How can investors parse Donald Trump’s policymaking? That is a burning question right now, as markets tumble after the US president announced tariffs on Wednesday that exceed even those of the protectionist 1930s.
Viewed through the lens of mainstream 20th-century economic thinking — be it that of John Maynard Keynes or free-marketeers like Milton Friedman — such tariffs seem strangely self-sabotaging. Indeed, the so-called liberation day declared by Trump smacks of such economic lunacy that it might seem better explained by psychologists than economists.
However, I would argue that there is one economist whose work is very relevant in this moment: Albert Hirschman, author of a striking book published in 1945, National Power and the Structure of Foreign Trade.
In recent decades, this work has gone largely ignored, as Jeremy Adelman, a Princeton historian who wrote Hirschman’s biography, points out. No wonder. The German Jewish economist suffered such trauma in the Spanish civil war and Nazi Germany that when he arrived at the University of California, Berkeley, as an economist, he decided to study autarky.
More specifically, he used the disastrous protectionism of the 1930s to develop a framework for measuring economic coercion and the exercise of hegemonic power (the academic word for bullying). However, this analysis was largely ignored by trade economists, since it ran counter to both Keynesian and neoliberal economic ideas.
Instead, the book’s main impact was on antitrust analysis. The economist Orris Herfindahl later used Hirschman’s ideas to create an index measuring corporate concentration, which was adopted by the US Department of Justice, among others.
However, if Hirschman had been alive to watch Trump unveil his tariff strategy in the White House Rose Garden this week, he would not have been surprised. Neoliberal thinkers often see politics as a derivative of economics. But Hirschman viewed this in reverse, arguing that “so long as a sovereign nation can interrupt trade with any country at its own will, the contest for more national power permeates trade relations”.
And he viewed “commerce as . . . a model of imperialism which did not require ‘conquest’ to subordinate weaker trading partners”, as Adelman says. This is close to how the Trump advisers parse economics. But it is very different from how Adam Smith or David Ricardo saw trade flows (which they assumed involved comparably powerful players).
Some economists are leaning into this shift. Just after Trump spoke, a trio of American economists — Christopher Clayton, Matteo Maggiori and Jesse Schreger — released a paper outlining the growing field of “geoeconomics”, inspired by Hirschman.
When the trio first started this research agenda, four long years ago, “hardly anyone seemed interested” in the ideas, since they were so at odds with the current frameworks, admits Maggiori. But interest is now surging, he says, predicting a looming intellectual shift comparable to that which took place after the global financial crisis. This year’s American Finance Association meeting, for instance, featured a novel session on geoeconomics, where Maurice Obstfeld, former chief economist of the IMF (and fan of Hirschman), delivered a forceful speech.
This work has already produced three themes that investors should pay attention to. First, and most obviously, the trio’s analysis shows that it is dangerous for small countries to become too dependent on any large trading partner, and they offer tools to measure such vulnerability.
Second, they argue that the source of America’s hegemonic power today is not manufacturing (since China controls key supply chains) but is instead financial and structured around the dollar-based system.
Trump’s tariffs, therefore, are essentially an attempt to challenge another hegemon (China), but his policies around finance are an effort to defend existing dominance. (The hegemony in technological power, I would argue, is still contested.) This distinction matters for other countries trying to respond.
Third, the trio argue that hegemonic power does not work in a symmetrical manner. If a bully has an 80 per cent market share, say, it usually has 100 per cent control; but if market share slips to 70 per cent, hegemonic power crumbles faster, since weaklings can see alternatives.
This explains why the US has failed to control Russia via financial sanctions. And the pattern may play out more widely if other countries react to Trump’s aggressive tariffs by imagining and developing alternatives to the dollar-based financial system. Bullies seem impregnable — until they are not.
Is this analysis depressing? Yes. But it shouldn’t be ignored. And if shocked investors and policymakers want to cheer themselves up, they might note something else: against all the odds, Hirschman was a life-long optimist — or “possibilist”, as he preferred to say. He thought that humans could learn from history to improve the future.
Trump is ignoring that lesson now, with grim consequences. But nobody else should.
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