Friedich List and Productive Power

I discovered Friedrich List earlier this year, although I had been familiar with the general theory of productive powers that he wrote about in my readings on east Asian state capitalism. If we want to be simple, I believe he is the synthesis to Adam Smith and Karl Marx and would ideally replace both as the canon of all economics and political economy departments. I also believe that when it comes to the task of getting as much interest out of the economy as possible, Friedrich List helps us to get closer to the answer. This passage is particularly insightful:

Examples from private economy will best illustrate the difference between the theory of productive powers and the theory of values.

Let us suppose the case of two fathers of families, both being landed proprietors, each of whom saves yearly 1,000 thalers and has five sons. The one puts out his savings at interest, and keeps his sons at common hard work, while the other employs his savings in educating two of his sons as skilful and intelligent landowners, and in enabling the other three to learn a trade after their respective tastes; the former acts according to the theory of values, the latter according to the theory of productive powers.

The first at his death may prove much richer than the second in mere exchangeable value, but it is quite otherwise as respects productive powers. The estate of the latter is divided into two parts, and every part will by the aid of improved management yield as much total produce as the whole did before; while the remaining three sons have by their talents obtained abundant means of maintenance. The landed property of the former will be divided into five parts, and every part will be worked in as bad a manner as the whole was heretofore. In the latter family a mass of different mental forces and talents is awakened and cultivated, which will increase from generation to generation, every succeeding generation possessing more power of obtaining material wealth than the preceding one, while in the former family stupidity and poverty must increase with the diminution of the shares in the landed property.

So the slaveholder increases by slavebreeding the sum of his values of exchange, but he ruins the productive forces of future generations. All expenditure in the instruction of youth, the promotion of justice, defence of nations, &c. is a consumption of present values for the behoof of the productive powers. The greatest portion of the consumption of a nation is used for the education of the future generation, for promotion and nourishment of the future national productive powers.

Friedrich List, ‘The National Economy’

List compares a family engaged in consumption and interest versus a family engaged in the cultivation of productive powers. The first family sees interest as a means to generate wealth and so they become lazy, lacking the incentive to innovate and merely extract resources from their estate. The second family rejects this idea and understands that if they want to become prosperous, they have to learn new skills and innovate, such as through acquiring an education and learning trades. The effect of this is that the “mental forces and talents is awakened and cultivated, which increase from generation to generation” – this dynamic is akin to compound interest but on a multigenerational scale. While the former family squabbles over less and less resources, the latter family continues to increase the size and types of markets as they branch out into the various areas of life.

Cultivating the productive powers of yourself, your family or your nation is the road to prosperity, and this primordial logic has been forgotten in our time. Rent seeking was also prevalent in the later stages of the Roman empire and contributed to its decline:

The reforms of Diocletian and Constantine, by implementing a policy of systematic spoliation to the profit of the State, made all productive activity impossible. The reason is, not that there were no more large fortunes: on the contrary, their build-up was made easier. But the foundation of their build-up was now no longer creative energy, or the discovery and bringing into use new sources of wealth, or the improvement and development of husbandry, industry and commerce. It was, on the contrary, the cunning exploitation of a privileged position in the State, used to despoil people and State alike. The officials, great and small, got rich by way of fraud and corruption.

Michael Rostovtzev, ‘Social and Economic History of the Roman Empire’

Today, we make the mistake of assuming productivity is merely movement in the economy. This is because of the contemporary libertarians and their obsession with measuring consumption as a means of economic growth, such as the purchase of goods thanks to cheap credit: televisions, cars, homes, food, holidays etc. This is not economic productivity, and this is the issue with interest-obsessed rent seeking economy we live in today. It saps the productive power of a nation by putting money into paying interest to creditors when that money can be used to finance productivity.

Ibn Khaldun and Productivity

Ibn Khaldun is mostly known for his work on the cyclical nature of civilisation, the concept of ‘asabiyya (group cohesion), and to a lesser extent, his theories on taxation. However, what is not commonly understood is that Ibn Khaldun was one of the first proponents of a sort of theory of productive power in the manner of Friedrich List (and others). This theory of productive power was the driving force behind Ibn Khaldun’s views on taxation.

The Khaldunian Curve was not just an attack on excessive expenditure driven by a bloated bureaucracy and decadent elite, but also on the rent seeking of these classes that diverted money away from productivity and innovation, thereby contributing to the decline of that particular society. Ibn Khaldun wrote at length about the inextricable links between moral and divine law, justice, good rulership, trade and economy and the health of a society. His famous Circle of Justice expresses this in artistic form:

Muhammad Umer Chopra, 'Muslim Civilisation: The Causes of Decline and the Need for Reform'

All aspects of the circle must exist together. If one falters, then the circle as a whole begins to break down as expressed by the inner pentagon. The circle does not exist apart from his general theories. To achieve a circle of justice requires a just taxation regime and both are necessary to achieve ‘asabiyya. When the circle starts to break down, when the rulers start to unjustly tax the people, then ‘asabiyya breaks down resulting in disorder and chaos. This philosophy of rule is not medieval, it is primordial and applies across the space-time continuum; this is an ironclad scientific law of civilisation.

In short, Ibn Khaldun understood the connection between rent seeking as exhibited in increased taxation and the collapse of productive power in a society. Firstly, he distinguished tax rates from tax revenues. Secondly, he correctly perceived that tax rates would not only yield less revenues after an optimal point, but that the reason behind this was that this was a rent seeking activity by the elites that would then sap money away from being employed in productive economic activities by the citizenry.

At the beginning of a dynasty, taxation yields a large revenue from small assessment. At the end of a dynasty, taxation yields a small revenue from large assessment. The reason for this is that when the dynasty follows the way of the religion, it imposes only such taxes as are stipulated by the religious law, such as charity taxes, the land tax, and the poll tax. They mean small assessments, because, as everyone knows the charity tax on property is low. The same applies on charity tax on grain and cattle, and to the poll tax, the land tax and all other taxes required by the religious law. They have fixed limits that cannot be overstepped.

Ibn Khaldun, 'Prolegomena'

Ibn Khaldun and State Capitalism

A further element of Ibn Khaldun’s thinking that has been obfuscated was that he understood that mere consumption was not economic production and innovation. Therefore, it was not enough for the private citizenry to stimulate economic growth, this had to come from elsewhere. Ibn Khaldun articulated what many of the state capitalists of the 19th century would come to understand and implement; the state was the greatest source of revenues, expenditures, consumptions and gave reason for innovation.

The reason for this is that dynasty and government serve as the world’s greatest marketplace, providing the substance of civilization. Now, if the ruler holds on to property and revenue, or they are lost or not properly used by him, then the property in the possession of the ruler’s entourage will be small. The gifts which they, in their turn, had been used to give to their entourage and people, stop, and all their expenditures are cut down. They constitute the greatest number of people who make expenditures, and their expenditure provides more of substance of trade than the expenditure of any other group of people. Thus when they stop spending, business slumps and commercial profits decline because of the shortage of capital. Revenues from the land tax decrease, because the land tax and taxation in general depend on cultural activity, commercial transactions, business prosperity, and the people’s demand for gain and profit.

Ibn Khaldun, 'Prolegomena'

Here he quite clearly lays out the dynamic at play. Since the state is the largest allodial owner of land, property and resources of any actor in society, its role in stimulating economic activity by having requirements for merely existing is vastly larger than any other actor or individual in society. Of course, this is not enough. The state must then actively expand consumption and spending to trigger a virtuous cycle of growth. They need food, textiles, metals for war, gold for coin, animals for transport and so on. In the market, individuals see a business opportunity and provide any and all these services in return for payment. They in turn have requirements of their own, spending to acquire their needs (and wants), which others also seek to supply, and the cycle continues.

However, should the state stop spending, this causes a breakdown in the virtuous cycle and the beginning of a vicious cycle. As spending decreases, productivity economic activity decreases in relation to this decline in demand. This means less productivity in agriculture or trade, leading to less tax revenues for the state, which then leads to a raising of taxes to extract more revenue, and the longer this cycle continues, the greater the diminishing returns. The logic of seeking rents prevails until the entire economic order has become stagnant and decaying.

“The tax money reverts to the people. Their wealth, as a rule, comes from their business and commercial activities. If the ruler pours out gifts and money upon his people, it spreads among them and reverts to him and again from him to them. It comes from them through taxation and the land tax and reverts to them through gifts. The wealth of the subjects corresponds to the finances of the dynasty. The finances of the dynasty, in turn, correspond to the wealth and number of the subjects. The origin of it all is civilization and its extensiveness.”

Ibn Khaldun, 'Prolegomena'

The logic of the Khaldunian curve is to achieve the optimal amount of tax revenues while not inhibiting economic productivity in any way. The point is not about economic consumption: we do not want more wealth in society just so it may be spent on consumption, we want people to put that wealth into innovation and into productive sectors which make returns for the next few generations at minimum. However, the part of this theory that has been obfuscated by libertarians is that the role that state spending has to play alongside achieving optimal taxation to achieve the circle of justice and prosperity for the people. The level of economic activity stimulated by “the market” is not enough to stimulate massive growth.

Ibn Khaldun was writing in the 14th century. However, it was in the 19th century that his ideas came to be enacted into national industrial policy by some of the greatest early modern statesmen: Alexander Hamilton, Abraham Lincoln and Otto Von Bismarck (among others). The successful statemen of the 20th century (particularly in east Asia) followed the 19th century statesmen in this “state capitalist” tradition, among them Park Chung Hee (South Korea) and Lee Kuan Yew (Singapore).

These countries understood that you cannot have a laissez-faire economy. The state has to take an active role in economic life or a people will never rise from their position of achieving basic needs. The state must also guide its own investment and that of the markets towards productive sectors so as to avoid the debilitating effects of rent seeking. The successful economies of the 21st century will not look to Smith or Marx; it will be Ibn Khaldun, List and others who expounded upon the importance of long-term investment and an active involvement of the state in this. They also offer the possibility of transitioning towards an economy less saturated by interest and credit consumption.