Saturday, February 26, 2011

What Is Wrong With Mercantile Political Economy?

Ian Fletcher writes in Huffington Post (25 February) (HERE):

The great Adam Smith, founder of modern economics, published his epoch-making free-trade tract The Wealth of Nations, the origin of endless subsequent delusions, in 1776. But he was a hypocrite, for Britain in 1776 was not a blank slate upon which free markets and free trade could work their magic. It was instead the beneficiary of several prior centuries of protectionism and industrial policy. In the words of British economist William Cunningham:

‘For a period of two hundred years [c. 1600-1800], the English nation knew very clearly what it wanted. Under all changes of dynasty and circumstances the object of building up national power was kept in view; and economics, though not yet admitted to the circle of the sciences, proved an excellent servant, and gave admirable suggestions as to the manner in which this aim might be accomplished
’.

England in this era was, in fact, a classic authoritarian (this is long before English democracy) developmentalist state: a Renaissance South Korea, with kings rather than the military dictators who ruled South Korea for most of the Cold War period. English industrialization must actually be traced 300 years prior to Adam Smith, to events like Henry VII's imposition of a tariff on woolen goods in 1489. King Henry's aim was to wrest the wool weaving trade, then the most technologically advanced major industry in Europe, away from Flanders (the Dutch half of present-day Belgium), where it had been thriving upon exports of English wool. Flemish producers were entrenched behind huge capital investments, which gave them economies of scale sufficient to outcompete fledgling entrants into the industry. So only government action could get England a toehold.
Even in the 15th century, there was an awareness that being an exporter of agricultural raw materials was a dead end--a problem impoverished African and Latin American nations wrestle with to this day. And there was an awareness that free trade will not lift a nation out of this predicament: you need some well-chosen protectionism. Henry VII created, in fact, the first national industrial policy of the modern era, long before the Industrial Revolution introduced artificial energy sources like steam power.

“In Praise of Mercantilism, or Why Economic History Isn't Boring”

Does economic history hold a giant clue for getting America out of its present trade mess? Yes, because it debunks the idea that free trade is how nations become prosperous. Instead, it shows that nations win at international trade by playing a 400-year-old game called mercantilism.

… Mercantilists saw free markets as a useful tool in economics, but not the sum total of economic wisdom. Even their much-mocked obsession with the accumulation of bullion was not as irrational as it is usually depicted as being, given that under a monetary system based on gold, accumulating it is the only way to expand the money supply and drive down interest rates, a boon to investment then as now. Mercantilism, in fact, created the modern European economy and thus made possible the colonial power that economically shaped much of the rest of the world. It is thus the foundation of modern capitalism itself.
Anyhow: Britain functioned on a mercantilist basis for centuries before its much misunderstood experiment with free trade began. Even as late as the beginning of the 19th century, Britain's average tariff on manufactured goods was roughly 50 percent--the highest of any major nation in Europe. And even after Britain embraced free trade in most goods, it continued to tightly regulate trade in strategic capital goods, such as the machinery for the mass production of textiles, in order to forestall its rivals. This was rational, as the win-win logic of free trade starts to break down if productive capital is mobile between nations or if free trade induces productivity growth abroad.

After Britain embraced free trade in the mid-19th century, its long economic decline, of course, began. Today, the United States is making the same mistake, having mistaken the temporary tactical advantages of free trade for a nation at the peak of its economic power for a fundamental strategic truth. Meanwhile, our rivals, especially but not only in the Far East, hold firm to the mercantilist principles that we ourselves employed for 150 years.

Mercantilism has somewhat different application in developed, rather than developing, nations, but its fundamentals still hold good. At the very least, we need to defend ourselves against mercantilist aggression against us, something we are not doing.


Comment
“Mercantile political economy” is how the concept was known from before Smith’s time, but which became ‘Mercantilism’ after Eli F. Heckscher’s magisterial 2-volume Work, published in Swedish (1931) was translated into English from the German edition in 1935, when the German ‘Mercantilismus’ became ‘Mercantilism’ and was adopted by the discipline (personally I prefer and usually use Smith’s name for the phenomenon – and have done since I was an undergraduate).

My problem with Ian Fletcher’s tendentious argument for mercantilism is that is that he takes a very narrow view of what was involved in the history of mercantile political economy in Europe, which survives today in practically every industrialising country (did it ever really go away in the so-called ‘laissez-faire’ decades in 19th-century Britain?).

Mercantile political economy is associated with the centralizing states in European history and the ambitions of kings and princes when faced with dynastic challenges and jealous rivals. Trade was seen as an adjunct of war, and vice versa. Kings saw mercantile development as an instrument of state power and, of course, this growing power had a heavy price in the casualties of wars between and among neighbours, and in more distant regions of the world coming with increasing sailing distances achieved by shipping expeditions that proved anything but benign in the centuries that followed.

Ian Fletcher ignores all of these consequences, as if what happened as northern parts of Europe followed Venice and similar commercial centres in the Eastern Mediterranean in earlier centuries (think of the appalling cost in life – and treasure - in the infamous Crusades) was a mere detail in European history.

In the 17th-18th century, as commercial society gathered some momentum on the way towards, as it turned out, slow growth in the annual output of the “necessaries, conveniences, and amusements of life”, soon to be given a historic boost under industrialization, invention of new techniques and across-industry innovation.

Such was the momentum of mercantile political economy and state glory in the last quarter of the 18th century that when an opportunity presented itself to British legislators and those who influenced them with the forced withdrawal from the former British colonies after the war from 1776, and as advised by Adam Smith in the very last paragraph of Wealth Of Nations (about Britain adapting its mercantile colony ambitions to the ‘mediocrity of its circumstances’), Britain, instead, carried on as normal (learning nothing and forgetting everything) aggressively reinforcing what it held in Eastern Canada, the Caribbean, South Africa, and India , and founding a new ’empire’ in what became Australia, western Canada, Asia and the Pacific. From this consequence came continual wars in Europe, intensified rivalries and more wars among potential trading partners, new shameful aggressions in Asia (for which China still bears old grudges) and gross wastage of human life, ‘treasure, stalled modernization (increasingly captured by new trading powers on the Continent), and dangerous militarisations in Europe that culminated in two ‘world’ wars and several million deaths, and the introduction and spread of a new world force, communism, which killed many millions more.
All this from the consequences of mercantile political economy that Ian Fletcher is unrestrained in his praise of, and, apparently, oblivious of these consequential costs, once again, he probably dismisses them as mere details.

I recommend that he reads Heckscher’s ‘Mercantilism’, Adam Smith’s critique of mercantile political economy (Book IV, Wealth Of Nations) and any number of history books of the post-Medieval World.

Mercantile states left Britain by the 18th century stuck with the false ideas legislated by ambitious Kings, Queens, Courtiers, merchants and legislators, such as the Apprentices Statutes (to promote quality tradesmen and their products, which created legalized monopolies that raised prices and restricted competition); Trade Guilds (aimed at quality assurance and protected incomes that raised prices, restricted competition and innovation); Settlement Acts (to cope with local poor burdens and vagabonds that prevented movement of unemployed labour and localized poverty); and the Navigation Acts that aimed to promote a larger domestic marine trade necessary for defence of an island (raised prices, diverted capital into foreign trade and restricted competition, and promoted wars).

In addition, the laws of primogeniture (necessary for stable inheritance in a monarchy) and entails (to preserve large land ownership among descendants), the effect was to freeze land re-distribution by curtailing breakup sales to new owners, and lowered quality and prevented needed improvements (several British colonies abandoned entail laws and notably prospered).

What Ian Fletcher calls the “developmentalist state” actually acted as a drag-anchor on development and a distorting force in the allocation of capital. Fortunately, as Smith noted in his criticism of some Physiocrats who demanded the institution of Natural Liberty before opulence could be created. Smith remarks that if such a precondition was required then no country would have ever produced any opulence; but many did, if only for a while). Nor did he insist that free trade be instituted – or, indeed would ever be adopted in Britain and called such an idea as ‘utopian’.

Smith was never an ideologue. He had a pragmatic view of what was practical and no illusions about the powerful forces that flourished in the mercantile state, and had done for centuries (and which continued for two more, and counting). He observed and reported; he did not propose grand plans for change. That his observations were not acted upon was not due to his ‘hypocrisy’, as Ian Fletcher suggests; there was no ‘clever plan’ to dupe the world. That is fantasy land, populated by the paranoid and immature conspiracy addicts.

But what is worrying is that Ian Fletcher’s understanding of what is happening in the rise of new developed countries is that they are a ‘threat’ to the USA and 'something must be done about it'. But the mercantile state, bolstered by modern state capitalism, is in no real position to face such challenges using the old mercantile methods and forgetting the lessons of mercantile history.
Mercantile political economy is a dead-end. Adam Smith taught that within the confines of the necessary discretion needed to avoid the full weight of the protectionist establishment, then, as now, rampant within the mercantile state. The best that may be hoped for is that measures are taken over time to mitigate the worst effect of mercantile political economy on a case by case basis.

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6 Comments:

Blogger Inspector Clouseau said...

I strongly suspect that neither political party really knows what to do regarding the economy, nor do the experts, although they have opinions and theories. (If you want to really check out their level of confidence, ask them to guarantee the stated results of their anticipated policies, and then require them to put up their family assets resulting in forfeiture if they are wrong.) The problem is simply too large, complex, and interconnected with economies of other nations, over which the US has no control.
To fix most things in the universe, you have to get them to “sit still” at least for a short period of time, and suspend those outside factors bearing on the problem. This is a dynamic situation. If we as a society actually knew what worked, and could establish a cause and effect relationship with any certainty, we would have done it by now. Don’t you think?

5:22 p.m.  
Blogger Gavin Kennedy said...

Thanks for your comment.

History teaches us to an extent what doesn't work if the experiences are repeated over and over and lead to similar outcomes.

That is the case with mercantile political economy. What is now happening (China, India, Brazil, and other to follow) Shows signs of repeating the past.

Hostility from competition among different countries, jealousy of trade, seeking blocking alliances, ramping up the pressure and rhetoric, and engaging in threats. We've been before and there is a long list of wars to show for it.

Pragmatic steps are preferred to 'grand plans'.

That was Adam Smith's proposal.

9:45 p.m.  
Blogger Peter T said...

If pragmatic steps are to be preferred, then mercantilism has to count among the options. Free trade is a theoretical good under a highly restrictive and narrow set of assumptions. It sometimes pays off - although the social and internal economic consequences seem to require a lot of offsetting action. People in the 17th and 18th centuries were not fools - if they followed mercantilism it was because it worked for them. When the times changed, policy changed.

btw, bit hard to ascribe war to mercantilism - a more plausible case would put it the other way round. And a bit hard to ignore the threat of war if you are a policymaker.

12:57 a.m.  
Blogger Gavin Kennedy said...

Peter

When you say that 'people.... were not fools', you pass over the real possibility that people choose options and sometimes choose the wrong ones. And if the key players are absolute monarchs, advised by people who are plain wrong, the choice is not some philosophical debate that surveys every option. People have interests and these can conflict with alternatives that are dismissed. Monarchs can be fed fears that re unjustified - that is the problem with 'jealousy of trade' and a desire to avert illusions of threats. Mutual responses can (and did) lead to wars.

Mercantile political economy did work for its advocates and beneficiaries - it reduced competition, it diverted capital into its consequences, as discussed by Smith, that may have had better uses elsewhere. It raised prices, reducing outlets for alternative spending.

Wars were calamitous events for those in and near the battlefields (destruction of cities, rapine, laying waste farmland and stock). The 18th century was well supplied with wars - war expenditures were high from Marlborough to Wellington. Whether war or the fear of war was a result or the cause of mercantile political economy is difficult to entangle.

There are gainers and losers from mercantile political economy and its consequences, and from most other social dynamics. Smith's point was that changing course was an option in removing protection - over time and allowing the necessary adjustments to be made - though some tariffs would likely remain because the State had no other sources of income (there was no income tax until 1800 - but by then war expenditures and borrowing were at their height).

Pragmatic responses would be of little cost - tariffs on Irish cattle if abolished would benefit Irish trade at little cost to British cattle farmers; slackening the Navigation Acts would assist the American colonists and lower UK import prices of colonial produce.

Each mercantile intervention had specific and local reasons, the advocates of which were organised and vocal. The wider interests of the community were less vocal and thereby unheard (lobbyists for a case are always more influential than the generalists - even today).

If a country's political rhetoric is loud and threatening ('Beware the Threat of China, etc' it elicits the counter response of 'Beware the threat of America'). Domestic politicians are under pressure to respond to domestic rhetoric, if only to curb their opponents. Cycles of rhetoric and 'incidents' add to the clamour. War drums are louder than cool headed thinking.

9:20 a.m.  
Blogger Peter T said...

Gavin

You are arguing from theory. Why not look at the actualities? War was a given (and often politically popular) activity of the state. European monarchical absolutism was a response to the inability of the state to overcome vested interests entrenched in courts and estates. In largely non-cash economies, the key to state effectiveness was maintenance of a solid cash-flow, which only a trade surplus could provide.

The most profitable sectors of European trade were the long-distance trades (Turkey, India and China) where force was the key to profit, and West Indies sugar, which rested on the slave trade.

The gentry and merchants of England often complained about specific mercantilist practices, but they were keen advocates of the system as a whole. Why not? It was their state. They gradually became convinced of the merits of free trade after they had cornered the market.

You cannot tout the virtues of self-interest and then complain when people identify and follow their interests at the expense of foreigners, the non-voting poor etc.

This is not to advocate war, but to point out that any single policy has a wider context, and people have multiple aims. If the British political classes of the C17 and 18 judged that free trade was, overall, not to their benefit, then you have to ask why, as rational people, they did so.

12:16 p.m.  
Blogger Gavin Kennedy said...

Peter
I am not clear where you think that self-interest is the sole foundation of what becomes economic activity. The economy is not isolated from all other motives for behaviour. War is 'popular' among those who are distant from the experience of it. The mass destruction from the '30 years' war was not popular with the relatives of the 6 million dead, many of whom died for a religious dispute and the associated dynastic consequences to European monarchies. To which can be added the millions of victims of rape. Scotland suffered on a much smaller scale in the aftermath of the Jacobite rising 1745-6 from slaughter and rapine, still rankling in domestic politics today.

The early monarchial states were the absolute property of the monarch, who took 'advice' from lower gentry and merchants at his pleasure. If a foreign country is portrayed as an enemy in trade, it feeds the 'jealousy of trade', which leads to violence. The immediate gainers are some, not all, traders - consumers are not represented in these matters, nor other merchants. The 'ear of the king' can be accessed via intermediaries, for a bribe; it was not a transparent process; bishops could influence it on sectarian religious grounds, conspiracy theories grow on imagined fears of 'alliances' between distant parties in dynastic squabbles - 'strike while they are divided', etc.

Mercantile political economy thrived on such suspicions. That it dominated for so long was partly caused by no general criticism of it - Steuart wrote such a favourable mercantile treatise in 1767 - nine years before Smith's Wealth Of Nations, and List in Germany combined criticism of Smith's anti-mercantile line in 1841, feeding the stirring Germanic nationalism of that time.

Because a false idea persists it does not legitimise it. My general point is that mercantile political economy did not go away; it persists in national politics today, even among those nominally critical of it (the USA, EU).

Gavin

7:28 a.m.  

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