliament, and one of the most vocal advocates for economic reform in the German states.
Specifically, List had agitated for a customs union that would allow goods to move freely across the patchwork of German territories. But that idea threatened the entrenched interests of local rulers who profited from the existing system of internal tariffs and trade barriers… and they weren’t too keen to give up their fiefdoms.
Tiring of his reform efforts, the German authorities expelled List from parliament. Then they sentenced him to ten months of hard labor in the fortress of Hohenasperg – almost certainly seeking to make an example of him.
Panicking, List escaped to France under the cover of night. Then he spent two years evading German authorities in Alsace, Baden, and Switzerland. But growing tired of living like a fugitive, List returned to Germany in 1824 in hopes of mercy.
He didn’t get it. List was arrested immediately and forced to serve his sentence.
Upon completing nearly a year of hard labor, List was only permitted to leave under the condition that he leave Europe entirely. And that’s how he found himself in America.
So here was a man who had been imprisoned for advocating economic modernization in his own country… arriving in a country that had already implemented many of the ideas he had been jailed for promoting.
Making his way south from New York, List settled in Reading, Pennsylvania and took up editing a German-language newspaper to earn a living. That helped him get back on his feet. And then a stroke of luck changed his life forever…
Pennsylvania in the late 1820s was the beating heart of the American industrial experiment. The ironworks of Pittsburgh were producing steel at scale. Textile mills along the Schuylkill River were competing with British imports. Coal was being extracted at an accelerating pace.
And a new technology — the railroad — was beginning to connect these enterprises into something that looked, for the first time in America’s history, like a coherent national industrial economy.
Amazed by what was happening all around him, List saved enough money to buy some land in the area. Soon after, a large deposit of coal was discovered on his land… making him a wealthy man.
With his newfound financial independence and his fascination with the roaring industrial economy he observed first-hand, List began studying the writings of Alexander Hamilton — particularly the Report on Manufactures.
The more he read, the more he realized that the economic reforms he had advocated in Germany were already in place in America… and they were working wondrously.
List could see how the insulated domestic economy and free trade across state borders were making the country wealthy. And that wealth was being reinvested to expand American industry, which created a virtuous circle of sorts.
To List, the economic theory he was so passionate about was being validated… in America.
After five years in the country, List became a naturalized American citizen. And then in 1832, he actively campaigned for President Andrew Jackson’s re-election. He saw Jackson as a fierce opponent to the financial interests who plied in extraction rather than production.
Jackson went on to win another term, and he appointed List as a United States consul to Germany. This was a mid-level diplomatic official whose primary job was to facilitate trade and protect American commercial interests in a foreign city.
So it was that List returned to Germany for the first time since his exile – but this time as a protected American citizen. And to add insult to injury, the same government that had imprisoned him now had to deal with List’s advocacy for trade and commerce once again.
Through it all, List was working on what would become, arguably, the most important economics book of the 19th century. It was the book that took Hamilton’s core playbook and started to flesh out the American System.
List’s Key Contribution – Productive Powers
List’s masterwork, The National System of Political Economy, was published in 1841. It came to be thought of as a critically important contribution to the study of economics at the time, which is somewhat ironic because I suspect almost nobody today has heard of it. I certainly hadn’t.
There was a central thread that ran through List’s work, and that is the fundamental distinction between what an economy has and what an economy can do.
List noted that the classical economists, following Adam Smith and David Ricardo, were primarily concerned with the exchange of existing goods. A nation’s wealth, in the classical British framework, was measured by its accumulated stock of goods, its balance of trade, and the efficiency with which it allocated resources through the market.
So if Britain could produce textiles more cheaply than Germany, Germany should buy British textiles and focus on whatever it could produce more cheaply in return. This was the principle of comparative advantage — and it remains a bedrock of economic theory to this day.
List did not try to refute the theory. In fact, he acknowledged that comparative advantages clearly exist.
However, List challenged the notion that comparative advantage should dictate the terms of trade… because, in his view, it ignored something very important.
A nation’s true wealth, List argued, was not its stock of goods. Instead, it was the nation’s productive powers — its capacity to create wealth in the future.
These productive powers include factories and machinery, certainly. But they also include things that are harder to measure – like scientific knowledge, the skill level of the workforce, the quality of educational institutions, the reliability of the legal system, the efficiency of public administration, and the physical infrastructure that connects producers to markets.
In List’s framework, a nation that has a thriving manufacturing sector, skilled workers, functioning institutions, and advanced technology is genuinely wealthy — even if its current balance of trade is temporarily negative.
Conversely, a nation that exports raw materials at a trade surplus but has no manufacturing capacity, no advanced workforce, and no institutional depth is poor — because it has no ability to produce anything of higher value.
The ability to produce things, in other words, is worth more than the things themselves. That’s the core idea underlying List’s view of an economy’s “productive powers”.
So to List, free trade within the nation was essential. But free trade between nations was not always desirable, even if comparative advantages made it more efficient for moving goods in the present.
The classical free trade argument said that a nation should import goods whenever it’s cheapest to do so. If Britain makes textiles more cheaply than Germany, Germany should buy British-produced textiles. Everyone benefits from lower prices, thus resources are allocated efficiently on a global scale.
List’s response was that buying British textiles may give you cheaper cloth today, but it prevents you from developing the ability to make cloth tomorrow. And once you’ve lost that ability — once the skills, the machinery, the institutional knowledge have atrophied or never developed — you are permanently dependent on whoever retained them.
You have traded long-term productive capacity for short-term consumer savings, in other words. And that means your economy will not grow to produce the higher-paying jobs that could indeed benefit domestic consumers in the future.
I hadn’t considered that argument before, but I do think there is some merit to it. And List was not shy about pointing out what he saw as Britain’s hypocrisy on the matter.
In one of his more memorable passages, List wrote that any nation which has raised its manufacturing power through protective duties and trade restrictions “can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth.”
List was saying that Britain industrialized behind its own protectionist walls — the Navigation Acts, the Corn Laws, and the imperial preference system. But having climbed the ladder of industrialization, Britain then kicked it away and told everyone else that free trade was the natural order of things.
Whether List was right about Britain’s motivations is debatable. But the historical pattern he identified is not. Britain did indeed industrialize under protectionist policies, and it did begin advocating free trade only after it had achieved manufacturing supremacy.
What List Saw Clearly – And What He Missed
List’s productive powers framework has genuine analytical strength. It explains something that classical trade theory struggles with — why some nations develop and others don’t, even when both are participating in international trade.
The nations that adopted List’s approach — using temporary protection to build domestic manufacturing capacity before opening to competition — do appear to have industrialized more successfully than those that followed the British free trade prescription from a position of weakness. This is the pattern we discussed in our last essay. The United States, Germany, Japan, and others each followed some version of this developmental path.
But there’s a fundamental problem with List’s framework that becomes more visible over time, and I think it’s important to assess it objectively.
List was clear that he believed tariff protection should be temporary. It was a tool for development, not a permanent feature of economic policy.
And he explicitly restricted his argument to protective tariffs for manufacturing industries, not for agriculture, and only for nations in the early stages of industrial development. Once a nation’s manufacturers could compete on equal terms with established foreign competitors, List said that the tariffs should come down.
The problem is that List never suggested a clear mechanism for determining when that moment arrives. When should the tariffs come down?
This has proven to be one of the most persistent failures of protectionist policy everywhere it has been tried… because tariffs create perverse incentives, especially when in place for an extended period of time.
Industries that receive government protection via tariffs often develop political relationships with the governments that protect them. Then they hire lobbyists… and they start funding campaigns.
So they become entrenched interests. And then they fight to keep their protection in place long after the original developmental rationale has expired. The “infant industry” becomes an adult that refuses to leave home.
List would likely have responded that this is a failure of political will, not of his theory. And that’s fair. But a theory that depends on governments exercising a kind of disciplined restraint that governments rarely exhibit in practice is a theory with a significant real-world limitation.
There’s also a narrower critique.
List organized his entire framework around the nation-state as the fundamental unit of economic analysis. Perhaps that made sense in the 1840s, when the nation-state was the primary unit of political and economic organization. But it creates more complexity in a world of multinational corporations where supply chains cross dozens of borders and the concept of “national industry” is harder to define.
Still, List’s “productive powers” idea is a useful contribution to the school of economic thought… and it is the lynchpin that underlies the American System.
And it didn’t stop with List. We’ll look at the other men who advanced the system’s core principles in our next installment. And then we’ll ask a key question that has gone unanswered.
More to come…
-Joe Withrow
P.S. Episode 5 of the Phoenician League podcast dropped this morning. In it, I lay out my first-hand account of how the company I worked for in the investment research space got raided and strip-mined… and that story plays out exactly like an episode of CNBC’s American Greed.
The CEO was forced out… the Board of Directors was captured… and somehow $100 million in net income vanished over a 12-month period. Naturally, the stock price collapsed… and then we learned that the new CEO had a golden parachute that allowed him to walk away from the smoking rubble with more than $10 million.
This is the story of how what was a great publishing house with incredible talent was systematically torn down. And in the end, I got fired… in a somewhat devious way.
If you would like to tune in and join the conversation, the podcast is available on all the major platforms. This includes Apple Podcasts, Spotify, and all the others. The video version is available on our YouTube channel as well.
Alternatively, you can catch every episode after it has published at: https://phoenicianleague.com/podcast