O COMMERCIALISM is one of the great kids in economic history. The school, which dominated European thought between the 16th and 18th centuries, is now considered no longer that a historical artifact – and no self-respecting economist would describe himself as mercantilist. Sending out the mercantilist doctrine is one of the cornerstones of modern economics. However, his defeat was less total than an introductory economics course would suggest.
At the heart of mercantilism is the view that maximizing net exports is the best path to national prosperity. Boiled to its essence, mercantilism is “bullionism”: the idea that the only true measure of a country's wealth and success is the amount of gold it had. If one country had more gold than another, it would necessarily be better. This idea had important consequences for economic policy. The best way to ensure a country's prosperity was to have few imports and many exports, thus generating a net inflow of foreign exchange and maximizing the country's gold stocks.
Such ideas were attractive to some governments. Gold was thought to be necessary for a strong and powerful state. Countries like the UK have implemented policies that are designed to protect their traders and maximize income. The Acts of Navigation, which severely restricted the ability of other nations to trade between England and its colonies, was one such example.
And there are some fun (and possibly apocryphal) stories of bullionism in action. During the Napoleonic Wars, warring governments made few attempts to stop their enemies from importing food (and, in doing so, starving them). But they tried to make it difficult for their opponent to export goods. Fewer exports are supposed to result in economic chaos as the supply of gold dwindles. Ensuring an absence of gold, rather than an absence of food, was perceived as the most devastating way to crush the enemy.
But there is an important distinction between mercantilist practice and mercantilist thought. Thinkers' opinions were often distorted when they were translated into policy. And an article by William Grampp, published in 1952, offers a more subtle account of mercantilism.
Grampp admits that mercantilists were interested in foreign trade. It is often read in mercantilist terms that foreign trade would be more beneficial than domestic trade. And some of the early mercantilists, like John Hales, were delighted with the idea of an overflowing treasure.
But Grampp argues that, on the whole, we should stop confusing mercantilism with bullionism. Few mercantilists were balance-of-payments slaves. In fact, they were alarmed at the idea of hoarding gold and silver. That's because many mercantilist thinkers were more concerned with maximizing employment. Nicholas Barbon – who pioneered the fire insurance industry after the Great Fire of London in 1666 – wanted the money to be invested, not hoarded. As William Petty – the first “proper” economist – argued, investment would help improve labor productivity and increase employment. And almost all mercantilists considered ways to attract more people into the workforce.
Grampp even suggests that Keynesian economics “has an affinity with mercantilist doctrine,” given its common preoccupation with full employment. Keynes, in a brief note to his “General Theory,” approvingly quotes mercantilists, noting that a wide supply of metals be critical to maintaining control over domestic interest rates and therefore to ensuring proper use of the resources. In a sense, the Keynesian theory of underconsumption – that is, inadequate consumer demand – as a cause of recessions was foreshadowed by mercantilist contributions., a French thinker, denounced those who opposed the use of expensive silks and argued that buyers of luxury goods created a livelihood for the poor, while the miser who saved his money “caused them to die in danger".
Mercantilism is believed to have begun its intellectual eclipse with the publication of Adam Smith's “Wealth of Nations” in 1776. A simple interpretation of economic history suggests that Smith's relentless defense of free markets was totally contrary to the mercantilist doctrine of heavy regulation. But according to research by Lars Magnusson of Uppsala University, Smith's contribution did not represent such a sharp break. The father of economics was certainly concerned about the effects of some mercantilist policies. He saw the damage that government intervention could do. Smith argued that the East India Company, a quasi-governmental organization that administered parts of India at the time, was responsible for creating the huge famine in Bengal in 1770. And he hated monopolies, arguing that greedy barons could earn "wages or profits, far above their natural rate." Smith also grumbled that lawmakers could use mercantilist logic to justify stifling regulation.
There is an argument for freer trade – it can make the world economy more efficient. But it does nothing to increase demand.
And there is even an argument that increased trade reduces employment in the US in the current context; if the jobs we gain are of greater added value per worker, while those we lose are of lower added value, and the expenses remain the same, that means the same GDP, but less jobs.
If you want a trade policy that helps employment, it has to be a policy that induces other countries to run larger deficits or smaller surpluses. A countervailing duty on Chinese exports would be job creation; an agreement with South Korea is not.
But more importantly, the argument for bullionism as a demand stimulus evaporated with a role for gold in monetary policy. The introduction of fiat money meant that balance of payments targets were unnecessary to maintain a specific posture. monetary policy, as central banks no longer needed an adequate stock of gold to inject money into the economy. The mercantilist temptation is strong, however, especially when the growth of the economic pie slows or stops altogether. More than two centuries after Smith's landmark work, the fundamental debate of economics continues to resonate.
See too: Democracy in Brazil
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