Kicking Away the Ladder:

How the Economic and Intellectual Histories of Capitalism Have Been

Re-Written to Justify Neo-Liberal Capitalism
Ha-Joon Chang 1
There is currently great pressure on developing countries to adopt a set of good policies and
good institutions such as liberalisation of trade and investment and strong patent law to
foster their economic development. When some developing countries show reluctance in
adopting them, the proponents of this recipe often find it difficult to understand these
countries stupidity in not accepting such a tried and tested recipe for development. After all,
they argue, these are the policies and the institutions that the developed countries had used in
the past in order to become rich. Their belief in their own recommendation is so absolute that
in their view it has to be imposed on the developing countries through strong bilateral and
multilateral external pressures, even when these countries dont want them.
Naturally, there have been heated debates on whether these recommended policies and
institutions are appropriate for developing countries. However, curiously, even many of those
who are sceptical of the applicability of these policies and institutions to the developing
countries take it for granted that these were the policies and the institutions that were used by
the developed countries when they themselves were developing countries.
Contrary to the conventional wisdom, the historical fact is that the rich countries did not
develop on the basis of the policies and the institutions that they now recommend to, and
often force upon, the developing countries. Unfortunately, this fact is little known these days
because the official historians of capitalism have been very successful in re-writing its
history.
Almost all of todays rich countries used tariff protection and subsidies to develop their
industries. Interestingly, Britain and the USA, the two countries that are supposed to have
reached the summit of the world economy through their free-market, free-trade policy, are
actually the ones that had most aggressively used protection and subsidies.
Contrary to the popular myth, Britain had been an aggressive user, and in certain areas a
pioneer, of activist policies intended to promote its industries. Such policies, although limited
in scope, date back from the 14th century (Edward III) and the 15th century (Henry VII) in
relation to woollen manufacturing, the leading industry of the time. England then was an
exporter of raw wool to the Low Countries, and Henry VII for example tried to change this by
taxing raw wool exports and poaching skilled workers from the Low Countries.
Particularly between the trade policy reform of its first Prime Minister Robert Walpole in
1721 and its adoption of free trade around 1860, Britain used very dirigiste trade and
industrial policies, involving measures very similar to what countries like Japan and Korea
later used in order to develop their industries. During this period, it protected its industries a
lot more heavily than did France, the supposed dirigiste counterpoint to its free-trade, freemarket system. Given this history, argued Friedrich List, the leading German economist of the
mid-19th century, Britain preaching free trade to less advanced countries like Germany and the

Cambridge University, UK

USA was like someone trying to kick away the ladder with which he had climbed to the
top.
List was not alone in seeing the matter in this light. Many American thinkers shared this view.
Indeed, it was American thinkers like Alexander Hamilton, the first Treasury Secretary of the
USA, and the (now-forgotten) economist Daniel Raymond, who first systematically
developed the infant industry argument. Indeed, List, who is commonly known as the father
of the infant industry argument, in fact started out as a free-trader (he was an ardent supporter
of German customs union Zollverein) and learnt about this argument during his exile in the
USA during the 1820s
Little known today, the intellectual interaction between the USA and Germany during the 19th
century did not end there. The German Historical School represented by people like
Wilhelm Roscher, Bruno Hildebrand, Karl Knies, Gustav Schmoller, and Werner Sombart
attracted a lot of American economists in the late 19th century. The patron saint of American
Neoclassical economics, John Bates Clark, in whose name the most prestigious award for
young (under 40) American economists is given today, went to Germany in 1873 and studied
the German Historical School under Roscher and Knies, although he gradually drifted away
from it. Richard Ely, one of the leading American economists of the time, also studied under
Knies and influenced the American Institutionalist School through his disciple, John
Commons. Ely was one of the founding fathers of the American Economic Association; to
this day, the biggest public lecture at the Associations annual meeting is given in Elys name,
although few of the present AEA members would know who he was.
Between the Civil War and the Second World War, the USA was literally the most heavily
protected economy in the world. In this context, it is important to note that the American Civil
War was fought on the issue of tariff as much as, if not more, on the issue of slavery. Of the
two major issues that divided the North and the South, the South had actually more to fear on
the tariff front than on the slavery front. Abraham Lincoln was a well-known protectionist
who cut his political teeth under the charismatic politician Henry Clay in the Whig Party,
which advocated the American System based on infrastructural development and
protectionism (thus named on recognition that free trade is for the British interest). One of
Lincolns top economic advisors was the famous protectionist economist, Henry Carey, who
once was described as the only American economist of importance by Marx and Engels in
the early 1850s but has now been almost completely air-brushed out of the history of
American economic thought. On the other hand, Lincoln thought that African Americans
were racially inferior and that slave emancipation was an idealistic proposal with no prospect
of immediate implementation he is said to have emancipated the slaves in 1862 as a
strategic move to win the War rather than out of some moral conviction.
In protecting their industries, the Americans were going against the advice of such prominent
economists as Adam Smith and Jean Baptiste Say, who saw the countrys future in
agriculture. However, the Americans knew exactly what the game was. They knew that
Britain reached the top through protection and subsidies and therefore that they needed to do
the same if they were going to get anywhere. Criticising the British preaching of free trade to
his country, Ulysses Grant, the Civil War hero and the US President between 1868-1876,
retorted that within 200 years, when America has gotten out of protection all that it can offer,
it too will adopt free trade. When his country later reached the top after the Second World
War, it too started kicking away the ladder by preaching and forcing free trade to the less
developed countries.

The UK and the USA may be the more dramatic examples, but almost all the rest of the
developed world today used tariffs, subsidies and other means to promote their industries in
the earlier stages of their development. Cases like Germany, Japan, and Korea are well known
in this respect. But even Sweden, which later came to represent the small open economy to
many economists had also strategically used tariffs, subsidies, cartels, and state support for
R&D to develop key industries, especially textile, steel, and engineering.
There were some exceptions like the Netherlands and Switzerland that have maintained free
trade since the late 18th century. However, these were countries that were already on the
frontier of technological development by the 18th centuries and therefore did not need much
protection. Also, it should be noted that the Netherlands deployed an impressive range of
interventionist measures up till the 17th century in order to build up its maritime and
commercial supremacy. Moreover, Switzerland did not have a patent law until 1907, flying
directly against the emphasis that todays orthodoxy puts on the protection of intellectual
property rights (see below). More interestingly, the Netherlands abolished its 1817 patent law
in 1869 on the ground that patents are politically-created monopolies inconsistent with its
free-market principles a position that seems to elude most of todays free-market economists
and did not introduce another patent law until 1912.
The story is similar in relation to institutional development. In the earlier stages of their
development, todays developed countries did not even have such basic institutions as
professional civil service, central bank, and patent law. It was only after the Pendleton Act in
1883 that the US federal government started recruiting its employees through a competitive
process. The central bank, an institution dear to the heart of todays free-market economists,
did not exist in most of todays rich countries until the early 20th century not least because
the free-market economists of the day condemned it as a mechanism for unjustly bailing out
imprudent borrowers. The US central bank (the Federal Reserve Board) was set up only in
1913 and the Italian central bank did not even have a note issue monopoly until 1926. Many
countries allowed patenting of foreign invention until the late 19th century. As I mentioned
above, Switzerland and the Netherlands refused to introduce a patent law despite international
pressure until 1907 and 1912 respectively, thus freely stole technologies from abroad. The
examples can go on.
One important conclusion that emerges from the history of institutional development is that it
took the developed countries a long time to develop institutions in their earlier days of
development. Institutions typically took decades, and sometimes generations, to develop. Just
to give one example, the need for central banking was perceived at least in some circles from
at least the 17th century, but the first real central bank, the Bank of England, was instituted
only in 1844, some two centuries later.
Another important point emerges is that the levels of institutional development in todays
developed countries in the earlier period were much lower than those in todays developing
countries. For example, measured by the (admittedly highly imperfect) income level, in 1820,
the UK was at a somewhat higher level of development than that of India today, but it did not
even have many of the most basic institutions that India has today. It did not have universal
suffrage (it did not even have universal male suffrage), a central bank, income tax, generalised
limited liability, a generalised bankruptcy law, a professional bureaucracy, meaningful
securities regulations, and even minimal labour regulations (except for a couple of minimal
and hardly-enforced regulations on child labour).

If the policies and institutions that the rich countries are recommending to the poor countries
are not the ones that they themselves used when they were developing, what is going on? We
can only conclude that the rich countries are trying to kick away the ladder that allowed them
to climb where they are. It is no coincidence that economic development has become more
difficult during the last two decades when the developed countries started turning on the
pressure on the developing countries to adopt the so-called global standard policies and
institutions.
During this period, the average annual per capita income growth rate for the developing
countries has been halved from 3% in the previous two decades (1960-80) to 1.5%. In
particular, Latin America virtually stopped growing, while Sub-Saharan Africa and most exCommunist countries have experienced a fall in absolute income. Economic instability has
increased markedly, as manifested in the dozens of financial crises we have witnessed over
the last decade alone. Income inequality has been growing in many developing countries and
poverty has increased, rather than decreased, in a significant number of them.
What can be done to change this?
First, the historical facts about the historical experiences of the developed countries should be
more widely publicised. This is not just a matter of getting history right, but also of
allowing the developing countries to make more informed choices.
Second, the conditions attached to bilateral and multilateral financial assistance to developing
countries should be radically changed. It should be accepted that the orthodox recipe is not
working, and also that there can be no best practice policies that everyone should use.
Third, the WTO rules should be re-written so that the developing countries can more actively
use tariffs and subsidies for industrial development. They should also be allowed to have less
stringent patent laws and other intellectual property rights laws.
Fourth, improvements in institutions should be encouraged, but this should not be equated
with imposing a fixed set of (in practice, todays not even yesterdays Anglo-American)
institutions on all countries. Special care has to be taken in order not to demand excessively
rapid upgrading of institutions by the developing countries, especially given that they already
have quite developed institutions when compared to todays developed countries at
comparable stages of development, and given that establishing and running new institutions is
costly.
By being allowed to adopt policies and institutions that are more suitable to their conditions,
the developing countries will be able to develop faster. This will also benefit the developed
countries in the long run, as it will increase their trade and investment opportunities. That the
developed countries cannot see this is the tragedy of our time.