Austerity Versus Productive Investment: Two Traditions in Capital Formation and Growth

The basic argument of this article is that you need financial incitements to get production moving. After a brief introduction to the Western debt crisis, it proceeds to List’s criticism of Adam Smith. List criticised Adam Smith for not understanding the largely immaterial nature of capital nor understanding growth, and therefore adhering to a counterproductive policy of saving and austerity. Some of Smith’s mistakes have been inherited by modern economics. Although List does not excel in the details of monetary theory, he explains the core principles of mobilising capital for productive purposes in practice. Core tools in this pursuit were public measures such as protective tariffs; targeted investment in public goods like education, infrastructure, energy, and machine tools; and a financial system serving productive purposes, all contributing to stable growth. With thoroughness List explains the principles—of how a nation must prioritise in her investment strategy, strategically using its human and material capital productively, all in order to restructure the national economy in a productive direction, and thus elevate Labour and Civilisation. This article also elaborates on the financial side of the matter: mobilising capital for productive investment, through the money creation process.