Protectionism

By Oyang Teng

It's time to bring back the American System

"Globalization has brought huge overall benefits, but earnings for most U.S. workers -- even those with college degrees -- have been falling recently; inequality is greater now than at any other time in the last 70 years. Whatever the cause, the result has been a surge in protectionism. To save globalization, policymakers must spread its gains more widely. The best way to do that is by redistributing income."

At a town hall meeting with Gov. Schwarzenegger, who on January 10 declared a fiscal emergency in California, U.S. Treasury Secretary Paulson said this:

"Now, I talked about the challenge we face in the credit markets and in housing. There's another challenge we face in the U.S., which is also a serious challenge, and that's the challenge of protectionism. And it's really ironic that at a time where we are more dependent than ever, and prosperous in terms of our trade, that some people are beginning to question the economic principles that have made this country great. And even some economists are somehow or other it's becoming fashionable to recant economic principles, and say maybe there's a different paradigm we need in this age of globalization. But trust me, globalization has not reversed economic gravity. Isolationism doesn't work, protectionism doesn't work. Your governor knows this, all of you know this, California knows this."

Other recent remarks by the high priests of the financial establishment, including Michael Bloomberg, have sounded the same alarm: at a time when the international financial system is disintegrating in a hyperinflationary blowout as insolvent banks desperately scramble for government bailouts; when a rising tide of home foreclosures is wiping out not only trillions of dollars in nominal assets, but setting off waves of social instability; when the collapse of the speculative bubble economy has led to deadly state and local budget deficits nationwide; in the face of all this, the real danger to the economy is protectionism.

A more honest observer might conclude that the actual danger is that people like these have been running our economy!

In reality, these statements by "experts" like Paulson belie an existential policy fight, at the center of which stands Lyndon LaRouche. At stake, as Scheve and Slaughter indicate, is nothing less than the fate of globalization, and, therefore, of nations themselves.

First, let us examine in historical perspective what protectionism really signifies, and ask: Why is it so dangerous?

HAMILTON AND THE AMERICAN SYSTEM OF POLITICAL ECONOMY

In 1789, a Constitution was established for the formation of a "more perfect Union" establishing, among other things, a Congress with the power to "lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States."

Guided by this declaration of national sovereignty, Alexander Hamilton traced out the foundations of a uniquely American System of political economy in three revolutionary addresses--on a National Bank, on a system of Credit, and on Manufactures--to the Congress in 1790, from his position as the nation's first Treasury Secretary.

The American System was conceived in explicit opposition to British free trade. For one, its doctrines were established on the foundations of physical economy. For example, in order to fulfill their function as "nurseries of national wealth," banks would administer the flow of government-sponsored credit solely for the purpose of nourishing the "productive powers of labor." An advanced manufacturing sector, by employing new physical principles in the use of machinery, offered the private entrepreneur a greater variety of expression for the exertions of his mind. This, Hamilton said, was the ultimate source of national wealth: "To cherish and stimulate the activity of the human mind, by multiplying the objects of enterprise, is not among the least considerable of the expedients, by which the wealth of a nation may be promoted."

Among the broad means by which to effect the power of the government to "provide for the general Welfare" by promoting manufactures, were protective tariffs on imports or exports, outright prohibitions on imports or exports, and direct "pecuniary bounties" (i.e., subsidies) for certain enterprises. Hamilton recommended a selective use of these protectionist measures to raise revenue, but, primarily, to encourage the growth of the productive powers of the nation. Hamilton's reply to populists who complained that this policy was unfair was to assert that "there is no purpose to which public money can be more beneficially applied than to the acquisition of a new and useful branch of industry; no consideration more valuable than a permanent addition to the general stock of productive labor."

FRIEDRICH LIST VS. ADAM SMITH

In order to counter the corrosive assaults of a treasonous free trade faction inside the country, Friedrich List sought to revive Hamilton's protectionist policies in the years following his assassination.

List argued that the only way the productive forces of society could be marshalled, was through the sovereign powers of the nation, since a "nation is the medium between individuals and mankind, a separate society of individuals...possessing common government...and possessing power to regulate the interests of the individuals, constituting that body, in order to create the greatest quantity of common welfare in the interior and the greatest quantity of security as regards other nations."

Given that the development of national economy rested on the growth of physical, rather than monetary, values, he attacked the absurdity of treating only the "effects of exchange of matter instead of treating the cause of the rise and fall of productive powers...weigh the gain of matter with the loss of power, and how stands the balance?" In other words, buying from foreign sources rather than domestic manufactures because it's supposedly "cheaper" is actually more costly in terms of lost productive capability!

A nation lacking protection for its industry would ultimately be left vulnerable without a strong internal market that could utilize the full potential of its domestic labor.

"A nation may become dependent by its exports as well as by its imports from other nations, and a great sale of raw materials and provisions to foreign countries may oftener become a source of calamity and of weakness in the interior and of dependence upon foreign powers, than of prosperity."

HENRY CAREY

Coming a generation after List, Henry Carey made no mistake about the identity of these "foreign powers." He never missed an opportunity to show that the British were engaged in perpetual economic warfare against the United States, even laying the blame for the Civil War at their doorstep: "...slavery did not make the rebellion. British free trade gave us sectionalism, and promoted the growth of slavery, and thus led to rebellion."

He pointed out that every time the protective policy was administered, it led to increasing prosperity. Every time the "resistance policy" (i.e. resistance to the British) was abandoned, misery and financial crises followed. As an example, he cited the explosive gains in raw production of iron and other manufactured goods resulting from the protective tariffs of 1828 and 1842.

Carey also refuted the argument--still repeated today--that protectionism equals isolationism, by showing that foreign trade is boosted by protection because the more that is produced, the more can be traded. He compared foreign trade to the apex of a pyramid, which grows in proportion to the base of domestic commerce.

For Carey, as for LaRouche today, real economics is not an issue of arbitrary doctrine, but of science. And as he pointed out, with the hegemony of British Liberalism (the so-called "Classical School"), the prevailing "science" of political economy stood then in the same state as astronomy in the days before Copernicus, Kepler, and Galileo.

It was a "science of assumptions", with an obsessive fixation on counting only material wealth, but not that which produces it:

"Wealth consists in the power to command the always gratuitous services of the great forces of nature. That power grows as men are more and more enabled to combine their efforts for nature's subjugation. That such combination may be effected, there must be that diversification in the demands for human power which results from variety in the modes of employment. The more thorough this becomes, the greater is the tendency toward production of men like Fulton, Morse, Davy Faraday, Bessemer, Scott, and Dickens, greatest of all the "wealth producers," although wholly excluded from consideration by men who restrict the domain of economic science to material wealth alone.

The object of protection to domestic industry is that of bringing about the diversification of employment above described."

Like Hamilton and List, Carey argued for the development of the productive powers of labor, and fought to secure the powers of effecting that.

LYNDON LAROUCHE AND THE SCIENCE OF PHYSICAL ECONOMY

After Carey, there was an 80-year gap where economic science didn't advance at all. Although FDR, who had written a graduate thesis on Alexander Hamilton, revived the American System in practice, it was LaRouche in the early 1950's who picked up where Carey left off. In discovering the principle of potential relative population density, LaRouche established with scientific precision a concept that had been implicit in Hamilton, List, and Carey's notion of "productive powers of labor." Unlike Alan Greenspan's 50-year track record of failure, LaRouche's success in economic forecasting has validated his unique methodological approach. Applied to economic policy, this involves shaping monetary and financial processes to facilitate the increase of potential relative population density. This is accomplished by regulating prices through tariff, trade, and tax policy under an international fixed-exchange rate currency system. When the physical economy is sacrificed to feed the growth of fictitious paper values, the collapse function described in LaRouche's Triple Curve is unleashed.

In his 2004 paper On the Subject of Tariffs and Trade, LaRouche wrote:

"In all competent discussion of the role of capital in an economy, we start with the notion of physical capital, and compare cycles of growth and depletion, and trends so defined. We must contrast the actual, physical capital invested, to the money-value used for financial and cost accounting for those physical investments. This confronts us with the challenge of regulating financial values of capital to conform to the functional, rather than object-by-object notion of comparative financial valuation attached to physical values. The regulation of financial and monetary behavior, for the purpose of controlling the wild-eyed follies inhering in the irrational behavior often induced by blind religious faith in money, is the means, by which, despite delusions about money, we are enabled to foster a sane effect in the real, physical economy. This role of sanity by government, is what is known as `protectionism.'"

GLOBALIZATION IS THE NEW IMPERIALISM

So, the real danger of protectionism that those like Paulson warn about, is not the threat to the real economy--which, as we have briefly demonstrated, depends on a constant input of deliberate and creative interventions by government--but, rather, to their own perceived power. This potential "FDR" reflex in the American population is what the Bloomberg putsch is intended to curtail.

In the public domain, the fight over protectionism has been limited to talk about trade wars with China, or stopping foreign takeovers of our ports, or simply "saving American jobs." This is not the real issue. What is actually at stake are the institutional powers necessary to "command the great forces of nature," which depend on the complete sovereignty of individual nations over their own economy. National sovereignty itself is the target of such abominations as the Lisbon Treaty, which is aimed at imposing fascist, supranational control over Europe.

The threat today, as it was in Russia, Germany, and Japan in the 19th century, is that nations will adopt the American System, thereby eliminating the usurious power of an international financial "slime-mold." China, for one, has come to recognize what a potential "source of calamity" their slavish dependence on cheap dollar-denominated exports has become--which is why they have recently oriented to LaRouche's proposals.

Consider LaRouche's Economic Recovery Act, to put the automobile industry and its vital machine-tool design capability under federal government protection to power an infrastructure-oriented regrowth of the physical economy. Under conditions of internal development, we would be prepared to participate in huge, cross-border projects of cooperation. Instead of drowning in cheap imports destined for Wal-Mart's shelves, high-technology capital goods would instead flow into China on new, high-speed rail lines traveling under a newly-constructed Bering Strait tunnel. Instead of complaining that China is unfairly undervaluing its currency, we will find that, with new demands on the productive output of the U.S., it's our dollar that will be undervalued!

In order to accomplish this global reorganization, globalization must be allowed to go the way of other failed imperial systems of the past: self-destruction.