The Historical School: From Friedrich List to the Social Market Economy

Friedrich List – preacher of the ideas of «national economy» and «educational protectionism» – the forerunner of the historical school

The 30s-40s of the 19th century were blessed for Germany in terms of diversity (today we would say pluralism) of opinions – ideas on the problems of political economy. It was in these years that the classical school found some followers in Germany, of whom the most prominent, as noted above, was Johann Heinrich von Thünen (1783—1850), who wrote his only work «The Isolated Economy in its Relation to Agriculture and National Economy», which led to the emergence of the abstract theory of the psychological and mathematical school on the Austro-German soil in the 80s of the 19th century.

On the other hand, the development of capitalism and the emergence of machine labor by the mid-twentieth century not only did not lead to general welfare, but also led to the ruin of small producers and to the distress of the population. The aggravation of the contradictions between labor and capital, accompanied by uprisings and revolutions in these years leads to the emergence of the economic theory of socialism, which evolved on German soil into the revolutionary theory of Marxism, and later Austro-German social reformism.

A peculiarity of Germany in this period of development is the so-called Prussian way of developing capitalism with the gradual adaptation of landlord-junker economies to capitalism. Another peculiarity is the fragmentation of the country, the unification of which became in the first half of the XIX century an urgent issue of bourgeois development of Germany.

The fragmentation of Germany made it urgent to realize national unity, both in political and economic terms, and it was this idea of national unity that formed the basis of the views of the brightest German scientist Friedrich List (1789—1846), whose strength lay in boldly raising acute issues of economic policy in the conditions of a relatively backward country.

The English historian of economic thought Lord Lionel Robbins (1898—1984) considers Friedrich List to be a very authoritative figure in the early 19th century in Germany in matters of protectionist policy, who «exerted an influence on the politics of various countries inferior only to that of Adam Smith in his time and Karl Marx in our time»41.

Another great Anglo-Austrian historian of economic thought, Joseph A. Schumpeter (1883—1950) in his History of Economic Analysis states, «as a scientist, the economist List possesses one property that characterizes great scientists, namely, a great vision of the situation of his country, which, while not in itself a scientific achievement, serves as a prerequisite for scientific achievement of a certain type, of which the outstanding example in our day is the work of Keynes» further noting, «List was also not lacking in specifically scientific tools in which the vision must be realized in order to bear scientific fruit; in fact, he was not lacking in the specific scientific tools in which the vision must be realized in order to bear scientific fruit. But parts of this analytical apparatus were not particularly new»42.

Indeed, Friedrich List can be considered the most prominent ideologue of the German bourgeoisie in the first half of the nineteenth century, leading an intensified propaganda for the economic unification of Germany, whose ideas contributed to the formation of «educational protectionism», national economy and history as a method of knowledge of economics.

Hildebrand, comparing the views of List and Müller, argues that «despite the same protest against the Smithian system, both these writers pursue quite opposite interests, and List advocates precisely what Müller rejects. He censures Germany for still clinging too strongly to the old ways and not so vigorously embarking on the path of industrial development, while Müller, on the contrary, censures her for crushing the old and rushing to assimilate English industry»43.

In turn, the Social Democrat Rudolf Hilferding, in his work «Financial Capital», correctly enough notes that «List’s system is by no means a refutation of the theory of free trade, as it was formulated, for example, by Ricardo. It is merely an economic policy which is only meant to make possible a system of free trade by fostering such national industry for which a system of free trade is most appropriate. List’s educational duties were to serve exclusively this purpose; List therefore demanded low duties which were to equalize the difference between the superiority of England and the backwardness of Germany – temporary duties, since his policy was to cause the duties to become finally superfluous… List’s system was recognized as the system of capitalist backward countries.»44

Liszt was born in Reutlingen in the kingdom of Würtenberg (southern Germany), which was until 1814 a vassal of the French Empire. The son of a prosperous artisan, after receiving a school education, he was apprenticed to a scribe. For ten years of service, List held many different positions, a year and a half studied law at the University of Tubingen and finished his career in the rank of counting counselor in the capital of the kingdom of Stuttgart. From 1817, under the patronage of the liberal minister Wangenheim, he was appointed professor of «the practice of public administration» at the University of Tübingen. As noted by historians, List had a great talent as a writer and orator, the clarity of thought which distinguishes all his writings and articles, by nature an enthusiastic, expansive and unusually energetic man. He traveled to Austria, North Germany, Hungary, Switzerland, France, England and, as he writes, everywhere he tried to familiarize himself with the current state of these countries. List can be considered a supporter of radical bourgeois-democratic reforms. He was one of the organizers of the «General Association of German industrialists and merchants» and led an intense propaganda of the ideas of economic unification of Germany. Because of his disagreements with the government, forced to emigrate to the United States in 1825, he returned home only in 1832 as American consul. As he himself notes, in North America, the best book from which to familiarize himself with political economy in this country was life itself. Engaged in business in the United States, where he discovered an anthracite deposit in Pennsylvania and participated in a railroad project, he became quite a wealthy man. With no less energy he tried to realize the idea of creating railroads in Germany. It was thanks to the increased activity of F. List, as historians believe, in 1833 was created the German Customs Union, which can be considered the first step towards the unification of Germany. In 1837, List receives news that the industrial crisis in America ruined him. His strength is no longer sufficient to fight his opponents and the turbulent activity to which he had become accustomed. In the fall of 1846 in the city of Kuvstein, in a hotel he committed suicide.

His main political economy ideas are outlined in the book «National System of Political Economy» (1841). The book was a great success and, according to historians, served a great service in the further national and economic unification of Germany and contributed to the formation of an alternative to the classical school of political economy direction, which would later take shape in the historical school. The reason for the success of the book is probably also the fact that it was timely and pursued the goal of theoretically substantiating the urgent economic needs of Germany. Engels considered Liszt’s work "…the best of what German bourgeois economic literature has produced, although all of his celebrated work was copied from the Frenchman Ferrier». There may be some truth in these words, but it should be noted that any research is the result of analysis, including the literature of its predecessors and, as the author of this study believes, List’s work is a really very deep analysis of the economies of the European countries of his time and the theory of Adam Smith and a number of representatives of the classical school of political economy. It should also be noted that List, being in America, was familiar with the views of the American Minister of Finance (Secretary of the Treasury) Alexander Hamilton (1757—1804), who was the author of the program to encourage the development of national industry, and living in France, with the works and views of statesman and political figure, economist and publicist François Ferrier (1777—1861). Developing the idea of «educational protectionism» put forward by A. Hamilton and F. Ferrier, List advocated active intervention of the state in the economy in order to create a single national market and protect national production until it reached the English level of competitiveness. All this contributed to the expansion of List’s views and, reflecting the historical peculiarities of the development of capitalism in Germany, he, preaching the idea of «educational protectionism» opposes both the adherents of feudal orders and supporters of economic liberalism, and it is deeply substantiated in the work «National System of Political Economy», which he publishes in 1841.

In this work List formulates his position in the consideration of the method, tasks and content of political economy: 1) historicism as a method of political economy; 2) productive forces as a source of wealth of the nation and 3) the national idea as the basis of economic policy of the state.

List creates his own system of historical-economic development of nations, distinguishing five main stages: states of savagery, pastoral, agricultural, agricultural-manufacturing and agricultural-manufacturing-commercial.

In the theory of productive forces, List considers «mental capital» – the main source of wealth – to be the main component.

Friedrich List’s book «The National System of Political Economy» in Russian translation by V.M.Isergin, edited by K.V.Trubnikov, published in 1891 and republished by the publishing house «Sotsium» in 2017 contains four books: the first is called «History», the second – «Theory», the third – «Systems», the fourth – «Politics».

In the introduction, compiled by Konstantin Trubnikov it is noted that F. List, during his lifetime, was known in the highest government, scholarly and public spheres throughout Germany, Austria, England, France and the United States of America, where he personally participated in scholarly economic literature. After his death, The National System of Political Economy was reprinted several times in Germany, and was translated into French and English. Trubnikov notes, «unfortunately, the „National System of Political Economy“ by Fr. List, which has a worldwide reputation, not only has not been translated into Russian until now, and therefore unknown to Russian educated society, but even very little known to most of our scientists-economists»45. Konstantin Trubnikov further states that the teachings of Fr. List constituted an epoch not only in the scientific, but also in the practical life of Germany and the United States, and were the guiding star that brought finance, agriculture, industry and commerce in these states to a flourishing state. Scholars of economics recognize that List’s «National System of Political Economy» may be regarded «as the highest scientific expression of the patronage system.»

Let us turn directly to the primary source. In the preface of the book List notes that he has to tell in it almost half of his life, because «more than twenty-three years have passed since I had my first doubt about the truthfulness of the prevailing theory of political economy, since I devoted myself to the study of its fallacies and their root causes… I have studied as well as others everything that was then thought and written about the subject, but I did not want to limit myself to familiarize young people with the current state of science; I sought to teach them how the national-economic theory of political economy, the national system of political economy, the national system of protection, the national system of protection, and the national system of political economy46. And he also notes there that «for two very advanced nations, free competition can only be beneficial when they are both at the same approximate stage of industrial development». He found a difference between cosmopolitan economics, as he called classical political economy, and political economy.

Criticizing the classical school for its «cosmopolitanism,» he formulated the doctrine of «national economy,» by which he meant a system of economic policy recommendations for the developing German national bourgeoisie. In his introduction, foregrounding the analysis of national factors and national unity, he argued that there is a «cosmopolitan and political economy, a theory of exchange-valued property and a theory of productive forces – doctrines different in essence, but which must be developed independently» and he further notes «the productive forces of nations depend not only on the labor, savings, morals, and abilities of men, or on the possession of natural treasures and material capitals, but also on social, political, and civilization. No matter how diligent, thrifty, skillful, enterprising, intelligent and moral individuals may be, yet without national unity, without national division of labor and without national cooperation of productive forces, a nation will never be able to attain a high degree of wealth and power or secure a lasting possession of its intellectual, social and material wealth»47.

The first book, «History» of the «National System of Political Economy» includes an in-depth analysis of the development of the economies of the Italians, Hanseatic, Dutch, English, Spanish and Portuguese, French, Germans, Russians, North Americans and Chapter X – «Lessons of History». He speaks of the rise and loss of power of the Italian cities and the Hanseatic League, how they were supplanted by the Spanish and Portuguese and then the Dutch, in particular he claimed that «when Hanseatic shipping began to decline, the Dutch were building up to 2,000 new ships each year»48. And he goes on to note that until the first half of the seventeenth century, «the Dutch are as far above the English in factories and colonies, in trade and navigation, as the English are at present superior to the French in this respect.» And in the chapter on the English he emphasizes the thought of how, through the wise and energetic policy of Queen Elizabeth and the encouraging measures of the government, industry and commerce have developed in this country. F. List saw the beginning of the industrial and commercial greatness of England mainly in sheep breeding and wool production, emphasizing the great importance of the act of navigation for the growth of economic power of the country. Laying out the policy of protectionism of the English government, he wrote: «It comes out according to our theory, which we call the theory of productive forces and which, without investigating its foundations, recognized English ministers, adhering to the rule: buy raw materials, sell fabricated goods. The English ministers cared not for the acquisition of very cheap but transitory manufactures, but for the creation with endowments of an expensive and permanent manufactory force»49.

In the history of the development of the French economy F.List notes the role of Colbert’s policy, singling out this time as a brilliant period of French industry and censures Kenet, who «censured» Colbert for the fact that he sought to bring factory industry at the expense of farming. Noting Napoleon’s «advancement» List writes «Once upon a time,» Napoleon said, «there was only one kind of property known – land property; now there is a new kind – industry. Thus Napoleon «saw and expressed clearly what his contemporary economists did not see or could not determine with precision, namely, that a nation combining factory industry and agriculture is more perfect and richer than countries purely agricultural»50.

Evaluating the economic history of Germany, F.Liszt notes, – «Even at the beginning of the XVIII century in Germany we see: barbarism in literature and language, barbarism in legislation, administration and court; barbarism in agriculture; decline of industry and large-scale trade; lack of national unity and strength; powerlessness and weakness in everything compared to foreign countries. One thing alone has saved the Germans: their original character; their love of labor, order, thrift, and moderation, their perseverance and endurance in research and affairs; their earnest desire for the best; their great store of morality, moderation, and prudence.»51.

As a champion of German national unity, he favored transforming Germany into a power capable of economic and political expansion on the world stage. War is «a blessing for the nation,» he said. Drawing attention to the historical peculiarities of the development of capitalism in Germany, he opposed both the supporters of feudal-patriarchal orders and the supporters of liberalization of the economy.

Noting the state of the Russian economy, List shows a thorough knowledge of the economic policies of the Russian government and the country’s economic history in chapter eight, «The Russians.» He refers to the political economy course of A. Storch, which was no less respected in Russia than the works of Say in Germany. Let us turn to the primary source: «Russia owes its first successes in culture and industry to relations with Greece, then to trade with Hanse through Novgorod, and finally, after the conquest of this city by Tsar John Vasilievich, as well as due to the opening of the waterway through the White Sea, to trade with the British and the Dutch. Significant development of Russian industry, as well as mainly the softening of manners, however, began only with the reign of Peter the Great. The history of Russia, from the seventeenth century to the forties of the eighteenth century, provides striking evidence of what a powerful economic prosperity of the people»52. List believes that reasonable trade and economic policy, conducted at different times in Russia, led to the fact that «trade crises have completely ceased, and it is enough just to look at the latest reports of the Russian Ministry of Finance to see that Russia thanks to this system has achieved a high degree of prosperity and that it is moving giant steps along the path of national wealth and power… Any nation, as well as any person, has no more dear interests as their own. Russia has nothing to concern herself with the welfare of Germany. Let Germany concern herself with Germany, Russia with Russia. Instead of complaining, hoping and waiting, for the Messiah of future free trade, it would be far better to throw cosmopolitan systems into the fire and learn from the example of Russia»53.

Paying attention to the economy of the North Americans, F. List states that «the trade and industrial history of North America is more instructive for our purpose than any other, since here development is rapid, periods of freedom and restrictions and constraints quickly follow one after another, their results are seen with clarity and certainty, and the whole system of national industry and public administration is openly unfolded before the eyes of the observer»54.

In the tenth chapter of «Lessons of History» F. List notes «history teaches, therefore, that individuals derive most of their productive forces from social institutions and social organization». And then List writes: «history teaches that arts and crafts wander from city to city, from country to country. Persecuted and oppressed in their homelands, they flee to those cities and countries which afford them freedom, patronage and support. Thus they passed from Greece and Asia to Italy, thence to Germany, Flanders, and Brabant, and from these latter to Holland and England. Everywhere recklessness and despotism drove them out, but the spirit of freedom attracted them»55.

F.List creates his system of historical-economic development, assuming that all nations in their economic development go through certain stages. In «economic terms, nations must pass through the following stages of development: the state of initial savagery, pastoral, agricultural, agricultural-manufacturing and agricultural-manufacturing-commercial»56. List regarded the agricultural-manufacturing-commercial stage as an ideal, the achievement of which for young countries (to which he included Germany and the United States) is impossible without a policy of industrial protectionism. For the countries that were behind Great Britain in terms of the level of development of their economies, according to List, the transition to the «agricultural-manufacturing-commercial state,» the highest stage of economic development of nations, was possible only through a system of protectionism. At the end of the chapter «Lessons of History» he notes that at the first stage of development are Spain, Portugal and Naples, at the second Germany and North America, not far from the border of the latter is France, and at the last stage is still only Great Britain. List believes that a nation that has not reached the height of its economic power, has the right to defend itself and create patronizing tariffs, against the competition of other industrial countries. Germany was in this exact position and therefore, List’s endeavor was merely an effort to theorize the country’s overdue economic problems. Being an advocate of protectionist policy, List limits his protectionism only to the field of manufacturing industry and considers inadmissible the establishment of any duties for agricultural products, as it only delays the transition of the nation to the next manufactory stage. It should also be said that he considers it inadmissible to impose any duties on agricultural products, because this will retard the development of the nation, and here freedom of trade is needed. It is not difficult to see that Germany, while interested in industrial protectionism, was equally interested in free trade in agricultural products and was opposed to the bread protective import duties then existing in England.