{"id":73082,"date":"2025-02-07T06:27:35","date_gmt":"2025-02-07T06:27:35","guid":{"rendered":"https:\/\/peraltafinancing.com\/american-history\/its-a-trick-question-who-is-more-important-smith-marx-or-keynes\/"},"modified":"2025-02-07T06:27:35","modified_gmt":"2025-02-07T06:27:35","slug":"its-a-trick-question-who-is-more-important-smith-marx-or-keynes","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=73082","title":{"rendered":"It’s a Trick Question! Who Is More Important, Smith, Marx, or Keynes?"},"content":{"rendered":"


\n<\/p>\n

\n

\u00a0N.B. I started this speech before realizing it was a panel session! Made many of the same arguments in the discussion at FreedomFest Memphis 2023.<\/p>\n

Obviously, the question is a trick or trap because the clear winner is Alexander Hamilton. <\/span><\/p>\n

I realize that might be a dangerous proposition to espouse at a libertarian convention but several other<\/span><\/p>\n

classical liberal scholars, like Richard Salsman, also have lauded Hamilton\u2019s grasp of economics.<\/span><\/p>\n

In fact, I learned just yesterday that Salsman has an article on Hamilton as economist forthcoming in<\/span><\/p>\n

<\/span>The Independent Review<\/span>. Interestingly, except on international trade, Salsman makes different points from what I will here today.\u00a0<\/span><\/p>\n

The difference between Hamilton\u2019s advocates and critics is that his advocates have actually studied <\/span><\/p>\n

what Hamilton said and did in its totality and do not simply follow old canards, most of which stem from attempts to leverage Hamilton\u2019s genius for partisan gain.<\/span><\/p>\n

So please keep an open mind. You can find minute documentation of all of this in several of my books<\/span><\/p>\n

and articles as well as those of Salsman, financial historians Richard Sylla and David Cowen, and <\/span><\/p>\n

international trade economist Doug Irwin.<\/span><\/p>\n

One might protest that Hamilton was not an economist but in fact he was one heck of an economist <\/span><\/p>\n

and was able, as Treasury Secretary, to test many of his ideas in the real world. <\/span>He was, in that respect, more of an empirical or scientific economist than most, who were mere scribblers or, worse, <\/span>professors<\/span>.<\/span><\/p>\n

The mature Hamilton, as Treasury Secretary, was not so much a critic of Adam Smith <\/span><\/p>\n

as he extended some of Smith\u2019s ideas to new realms. Aaron Burr assassinated him before he could<\/span><\/p>\n

formalize his ideas but nevertheless he made numerous key contributions in the areas of asymmetric <\/span><\/p>\n

information, particularly moral hazard in bailouts and corporations; international trade, specifically in <\/span><\/p>\n

what would later be called Harberger Triangles; administrative efficiency; the economics of slavery;<\/span><\/p>\n

and the limits of sovereign debt.<\/span><\/p>\n

Hamilton was long gone before Marx or Keynes came along but he sure as heck was no communist <\/span><\/p>\n

and he debunked the notion that deficit financing could smooth out the business cycle before Keynes <\/span><\/p>\n

revivified it.<\/span><\/p>\n

Smith infamously disdained corporations due to their high agency costs. Instead of trying to squelch <\/span><\/p>\n

corporations in America, Hamilton sought ways to reduce principal-agent problems within corporations <\/span><\/p>\n

by authoring at least four corporate charters, three for banks and one for a manufacturing company, <\/span><\/p>\n

with built in checks and balances. They proved incomplete in the case of the manufacturing company <\/span><\/p>\n

but the problem was corrected and the banks did extremely well.<\/span><\/p>\n

Three of those charters moved the country towards general incorporation statutes by showing it was <\/span><\/p>\n

possible to create a joint-stock company, with limited liability and entity shielding, without a formal state <\/span><\/p>\n

charter. Although adopted slowly, general incorporation helped to ensure that America\u2019s economy <\/span><\/p>\n

remained open access and entrepreneurial.<\/span><\/p>\n

Hamilton believed in economic freedom, including the right to form non-profit voluntary associations to <\/span><\/p>\n

alleviate social issues and what we now call sound money. He was responsible for defining the US <\/span><\/p>\n

dollar in terms of gold and silver and ensuring that bank notes and deposits were convertible on <\/span><\/p>\n

demand into specific amounts of precious metals. He also helped to ensure that inconvertible bills of <\/span><\/p>\n

credit or other forms of fiat money issued by state governments were made unconstitutional.<\/span><\/p>\n

In terms of the moral hazard involved in bailouts, Hamilton in 1791 and 1792 developed what would <\/span><\/p>\n

later be called Bagehot\u2019s Rule, which states that the lender of last resort should lend freely at a penalty <\/span><\/p>\n

rate to all who could post sufficient good collateral. That rule stops panics by protecting solvent <\/span><\/p>\n

borrowers but denying subsidies to insolvent ones.<\/span><\/p>\n

Hamilton was an abolitionist, pushing to rid New York of the peculiar institution, which he understood <\/span><\/p>\n

was profitable for enslavers but ultimately bad for economic growth and development. Had he lived, he <\/span><\/p>\n

almost surely would have written an analysis like that of Hinton Helper by the mid-1820s.<\/span><\/p>\n

His views on the national debt and international trade are perhaps the most important to discuss <\/span><\/p>\n

because they are so often misunderstood.<\/span><\/p>\n

Unlike Smith, who deprecated all state debts, Hamilton was a debt realist. He held that governments <\/span><\/p>\n

should borrow to fund wars and other major state functions, like the acquisition of territory. During <\/span><\/p>\n

peacetime, it should repay its previous borrowings to the extent possible, borrowing on net if <\/span><\/p>\n

necessary during downturns but simply to fund normal government operations, not to stimulate the <\/span><\/p>\n

economy. Debt repayment could hurt the economy, so it should not be rapid but rather aided by growth in population and productivity. And any increase should be linked to new taxes to mute the \u201cborrow and <\/span><\/p>\n

spend\u201d habit that politicians find so alluring.<\/span><\/p>\n

In short, Hamilton did not believe in a large, permanent national debt as his critics claim by eliding his <\/span><\/p>\n

correct assertion that the national debt is a blessing QUOTE if it is not excessive UNQUOTE. He even <\/span><\/p>\n

detailed what he meant by an excessive national debt and I\u2019m chagrined to report that the US national <\/span><\/p>\n

debt has been excessive by Hamilton\u2019s measure since the great bailouts following the Global Financial <\/span><\/p>\n

Crisis of 2008.<\/span><\/p>\n

The national debt helped the economy, he correctly noted, because it helped to create loyalty to the <\/span><\/p>\n

new government, thus unifying the country and reducing policy uncertainty. It also helped by providing <\/span><\/p>\n

businesses and banks with a liquid security in which they could safely stash cash. The market for <\/span><\/p>\n

government bonds helped the development of markets for corporate bonds and equities, which <\/span><\/p>\n

provided entrepreneurs with external funding options outside of the banking system.<\/span><\/p>\n

Critics also like to claim that Hamilton implemented a protective tariff though the notion has been <\/span><\/p>\n

exploded by numerous scholars, including Dartmouth\u2019s Doug Irwin. Hamilton put in place a revenue <\/span><\/p>\n

tariff carefully geared toward maximizing government revenue by charging a higher rate on luxury <\/span><\/p>\n

items, like imported liquor. Hamilton infamously taxed domestic whiskey production in part to <\/span><\/p>\n

discourage domestic liquor production.<\/span><\/p>\n

Confusion arises because later protectionists used and abused Hamilton\u2019s Report on Manufacturers to <\/span><\/p>\n

claim that Hamilton was a protectionist. He was not. His Report was didactic, explaining the options <\/span><\/p>\n

open to Congress. So he discussed rather than espoused so-called infant industries. In his discussion <\/span><\/p>\n

of the relative costs and benefits of protective tariffs and bounties, he clearly noted that tariffs created <\/span><\/p>\n

two deadweight loss triangles while bounties created only one, which is what international trade <\/span><\/p>\n

textbooks still argue.<\/span><\/p>\n

Hamilton understood that taxes of all types should be minimized because of the distortions and tax <\/span><\/p>\n

wedges they cause. But the national debt had to be serviced and paid down. Hamilton preferred <\/span><\/p>\n

revenue tariffs over other types of taxes because they were relatively easy to collect at ports of entry <\/span><\/p>\n

and were embedded in prices.\u00a0<\/span><\/p>\n

As the federal government learned twice in the 1790s, internal taxes threatened liberty and <\/span><\/p>\n

insurrection but they had to be established lest tariffs failed to produce the needful during war or <\/span><\/p>\n

economic downturn. Tariffs indeed served as the government\u2019s largest peacetime revenue stream, with <\/span><\/p>\n

excise taxes like the whisky excise a close second, until implementation of the income tax in the 20th <\/span><\/p>\n

century.<\/span><\/p>\n

In sum, Hamilton extended Adam Smith to the real world of policy and passed with flying colors. The <\/span><\/p>\n

other two guys aren\u2019t even close as Marx wanted to enslave all to the state and Keynes wanted to <\/span><\/p>\n

deficit finance to smooth business cycles and to a large extent has gotten us into the excessive debt <\/span><\/p>\n

mess we are currently in.<\/span><\/p>\n<\/div>\n\n","protected":false},"excerpt":{"rendered":"

\u00a0N.B. I started this speech before realizing it was a panel session! Made many of the same arguments in the discussion at FreedomFest Memphis 2023. Obviously, the question is a trick or trap because the clear winner is Alexander Hamilton. I realize that might be a dangerous proposition to espouse at a libertarian convention but […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12032],"tags":[6342,37942,8268,4112,1358,2952],"dealstore":[],"offerexpiration":[],"class_list":["post-73082","post","type-post","status-publish","format-standard","hentry","category-american-history","tag-important","tag-keynes","tag-marx","tag-question","tag-smith","tag-trick"],"yoast_head":"\nIt's a Trick Question! 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