Two systems are before the world
Key Markets report for Wednesday, 24 September 2025
In our times, understanding the clash between two systems of governance could be more relevant to the future development of humanity than ever before. Unfortunately, that understanding is hard to come by as it has been deliberately obscured. Today, certain Western leaders speak of the conflict of political systems of governance: between open societies vs. closed societies, or between democratic vs. authoritarian systems. But any debate about alternative economic systems of governance is almost entirely absent in Western discourse.
Economic governance matters
I touched upon this subject in this newsletter on a few occasions, most recently in April this year. We could call the two opposed economic systems of governance as the British system of free trade vs. the American system of political economy, strongly advocated by leaders like Alexander Hamilton and Abraham Lincoln‘s chief economic advisor Henry C. Carey. In his 1851 work, “The Harmony of Interests,” Carey contrasted the two systems in a rather lengthy passage starting with the words, “Two systems are before the world…” Carey’s prose could be summarized as follows:
Trade vs. production: one system directs capital and draws labor (the productive potential of a people) toward trade and speculation, which depress wages and erode prosperity. The other system fosters production of goods, services and infrastructure. It leads to higher wages and rising standards of living.
Raw materials vs. finished goods: one system favors mass production of raw materials and cash crops for trade; it systematically impoverishes farmers and reduces their employment. Carey writes about farmers bearing most of the burden of freight in wholesale trade. The other system favors production of more refined quality products, enriching the producers.
Exporting produce vs. enjoying it at home: one system sends mass produced bulk abroad, frequently causing famines, while the other absorbs labor to produce diverse, quality products at home.
Concentration vs. dispersion of wealth: one system concentrates wealth and power in great commercial cities while depleting and impoverishing the rest of the nation; the other enriches those engaged in production and disperses wealth more broadly.
War vs. moral and intellectual growth: one system compels the productive sector to fund fleets and armies; the other directs the same means for moral and intellectual growth of the people in their own nations.
Stable communities vs. population replacement: one system requires a large, low-skilled labor force that accepts work with low wages. It predictably resorts to mass influx of migrants. The other system raises the standards of living, prosperity and security of native labor force.
Universal war vs. universal peace: one system gives rise to universal forever wars; the other preserves peace.
The “American system” did not originate in the United States; it was first explicitly elaborated by the German economist Friedrich List. But the system may have earned the label, “American” because it was practiced in the United States for some 150 years, elevating the nation to unprecedented levels of wealth and prosperity. During this time, the U.S. used tariffs, state subsidies and other barriers to trade to nurture domestic industries and to protect high-paying jobs. But in the post-war period, the U.S. reoriented its economic policy, progressively leaning in favor of the British system of free trade.
Slipping in the British system under Truman
In the wake of the creation of Bretton Woods monetary system, British influence pushed the U.S. to adopt the system of free trade. To that end, it planned to create the International Trade Organization (ITO). However, when the ITO charter was sent to the Senate for ratification as a formal treaty, it was shot down because it would cede key aspects of U.S. sovereignty to an international body and subject U.S. economic policy to ITO rules.
Given the strong opposition in the U.S. Congress, the ITO treaty was facing certain failure. To overcome this opposition, rather than resubmitting the treaty to Congress, Truman’s administration opted for the Protocol of Provisional Application and on 30 October 1947, Truman signed the General Agreement on Tariffs and Trade (GATT) as an executive agreement.
The GATT implemented tariff concessions envisioned under the ITO, and entered into force on 1 January 1948, enabling the Government to adopt GATT trade rules without legislative ratification. This was made possible by the Reciprocal Trade Agreements Act of 1934, which gave the executive the power to negotiate reciprocal tariff-cutting agreements with other countries.
Thus began the American pivot to the British free trade system. GATT was implemented on a provisional basis for decades until the “Uruguay Round” of trade negotiations (1986-1994). In December 1994, U.S. Congress voted in favor of the “Uruguay Round Agreements Act,” which included the agreement to create the World Trade Organization as a replacement for the “provisional” GATT system.
Along with these changes, the evolution of the U.S. economic development largely followed the predictable changes described in 1851 by Henry C. Carey. Over that time however, the academia largely scrubbed all mentions of the “American System,” Henry Carrey or of Friedrich List from the economics curriculum. Having taken many economics courses in university, I can attest to this: I’ve never heard of any of this until the blessing that is the Internet brought them back from Orwell’s memory hole and revived their teachings.
Perhaps the best real world case study of the two economic systems of governance is also the contrast between the British and German economic development in the last three decades of the 19th century, as we’ll explore in tomorrow’s report.
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Today’s trading signals
With yesterday’s closing prices we have the following changes for the Key Markets portfolio:
