Wednesday, April 25, 2007

Industrial Development: Hamilton vs. Jefferson

Readers of mlq3's blog who have followed Hvrds' comments would notice that he makes frequent references to Alexander Hamilton (e.g. here) and the Hamiltonian model (e.g. here). For his part, Abe Margallo has proposed a Philippines Inc. model to economic development which favors Hamilton's approach over that of Thomas Jefferson's.

What exactly is behind Hamilton (and Jefferson's) model? While both Abe and Hvrds, in their respective posts, provide clear explanations of the model(s), Alice H. Amsden and Wan Wen Chu in their book Beyond Late Development: Taiwan's Upgrading Policies , are able to give additional insight in distinguishing the two, and it has to do with what kind of firm acts as the primary agent of industrial development:

"Two classic approaches offer conflicting answers. One may be characterized as 'Jeffersonian' and the other as 'Hamiltonian' in perspective.

[Jeffersonian model]...emphasizes collectivity and cooperation. The relatively small, highly specialized firm is the agent of progressive change. It is able to cut bureaucratic costs through individual initiative and achieve speed and flexibility in entering new industries by being networked. What it lacks internally it overcomes by being part of a cluster of firms that mutually create 'external economies' (as analyzed by Alfred Marshall in his Principles of Economics). Such economies promote innovation and the efficiency needed to compete abroad.

[Hamilton's model], on the other hand, attributes modern manufacturing success to big business and internal economies, with Joseph Schumpeter as one of its most prominent partisans (see his Capitalism, Socialism and Democracy). It posits that in the course of economic development, as more and more physical and human capital is applied to manufacturing, the agent of change becomes the firm that makes a 'three-pronged' investment in (1) plants with minimum efficient scale, (2) in managerial hierarchies and proprietary knowledge-based assets, and in (3) global systems of marketing and distribution. The 'first mover' to do so enjoys advantages in the form of entrepreneurial rents that arise from scale economies, novel products and processes, and the managerial skills and capital to diversify into still newer industries."

In terms of the relative standing of these two theories in the marketplace of ideas, Amsden and Chu has this to say:

"By far, Jeffersonianism has proved to be the more attractive of the two theories. It champions individualism, cooperation, and democracy. In especially the United States, whose economic theories tend to dominate the global marketplace of ideas, the ideology of the small entrepreneur is supreme. The hero is imbued with the attributes of innovativeness, eficiency, and flexibility."

They then assert that in the real world, the situation is reversed:

"Arguably however, Hamiltonianism has in fact ruled the modern industrial world. The visible hand and internal economies may be said to predominate in most modern industries over the invisible hand and external economies. Whatever the tendencies toward disintegration and greater specialization, firm-level expansion has increasingly taken the mode of diversification, merger, and acquisition."

From the above passages, we are able to notice more than passing (but not exact) similarities in the recent debate between Manolo's Cult of the Market and John Nery's Myth of the State which i referred to in this post. Most specifically, embedded in the mental models of proponents of private initiatives for entrepreneurship are the ideas behind the Jefferson model, particularly that of the heroic entrepreneur. On the other hand, for those (like Abe Margallo and Hvrds) who believe that Hamilton's model is the key to economic take-off, the hand of the State is absolutely essential with the 'Cult of the Market' taking on the status of a false religion.

Update (04-28-2007): Over at mlq3's, hvrds has stated that "That dichotomy no longer exists.". From the discussions in this blog as well as in Abe's and mlq3's, i believe this dichotomy is still pretty much alive.

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