Friends,
I’m neck-deep in research, and I’ll have the next installment in our essay series on the American System for you soon. But first, I do need to acknowledge something that’s come to my attention. That is, an oversight on my part perpetuated a fairly common economic fallacy in the second installment of the series.
My goal with this essay series is not to advocate… it’s to learn and gain understanding. As such, we have been trying to get inside the minds of the American System’s architects to get a feel for their perspective. And we’ve attempted to analyze the system objectively to understand why its modern proponents believe so strongly in it.
I think I’ve been fair in assessing where I think the American System ideas have merit, and I feel like I have a good understanding of why these ideas are seeing a resurgence. But I have also pointed out some glaring gaps and shortcomings, as I see them.
At this point I feel like I have a firm enough grip on the topic to see a fundamental misunderstanding about it. I’ll share that with you in a few minutes.
I’ve also developed a hypothesis that could potentially connect some historical dots – we’ll explore that in a future essay. But for now, let’s address the fallacy…
In my second essay of the series, I looked at how 19th-century America went from this fledgling agrarian republic to the world’s industrial powerhouse within a span of roughly 80 years. The economic growth and technological advancement was astounding. There’s no denying it.
But then the essay honed in on a very specific set of economic policies – the American System policies – and I suggested that those policies worked to achieve the outcome… which happened to also be their stated desired outcome.
Maybe that’s indeed true… or maybe it’s not. The reality is that we cannot know for sure. And the reason we can’t know is that there were countless other economic factors at work in parallel also. So by excluding those other factors from my assessment, that particular essay wasn’t entirely fair.
Now, I can say with certainty that its proponents do emphatically believe that American System policies were responsible for America’s rise to an industrial power. But I still should have pointed out that there were other factors at work that could have been equally or possibly entirely responsible for America’s rise.
Thus, it was wrong for me to exclude them from the analysis and suggest that only this very specific set of policies caused the end result that we can see and measure.
This is something that came to my attention when a friend notified me that economist Bob Murphy and a gentleman named Adam Haman did a podcast episode to critique the essay in question. You can find their critique at: https://www.youtube.com/watch?v=efvbrHQFUa0
Now, I think they approached their critique under the assumption that I’m explicitly advocating for American System policies and thus that I am rejecting certain free market principles. Those who are familiar with my work understand that’s not the case.
It was also suggested several times in the critique that I hold certain beliefs and motives that I do not hold. Those familiar with my work will recognize that also. I’m an investment analyst… not a political commentator.
But without any additional context, I can certainly see why someone would read that essay and think that I was explicitly advocating for the assessed policies. Indeed, this essay in particular paints the system in a very positive light without addressing any shortfalls.
So it was a little uncomfortable for me to watch the critique, but also very helpful from multiple angles. When Bob very politely pointed out that there were other factors at work during that time period, I instantly realized that I should have included that in my assessment.
For example, Bob noted that they were operating on the classical gold standard in the 19th century, which meant they had sound money and little to no inflation. They were also operating in an economy without an income tax, so taxes were incredibly low. And the regulatory apparatus was virtually non-existent at the time, so they didn’t have to deal with all the red tape and inefficiencies that businesses must deal with today.
So Bob looked at it and he noted – you know, you put those things together with a sound system of property rights and commercial law and you have an environment that’s incredibly conducive to economic growth.
That begs the question – how can you say that these several specific American System policies caused this incredible outcome? What if it were mostly those other macro factors that were responsible?
That’s a spot-on critique. The only thing that we can really say with 100% certainty is that the policies we assessed in that essay did not prevent the incredible outcome from occurring.
The same is true for the other countries that we assessed briefly like Japan and Germany. They did in fact adopt the same policies, and they did achieve a similar outcome. But they also had other factors working in their favor.
I shouldn’t have missed that key point. It’s nothing more than a version of Frédéric Bastiat’s principle that you must look at “what is seen and what is not seen” when conducting economic analysis. Henry Hazlitt’s Economics in One Lesson covers the same principle.
So I should have been a little savvier about it. But that’s okay. Learning from what you missed is a great way to sharpen your thinking.
That said, I think this essay series has been tremendously helpful for me. By setting aside my own biases and assessing their policies and their worldview objectively, I can understand why these old economists believed the things that they did. And I can understand why the folks trying to restore the American System today believe it to be a noble effort.
And it comes down to this – the key economic people within the Trump administration are out there giving policy speeches that explicitly reference Alexander Hamilton and the American System by name.
It’s become clear to me that these guys are true believers. And the economic policies we’re seeing roll out – they aren’t these whimsical, chaotic, unprincipled positions that they may appear to be if all you read are tweets about them.
To the contrary, these guys do have a clear set of economic principles that they understand and believe in. And they appear to be rowing in the same direction to resurrect their chosen system.
What’s more, these guys see the globalist capture of American institutions as the enemy, and they see restoring the American System as the solution. Just like Alexander Hamilton explicitly sought to displace British influence in America, these guys are seeking to displace globalist influence.
So for them, they aren’t looking at these policies from the perspective of how they may violate free market principles and thus won’t allocate resources in the most optimal way. Nor are they assessing how they may create benefits for certain industries to the detriment of others.
Instead, they are looking at them with the same mindset that Hamilton had – that only economic strength and self-sufficiency can protect national sovereignty and disintermediate foreign influence in your country.
Based on what I’ve learned thus far, and based on what’s happened to the American economy over the past several decades, I can understand why they hold that view. And I’m hoping that this kind of understanding will help us look out and project where this all may be going. We’ll see.
But I think this analysis speaks to a key misunderstanding.
Those who understand Austrian economics and libertarian philosophy look out and see the State as the primary enemy of economic growth and personal freedom. So when they see someone talking about American System policies, they say wait a minute, you’re just strengthening the State at the national level here, and that’s the opposite of what you should be doing.
The proponents don’t see it that way. They think the federal government and most of America’s institutions were largely captured by hostile globalist influences, and they think those influences have been responsible for stifling economic growth and personal freedom in this country.
Thus, they seek to regain power over the State with the intent of weeding out those foreign influences and restoring America’s productive capacity. They believe that doing so will drive economic growth and rebuild the middle class.
One can form whatever opinion one wants on that view, but I’m confident enough in my research and analysis to say that’s the situation we’re looking at today. That’s what’s driving the current administration’s policies.
This is why I set out to write this essay series in the first place – in hopes of gaining insight and understanding. I’m just presenting you with what I’ve learned here… I would never presume to tell someone what to think.
But I do apologize for the oversight that I should have caught in that second essay. Perhaps we can assess this time period from the Austrian perspective in a future essay and see what insights can be had there.
For now though, we’ll press on with our American System series.
In the next installment, we’ll assess how the American System was gradually dismantled… and how the same forces that both Hamilton and Thomas Jefferson saw as their primary enemy appeared to have captured America’s key institutions from the inside in 1913.
More to come…
-Joe Withrow
P.S. I’m in the early stages of organizing our next public-facing strategy session for The Phoenician League. It will be later in July, so I don’t have any details to share with you yet. But it’s been a while since we’ve done one of those, so I look forward to putting another session together for you.
Also, Episode 8 of the Phoenician League podcast will drop tomorrow at 6:00 am Eastern. In it, we’ll continue to explore how the global financial architecture has shifted since 2022, and we’ll assess some major structural forces at work.
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