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Why American Prosperity Depends on Economic Sovereignty

As Alexander Hamilton understood, not all economic activity is created equal.

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(Public Domain)

To better understand the “American System” and its relevance today, it is worth reflecting on the origins of the term. In Federalist No. 11, Alexander Hamilton lays out the commercial importance of a political union between the American states. The “adventurous spirit” and “commercial character” of the American people, he warned, had begun to attract the unwanted attention of jealous European powers. The Dutch, British, and others would vie for military and economic domination in the Western Hemisphere and try to keep the Americans divided in petty rivalries. They would infringe on America’s right to neutrality and use all conceivable means to control international trade in our own backyard. 

However, Hamilton assured his reader, “Under a vigorous national government, the natural strength and resources of the country, directed to a common interest, would baffle all the combinations of European jealousy to restrain our growth.” A strong political union, fortified by sound political economy, will protect the nation from unfriendly competitors. Hamilton concluded with a resounding exhortation: “Let the thirteen States, bound together in a strict and indissoluble Union, concur in erecting one great American system superior to the control of all transatlantic force or influence and able to dictate the terms of the connection terms of the connection between the old and the new world!”

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The theme of Federalist No. 11 is national sovereignty. We tend to think of sovereignty as a legal concept: Who has the lawful authority to act on behalf of the state? But sovereignty is multifaceted. It has legal, philosophical, military, and economic foundations. For a nation to be truly sovereign, it must be free to act in the interest of its citizens without external constraints or foreign influence. Hamilton finds the philosophical foundation for national sovereignty in the law of nations, the portion of the natural law that polices relations between states. Simply put, “a nation has a right to manage its own concerns as it thinks fit,” as Hamilton wrote to George Washington in 1793. However, the mere assertion of a right does not guarantee its security. As Hamilton says in Federalist No. 6, “men are ambitious, vindictive, and rapacious” and the “love of power or the desire of preeminence and dominion” often causes nations to infringe on the rights of other nations.

Sovereignty in modern circumstances requires a substantial material foundation. Readers today often overlook a key theme in Hamilton’s early Federalist essays: Political and economic union go hand-in-hand. The national market is not simply an economic measurement, but a political tool as well. In Federalist No. 8, Hamilton declared that “an entire revolution in the system of war” has been produced by modern finance and industrialization. Political communities could no longer rely on small bands of spirited citizen-soldiers like the ancient Greek republics did.

Revenue, logistics, and industry, then and now, are important factors in military success. Military, commercial, and political power are interconnected and cannot be disentangled. A large territory, united under a stable government and encompassing a diversity of natural resources, talents, and economic interests, contains all of the elements necessary to sustain its sovereignty. It can grow its own food, make its own weapons, and provide sufficient revenue to fight a modern war. By contrast, a small nation that lacks strategic resources or has a monolithic economy must rely on the good graces of other nations to survive. It is vulnerable to what Washington called in his Farewell Address (written with Hamilton’s assistance) the “insidious wiles of foreign influence.”

Hamilton argued that the diversity of resources and economic interests was a great boon for America, for each region could supply the wants of the others. In Federalist No. 11 he noted that no state on its own could provide everything needed for a navy. However, a division of labor between the states could supply the navy with everything it needed—sailors and shipwrights from the northern states, iron from the middle states, and wood, tar, and pitch from the southern states. Just as each section of the Union would assist one another in constructing a powerful fleet, naval hegemony and commercial strength would in turn benefit each other. Trained merchant seamen and increased revenue would strengthen America’s infant navy, while the growing navy could in turn protect American vessels from foreign harassment, allowing the nation’s merchants (and by extension, farmers and manufacturers) to expand their reach in foreign ports. Thus, economic and military power would grow apiece as a unified American people, taking full advantage of their natural commercial character, would be able to protect itself from the meddling of European states.

The navy is just one example of a national division of labor in which the economic development of each region and class augments the general prosperity of the nation. In Federalist No. 12, Hamilton discusses the apparent conflicts of interest between farmers and merchants. Farmers want to sell their produce at the highest price, merchants wish to buy it at the lowest. At first, their interests seem diametrically opposed. Hamilton, however, assures us that “their interests are intimately blended and interwoven” because commercial activity “furnishes new incitements to the cultivators of the land” while the increase of agricultural goods in turn leads to higher commercial employment. In other words, economic growth is a common good that ties together the seemingly disparate interests of different industries. 

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For this reason, Hamilton argued that the young nation must take measures to promote manufacturing. Manufacturing provides an outlet for agricultural surplus, permitting the market for agricultural products to grow to new heights even while a portion of the labor force is channeled into manufacturing instead. An extensive system of domestic manufacturing completes the system of self-reliance and ensures economic sovereignty. Hamilton lucidly argued in his “Report on the Subject of Manufactures” that America would not reach its economic potential unless it developed a strong manufacturing sector as the backbone of the domestic economy.

Hamilton made a sevenfold case for encouraging manufacturing. First, the division of labor would increase economic efficiency. Second, a large manufacturing sector would encourage technological innovations to improve productive capacity across the board. Third, manufacturing could employ people who were not traditionally engaged in agriculture. Fourth, a thriving manufacturing sector encouraged skilled workers and entrepreneurs to emigrate from Europe, who would bring industrial knowledge and talent that had yet to be established in America. Fifth, manufacturing would furnish a “greater scope for the diversity of talents and dispositions.” Those who were naturally talented in the mechanical arts would be able to develop their talents further to the benefit of the entire community. Sixth, manufacturing would encourage “the spirit of enterprise” by diversifying economic production. The wider the array of occupations and industries, the more dynamic the economy. 

Hamilton’s seventh and final argument was that manufacturing would provide a domestic outlet for agricultural goods. The demand for agricultural goods was, he said, “rather casual and occasional, than certain or constant” and their price could often drop sharply due to “a glut in the market.” Likewise, demand could be harmed by tariffs, embargos, and other restrictions set by foreign powers. Domestic manufacturing would expand the domestic demand for foodstuffs, providing a stable market for American farmers.

This final argument in favor of manufacturing is particularly important because it demonstrates the interconnectedness of a national economy. A stable national market, safe from the tumults and geopolitical wrangling of the foreign market, is the best means for securing relative prosperity and a stable living for the great body of citizens. Self-reliance in the most essential economic areas, from Hamilton’s perspective, can only be beneficial.

Although manufacturing provides innumerable benefits, the “invisible hand” does not suffice to harmonize the nation’s various economic interests or to create a strong manufacturing sector. Although Hamilton agreed with Adam Smith on the need for a division of labor, he rejected the Scotsman’s case for free trade. Paradoxically, free trade can slow down economic development. If foreign producers flood the domestic market with cheap goods, then domestic industry cannot get off the ground. Consumers may benefit in the short term from the glut of cheap goods, but national prosperity suffers in the long run from the lost potential of innovation and dynamism that accompanies a strong manufacturing sector. Hamilton warned in his report on manufacturers that foreign competitors paying their workers low wages could flood the market with cheap goods to the detriment of our nascent domestic manufacturers—a lesson that America learned the hard way at the end of the twentieth century. Protective tariffs level the playing field, preserving both business growth and workers' wages.

Thus, contrary to popular belief, Hamilton did not favor manufacturing at the expense of agriculture. Rather, he sought a prudent set of policies to create a harmony of interests (as later Hamiltonians called it) between the various economic classes and regions of the United States and ensure a balance of trade with foreign nations.

A large country can have its own internal division of labor. The natural diversity of talents, resources, and geography allows for one section to focus on manufacturing, another on agriculture, another on merchant shipping, and so forth. Each section will become more prosperous by focusing on its natural strengths and relying on the other sections to supply its wants. This is a mean between pure autarky and unfettered globalization.

The purpose of Hamiltonian economic policies is to secure a common-sense arrangement that reconciles regional interests with the national interest. Hamilton’s core proposals of internal improvements to bind consumers and producers together in a national market, a national bank to circulate currency, and protective tariffs to nurture infant industries were later adopted by Henry Clay in what he termed the American System. The regime of high tariffs, sound money, and strong infrastructure fostered the greatest period of economic and wage growth in American history and ushered the nation to the heights of industrial power.

Hamilton devoted himself to securing the economic foundations of national sovereignty, stability, and prosperity. The doctrine he outlined in The Federalist and his report on manufactures still speaks to our own political-economic circumstances. Though we are no longer threatened by European colonial powers, we face different transcontinental threats, including the economic powerhouse of China and multinational corporations with no national attachment and an interest in driving down wages. Maintaining a national free market in the face of these destabilizing forces requires protective measures.

America is no longer a sovereign nation by Hamilton’s standard. We no longer produce our own weapons or medicine (for the latter we rely heavily on China). We cannot feed ourselves and we refuse to become energy independent—much to the delight of the OPEC cartel. One of our main sources for semiconductors, the beating heart of an advanced industrial economy, is Taiwan. Our prosperity rests on a precarious geopolitical situation. While free trade may have provided a temporary boost to the American standard of living, the cost of economic sovereignty was too high a price to pay.

Innovation has also slowed down as American manufacturing declined. When was the last time an American discovered a revolutionary invention that did not involve apps or algorithms? Not only has industrial genius slowed down, we are even losing the knowledge needed to maintain our vital infrastructure. Take, for example, the 2021 Colonial Pipeline ransomware attack, which briefly caused a gas shortage on the East Coast because most of the workers who knew how to operate the pipelines manually were retired. Whatever advantages there may be in the digital economy, the development of apps does not produce the same net effects as innovation in manufacturing. The production of physical goods provides stable employment, rising wages, and improved outputs in other economic sectors. If there is a clear lesson in Hamilton’s report on manufacturers, it is that not all economic activity is created equal.

Harmonizing economic interests today will be different than it was in Hamilton’s time. The production of pitch and tar, for example, is no longer a national security concern. But, if anything, the Hamiltonian framework is even more relevant today than it was in 1791. If national industry was the decisive geopolitical factor in the age of cannon and sail, it is much more so in the age of hypersonic missiles and nuclear-powered fleets. Hamilton’s practical political judgement is still necessary to secure our sovereignty and prosperity.

Statesmen today should take heed of Hamilton’s argument that sound economic policy produces political harmony. Instability at home threatens our sovereignty, as does foreign influence from abroad. Often, the two go together. A hyper-globalized economy creates unnecessary fissures in national politics by benefiting some regions and economic classes at the expense of others. Trade deficits may benefit the financial elite, but they are ruinous to local industrial economies. Look no further than the hollowed-out small towns of the Rust Belt. The collapse in local manufacturing devastated every part of those local economies. Lost wages and unemployment did more than strip Middle Americans of middle class niceties; they upended the moral fiber of their communities. Stable jobs and families were replaced by opioids, despair, and broken homes. Binding the nation together, preserving its sovereignty against foreign influence, and reviving the enterprising spirit that made America great will require a Hamiltonian vision of political economy.

This article is part of the “American System” series edited by David A. Cowan and supported by the Common Good Economics Grant Program. The contents of this publication are solely the responsibility of the authors.

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