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November 15, 2018 In the Stacks

Review of Concrete Economics

By Bree Ermentrout, U.S. Department of Defense, Springfield, VA

Concrete Economics: The Hamilton Approach to Economic Growth and Policy, by Stephen S. Cohen and J. Bradford DeLong. Published by Harvard Business Review Press (2016).

Politicians, economists and policymakers hotly debate the means to economic growth. These debates often focus on the size of government or the scale of government regulation. Berkeley’s Cohen and Delong argue that today’s ideological debates run counter to the economic history of the United States. They show how historically U.S. economic policy has been pragmatic, with the government repeatedly clearing the way for entrepreneurial innovation to expand and reshape the economy. This policy has also been concrete with policy makers being able to say in advance: “This is the kind of thing we are going to get.”1  America’s pragmatic and concrete approach created a success story.

However, America lost its policy way in the 1980s. Ideology and abstractions, not pragmatism and concrete thinking based on clear perceptions of where the economy should be going, carried the day. Laissez-faire economics and deregulation moved to the forefront and economic policy became ideological, not pragmatic. The authors’ prescription is simple: U.S. economic policy needs to return to concrete economics.

Those who think economics is the “dismal science” will find comfort in the book’s opening paragraph:

This book does not provide any important new facts. It sets out no new economic theories. It offers no analyses of new data sets. Its uses no statistic tools.2

Instead the book delivers a quick and lively dash through history. It is a history of government goal-setting enabling entrepreneurs to step in and do what they do best: innovate. As entrepreneurs innovated, they also expanded and reshaped the economy. In praising the role of government in thus enabling economic growth, the authors do not deny the power of the “invisible hand” but recognize that in the United States and all successful economies, the invisible hand is “repeatedly lifted at the elbow by government, and re-placed in a new position from where it could go on to perform its magic.”3  The heroes of this history are those who lifted the hand: Hamilton, FDR and Eisenhower.

The authors call Hamilton “the founding father of the American economy.”4  He redesigned an agrarian economy that arose under the British mercantile system: America provided raw materials while Britain provided manufacturing, banking, and shipping services. In contrast to Jefferson, who promoted an agrarian ideal, Hamilton “thought liberty could spring from the city as well as the countryside.”5  Hamilton recognized a prosperous rural nation could not protect itself against foreign empires without a strong manufacturing base.

The Hamiltonian redesign promoted industry, commerce and banking. It had four elements: high tariffs, high spending on infrastructure, assumption of state debts by the federal government, and a central bank. The high tariffs protected a nascent American manufacturing base from English imports. They also provided revenue for infrastructure development needed for territorial expansion and the assumption of state debts. This in turn led to a strong central government and a national debt providing the basis for a new financial market with a central bank.

The Hamiltonian system succeeded by creating opportunities for technological development. Without much detail, the authors state “Department of War money was used to fund the development of promising high-tech industries at the Springfield Arsenal and elsewhere, the pioneers of what would much later be called the spin-off.6  More recent examples of government-created opportunities include the development of the internet and IBM’s mainframe computers as well as the explosion of college and university computer science majors.

The Hamilton system did not die with his death. It evolved into what the authors call the “American System,” which they describe as “a bet on manufacturing, technologies, infrastructure, commerce, corporations, finance and banks, and government support of innovation.”7  The Hamilton legacy included American tariffs and infrastructure development. Tariffs were the largest in world by the end of the 19th century. With occasional drops in rates, high tariffs remained until World War II. In the late 19th century the government also took the lead in developing railroads by giving them land. The railroads then “reshaped the economy by opening vast regions to profitable farming and settlement and by accelerating the development of feeder industries such as steel and complementary industries such as telegraph.”8  Entrepreneurs such as Sears with its catalogue business and Swift with its meats developed alongside the railroads. In another example of a policy “pragmatic and concrete in conception,” the government also gave land to settlers, entailing land rights to prevent giant landholdings and ensure that only families living and working on the land could hold the land.9

Government pragmatism continued under both Roosevelts. Theodore Roosevelt’s pragmatism included using antitrust laws to regulate monopolies rather than opting for the ideological response of nationalization. FDR employed “pragmatic experimentalism,” trying and dropping policies to find what worked. Unlike prior government-led redesigns, the New Deal did not try to open a new economic space but focused on reviving a failing economy.

Though the New Deal was not itself ideological but rather the ultimate in pragmatic policy experimentation, it became the definition of the ideology that was post-World War II American liberalism: the regulation of finance, a social safety net, mortgage insurance, high marginal tax rates, and big active government. It became the model of what government could and should do.10

The authors’ claim that FDR was not an ideologue, while not new, may leave many readers wincing. There may be a fine line between ideology and pragmatism.

Cohen and DeLong credit Eisenhower with reshaping the U.S. economy in four ways. First, he preserved the New Deal with its safety nets and financial regulation.  Second, he created housing and highway programs which “enabled the massive suburbanization that drove the economy and reconfigured the physical, and social landscape.”11  Third, he supported financing world-class research universities which contributed to American economic performance. Fourth, primarily through defense spending, Eisenhower supported new technologies such as commercial jet aviation and microwaves. Investments in semiconductors and computers paved the way for the digital era.12  As it had done before, big government set the economic direction and picked winners.

Republicans Nixon and Reagan continued this non-ideological, pragmatic approach. They deployed the big government tools employed since the founding of the republic: “infrastructure development, tariff protection, direct picking and promoting of winners, exchange rate devaluation and during the first Reagan administration, a return to selective protectionism through naked import quotas in the form of ‘voluntary’ export restraints.”13 Then the climate changed. The authors make clear that this was not a Republican-driven change.

The good times for the United States ended in the 1980s with developments in both Asia and the United States. East Asian economies became Hamiltonian as governments led the way in promoting industrial development. They grew their exports while the United States began importing more than it exported. The United States moved into higher-value activities, but not the economy-transforming manufacturing and engineering industries of the Eisenhower era.

The U.S. economy withdrew from manufacturing and became heavy in finance and real estate and health insurance claims processing. With the memory of the Depression fading, the impetus for regulation also faded. The ideology of deregulation took hold. As an example, the authors cite the removal of Depression banking regulations such as the separation of commercial and investment banking. Beginning in the 1980s, decisions on what industry to promote were “driven not by pragmatic assessment, but by ideological vision wrapped in abstract economic theories.”14  Government policy was driven by people who “knew” that the American economy was held back by regulation, had insufficient incentives for entrepreneurs and had too many interest groups.

The authors seek to provide policy guidance for an economic redesign, a pivot back to concrete economics. They neither know nor prescribe the content of such a redesign, but they do want to return to concrete economics removed “from the speculative realms of ideology and its handmaiden theoretical abstractions.”15

The authors present a lively and informative account. The true historian will want to stop and learn more about individual events. Policymakers looking for concrete ideas will want more guidance. Professors DeLong and Cohen, we eagerly await a follow-on book!

1 Stephen S. Cohen & J. Bradford DeLong, Concrete Economics: The Hamilton Approach to Economic Growth and Policy 2 (Harv. Bus. Rev. Press 2016).

2 Id. at ix.

3 Id. at 2.

4 Id. at 7.

5 Id. at 37.

6 Id. at 42.

7 Id. at 34.

8 Id. at 9.

9 Id. at 10.

10 Id. at 13.

11 Id. at 14.

12 Id.

13 Id. at 15.

14 Id. at 23.

15 192