The Return of Mercantilism

Mercantilist trade policies have returned in a big, big way.

Dani Rodrik:

The liberal model views the state as necessarily predatory and the private sector as inherently rent-seeking. So it advocates a strict separation between the state and private business. Mercantilism, by contrast, offers a corporatist vision in which the state and private business are allies and cooperate in pursuit of common objectives, such as domestic economic growth or national power.

The mercantilist model can be derided as state capitalism or cronyism. But when it works, as it has so often in Asia, the model’s “government-business collaboration” or “pro-business state” quickly garners heavy praise. Lagging economies have not failed to notice that mercantilism can be their friend. Even in Britain, classical liberalism arrived only in the mid-nineteenth century – that is, after the country had become the world’s dominant industrial power.

A second difference between the two models lies in whether consumer or producer interests are privileged. For liberals, consumers are king. The ultimate objective of economic policy is to increase households’ consumption potential, which requires giving them unhindered access to the cheapest-possible goods and services.

Mercantilists, by contrast, emphasize the productive side of the economy. For them, a sound economy requires a sound production structure. And consumption needs to be underpinned by high employment at adequate wages.

These different models have predictable implications for international economic policies. The logic of the liberal approach is that the economic benefits of trade arise from imports: the cheaper the imports, the better, even if the result is a trade deficit. Mercantilists, however, view trade as a means of supporting domestic production and employment, and prefer to spur exports rather than imports.

Today’s China is the leading bearer of the mercantilist torch, though Chinese leaders would never admit it  – too much opprobrium still attaches to the term.

I have three things to add.

First, states around the world including in the West, and especially America, have massively adopted corporatist domestic policies, even while spouting the rhetoric of free trade and economic liberalism publicly. One only has to look at the growth trend in American Federal spending to see that America has drifted further and further and further away from its free market rhetoric, and toward a centrally planned economy.

Second, the key difference between a free market economy, and a corporatist command economy is the misallocation of capital by the central planning process. While mercantile economies can be hugely productive, the historic tendency in the long run has been toward the command economies — which allocate capital based on the preferences of the central planner — being out-innovated and out-grown by the dynamic free market economies, which allocate capital based on the spending preferences of consumers in the wider economy.

Third, these two facts taken together mean that the inherent long-term advantage of the free market system — and by implication, of the United States over the BRICs — has to some degree been eradicated. This means that the competition is now over who can run the most successful corporatist-mercantilist system. The BRIC nations, particularly China, are committed to domestic production and employment, to domestic supply chains and domestic resource strength. America continues to largely ignore such factors, and allow its productive base to emigrate to other nations. And the production factor in which America still has some significant advantage — design, innovation, and inventions — has been eroded by the fact that the BRIC nations can easily appropriate American designs and innovations, because these designs are now being manufactured predominantly outside of America, and because of (American) communication technologies like the internet. This is the worst of both worlds for America. All of the disadvantages of mercantilism — the rent-seeking corporate-industrial complex, the misallocation of capital through central planning, the fragility of a centralised system — without the advantage of a strong domestic productive base.

80 thoughts on “The Return of Mercantilism

    • “…we are moving toward a society in which everything is up for sale.” It is a world in which “the logic of buying and selling no longer applies to material goods alone,” but “increasingly governs the whole of life.” This includes both citizenship and labor rights.’

      Welcome to the Jungle.

      • http://en.wikipedia.org/wiki/Michał_Kalecki

        Kalecki wrote in 1943:

        The rate of interest or income tax [might be] reduced in a slump but not
        increased in the subsequent boom. In this case the boom will last
        longer, but it must end in a new slump: one reduction in the rate of
        interest or income tax does not, of course, eliminate the forces which
        cause cyclical fluctuations in a capitalist economy. In the new slump it
        will be necessary to reduce the rate of interest or income tax again
        and so on. Thus in the not too remote future, the rate of interest would
        have to be negative and income tax would have to be replaced by an
        income subsidy. The same would arise if it were attempted to maintain
        full employment by stimulating private investment: the rate of interest
        and income tax would have to be reduced continuously.”

        Can you imagine China adopting Bitcoin? No. America? Maybe

        • Nice quote. Thanks.

          I think we have a world now that is saturated in Gizmos. I am still using Windows XP. It works. I use an old PC. with an Intel Chip. It works. Old ithingmajiggy. It works. Flat screen TV DVD etc etc.

          I doubt if any new inventions other than designer drugs to help health problems will make the world a richer place. Food production using innovations is at its limits (I think gene tech is VERY wrong due to fragility)

          As a result we’ll see increasing cannibalisation of production, and we’ll have a world with very cheap long run productio of commoditised goods. This is the most efficient model. Companies won’t make huge profits due to Super profits tax, which is used to subsidise the poor.

          So Mercantilism will be the model the WORLD adopts, eventually labour will be free to migrate to industrial centres of the world (e.g. China), and they will probably use sail boats and horse drawn vehicles/electric trucks to distribute world wide, at the lowest possible cost.

  1. APATHETIC COWARDICE COMBINED WITH INTELLECTUAL SLACK PRODUCED A TEMPORARY BACKWARDATION INTO A PARALLEL UNIVERSE BECAUSE OF THE MIT MODELS

  2. THE individual who actually wrote that article (a NYTs best-seller, by the way) said to “be wary” of the people who produce (for profit, presumably) the “Diagnostic and Statistical Manual of Mental Disorders”

      • I studied Psychology as a hobby. The diversity of human emotions and idiosyncracies, is an important evolutionary tool. Bipolar is a way of resting the human body during low times then enabling extraordinary bursts of creative energy, violence etc. Constant depression is useful for a hibernating period. In ancient times people with schizophrenia were spirit men/women and revered.

        These meds that big pharma peddles is a way of people being able to cope with the 9-5, 5 day week business model. Their body just does not naturally fit with the mechanical system.

        No wonder we are seeing people go off the rails in the USA. The human body is being pushed to its limits and is releasing energy. Throw in violent movies games etc and this is a dangerous mix. The human mind think and therefore executes that energy through the body.

        The Banking lobby and Pharmaceutical lobby have the lawmakers by the balls. That is insane.

        • Buddy – agree, it’s insane (no pun intended) how much pressure people are under. Man was not meant to live this way.

  3. Intellectualism distracts people from the truth of the matter. It’s one system where each player has advantages/disadvantages. The elite in each country parlay their advantages in return for a slice of the global booty [labor-value earned].

    The U.S. has technology, the best university system, the dollar, and 5000+ nuclear weapons/global military empire. Japan/Germany took the high road and went for the quality markets. The Chinese have cheap labor by the hundred of millions. Great Britain has the BoE that still wants to play with the big boys but has little leverage left, so on and so forth…

    So, you hire the smartest people in the world and you have them figure out the most efficient way to steal money from everybody else, and there you have your economic system.

    • Predatory/prey when you want to steal other countries’ resources. Parasitism on your own country’s people, a slow bleed which doesn’t kill the host, but keeps you fat and happy. Those directly under the elite, who protect and work in the elite establishments, who want the status quo to continue because their very life depends on it, benefit from mutualism, as do the people on welfare and food stamps (keeps them from rising up and disturbing the elite).

      A controlled and deliberate bloodsucking in order to get something for nothing.

  4. Pingback: The Return of Mercantilism | My Blog

  5. Uncommon Knowledge at the Hoover Institution

    “Many people see that it cannot go on like this. I was afraid that those big States would collapse, so I tried to show a way how to decentralise so those States can survive”

    Since 1989, H.S.H. Prince Hans-Adam II has reigned in Liechtenstein. Comprising 62 square miles nestled between Austria and Switzerland with a population of about 35,000, Liechtenstein is one of the world’s smallest nations—but has the highest per capita GDP in the world. The head of a family that traces its history back more than 900 years, to the beginning of the second millennium, Prince Hans-Adam is the author of a new book, The State in the Third Millennium.

    • Thanks. I appreciate the insight from a BLUE BLOOD.

      They were the ones with family heritage smart and powerful enough to set themselves up for life.

    • Damn that’s why I like Benevolent Monarchs. Stability with a sense of service, and emphasis on responsibility to the nation at a ‘village” level.

      Hans Adam 2nd makes a great point that the Welfare State has to come at the village level, so that the community cares, and welfare recipients have a village conscious as opposed to parasitism of the Central Government (Not in my backyard mentality.

      Don, you’ll will enjoy this. Hans considers himself a Tea Party proponent.

        • I don’t know if you had a chance to watch, but the people have a right to vote down ANY law, via a petition passed by Parliament, before the Prince gives Royal assent.

          I think the People have ultimate say.

        • Like it is said, get more than two adults together in the same space, and all hell breaks loose.

          And,….if you need laws, then somebody has already been a steal’in. Laws protect the thieves, not the other way around!

    • OK, I think the Book written by H.S.H Prince Hans Herman the 2nd is a model that needs to be integrated into a New Confederacy State. If Liechtenstein did not have tight immigration standards I would move there ( I see Australia becoming more Centralised every day, instead of at the Town level, where a sense of community prevents welfare fraud, and crony capitalism ). I think it is a beacon of light for world government standards.

      Liechtenstein dating sites will be hot property as the world’s Libertarians seek a Passport.

  6. Aziz,
    While it is abstractly useful to distinguish between “liberal” (separation of firm and state) and “mercantilist” (crony capitalism), do you really believe that in “free market” USA, there is separation between firm and state?

    In the real world, the international trade policy (and much else) is always set by powerful domestic interests, which in the US are the big financial institutions, multinationals etc.

    In what respect is the US “free market” (when govt. spending accounts is 40% of GDP and taxes about 35%) while the BRICS are “mercantilist” (govt. spending in India is 17% of GDP and taxes 12%)? Of course govt. spending is only one measure and you can look at others. But spending/taxing 40% of GDP can distort a whole lot of prices in a “free market”.

    In the real world the borders of a “free market” are always decided in a political framework. So this “liberal” and “mercantilist” distinction is quite problematical.

    • While it is abstractly useful to distinguish between “liberal” (separation of firm and state) and “mercantilist” (crony capitalism), do you really believe that in “free market” USA, there is separation between firm and state?

      That’s exactly what I was arguing….

      • Perhaps I missed your point.

        But later in the post you contrast “dynamic free market” (in the past) of the US with “mercantilist” policies of BRICS.

        But when was the US a “dynamic free market”? After the Great Depression, all the western capitalist economiest became state capitalist, with huge govt. spending to GDP ratios.

        Was it pre-WW2? As Ha-Joon-Chang has demonstrated in “Kicking away the ladder”, “Between the Civil War and the Second World War, the USA was literally the most heavily protected economy in the world”.

        Or as Paul Bairoch, the economic historian, puts it, the US was “the mother country and bastion of modern protectionism” (Bairoch, (1993) Economics and World History Chicago: University of Chicago Press).

        My point was in the real world, nobody is for “free markets” unless they can profit from the rules.

  7. “One only has to look at the growth trend in American Federal spending to see that America has drifted further and further and further away from its free market rhetoric, and toward a centrally planned economy.”

    Drifted? The US plunged headlong into it in 1913 with the Federal Reserve Act. It has taken the people 100 years to realize that they are slaves.

  8. The star genius running Double Line, the billionaire with a degree in mathematics from Yale said a few mornings ago that analysts should watch out for snakes.

    http://blogs.barrons.com/incomeinvesting/2013/01/08/doublelines-gundlach-watch-out-for-washington-snakes/

    I would argue the politicians are all essentially trying to figure this crazy shit out, and that the actual types to have concern for are individuals like Paul Krugman. I wonder, do you think Gundlach takes PK seriously? While PK whines about why he does or does not want to be the Treasury boss, Gundlach responds in a conference call to a similar type of suggestion by saying something along the lines of “No, I wouldn’t want to be Treasury boss I’m too busy managing peoples money”.

    Point is, Krugman is a noob.

    What I understand is probably less obvious is that central bankers are basically modern day popes bowing down unthinkingly to the alter of econometrics – basically just totally complex yet amazingly useless mathematical models. I could be wrong, of course, but I genuinely think they really believe they’re smart. People like Paul Krugman, I don’t think he’s evil, just extremely arrogant and not very able to critically think things through despite his mild ability to work with numbers.

    PK just posted to the NYTs:

    “we need a strategy to deal with the crazies if they really do prove irredeemably crazy, which seems all too possible”

    It’s like a sick man who believes he’s on the right side of history because a mechanistic way of thinking has blinded him to reality. Even love can sometimes blind us, but this form of blindness – that which PK is exhibiting – can be far more extreme I think.

    http://krugman.blogs.nytimes.com/

  9. This explains the entire subject-matter:

    http://en.wikipedia.org/wiki/Euler%27s_formula

    “Euler’s formula, named after Leonhard Euler, is a mathematical formula in complex analysis that establishes the deep relationship between the trigonometric functions and the complex exponential function. Euler’s formula states that, for any real number x,

    e^{ix} = \cos x + i\sin x \

    where e is the base of the natural logarithm, i is the imaginary unit, and cos and sin are the trigonometric functions cosine and sine respectively, with the argument x given in radians. This complex exponential function is sometimes denoted cis(x) (“cosine plus i sine”). The formula is still valid if x is a complex number, and so some authors refer to the more general complex version as Euler’s formula.[1]

    Euler’s formula is ubiquitous in mathematics, physics, and engineering. The physicist Richard Feynman called the equation “our jewel” and “one of the most remarkable, almost astounding, formulas in all of mathematics.”[2]”

    • FEYNMAN WTF.

      DADS DYING OF CANCER I LOVE FEYNMAN I SHOWED HIM FYNMAN TALKING ABOUT NATURE/or should I say “Science” … and my Dad (business owner who’s slogged it his whole life to produce a great chance for myself in partnership with my Mother, but who’s not at all wealthy and is used to manual labour – he owned restaurants – basically just said to me – yeah that’s cool, but he is just saying a lot of obvious stuff with a lot of crazy type of talking, LOL. Maybe Dad was right…Still Like Feynman, though ;-)

    • I have no doubt that Feynman had good justification, in whatever he was working on, for calling this a jewel. But how does “this explain the entire subject matter” under discussion here?

        • Imp old friend, I’m afraid I’m too slow to figure you out (“know” you). When are you pulling my leg? When are you in the Age of Aquarius with or without cannabis? I know just enough of Feynman’s reputation to accept his views on higher (MUCH higher!) math. I know just enough about the talent and work ethic required to be a physician to view your work with respect and sometimes awe*. So just tell me what you think that I should think — then I will truly “know just enough to be dangerous”!

          * (1) My mathematical physicist brother, a PhD among many and exceptional PhDs, often spoke of his amazement at the acumen and skills of his Johns Hopkins MD colleagues. Having said that, I can add that also he noted outspoken disdain that JH Medical School physicians aimed at inferior medicine practiced by some clinicians. So, Aziz and others, carry on your striving for excellence!

          (2) 25 years ago our three-year-old grandson was diagnosed with a leukemia so rare that there was no established treatment protocol and no record of any survivors. To make a long story — over several years, hospitals, states and medical specialties — short, he graduated from West point and is a highly successful army officer. The story is punctuated by three doctors who each beat enormous odds — a young Korean-American just out of Sloan-Kettering, a pediatric surgeon who saved vital organs from post-chemotherapy fungus, and a staff doctor at M.D. Anderson who browbeat authorities into approving an untested protocol for killing the fungus.

    • Too deep for me. I will stick to 10-(6-2)=4 where 4 equals your income from combining your capital with labour (Hiring people is not bad) and deducting it from Sales of a useful object/service. That income is your labour value.

      Economics is fundamentally bookkeeping at the grass roots level. The bigger the business the further the brains are from the demand for goods and services.

      In simple terms : MIS-ALLOCATION!

  10. DO NOT FORGET. EVERYONE USED TO SERIOUSLY THINK THE WORLD WAS FLAT.
    I’m telling you, when people en masse actually are freed, they are fully going to be shocked because they have no idea what it is to be free, yet.

    • An ancient Greek proved the world was spherical* and measured its diameter with surprising accuracy. But the warring Greek cities, Persians, Egyptians, Romans, etc. had no incentive to expand this knowledge or even preserve it; Columbus, Copernicus, et al, re-“discovered” the true geometry/geography and got the credit. It’s like the Spanish conquistador’s “discovery” of the Pacific Ocean, no doubt a good LOL for the Polynesians, Japanese, Chinese, etc. when they got the word. Lessons here include: (a) individuals lead, and (b) institutions can obstruct.** However, Bell Labs, Manhattan Project, NASA, etc. show that some institutionalizing is necessary. But I think your implied generalization is correct — free people progress faster.

      * Sailors and port-workers had long noticed that the top of an approaching mast appears sooner than the hull.

      ** The legendary Vatican coercion of Galileo to recant his published proof of a heliocentric (not geocentric) solar system punctuates a lot of Might makes “Right” (scientific as well as moral) human history — including the current Washington regime’s successfully propagandizing voters to advance discredited socialism.

  11. LOL

    “PANETTA SAYS NO IDEA `WHAT THE HELL IS GOING TO HAPPEN’ ON CUTS”

    see the politicians are basically just chillers surfing the wave of free love, but being frantically advised by hysterical model heads totally consumed by mathematics

    BIDEN IS FAMOUS FOR BEING A CHILLER

  12. If I’m right, and I may very well be absolutely incorrect , I can’t really say for sure, this means that the issue of nuclear weapons might start to cool down as peace and stability slowly seeps back into the Middle East…

  13. “modern Singapore, Lee Kuan Yew” – if States were rolling over into the private sphere, or to be more precise, if States were peacefully rescinding the “public property” sector of the economy over a gradual time-frame as I suspect MIGHT be occuring —

    then it could quite well be the case that Israel becomes a sort of Singapore for the Middle East with presumably quite meaningful benefits to it neighbours

  14. Pingback: Guest Post: The Return of Mercantilism | PoorStandards

  15. Some writers over at ZH are commenting on this, saying Lincoln blah blah…
    They didn’t even have mobile phones, then. Communication is a pretty big part of commerce, in light of the fact that prices are nothing but signals (to be communicated) for voluntary co-operation serving the parties concerned, and jee wiz I bet you way more people communicate way more now in a way bigger market than back then.

    Plus Lincoln was a war nut; the Peaceful politicians of his time (http://en.wikipedia.org/wiki/Copperheads_(politics) had clearly adopted different points of view to how best manage conflict resolution – and, by the way, I should add: no war is civil. The phrase ‘civil war’ is ridiculous, no matter which State you’re talking about. All wars are barbaric. Saying a war is civil is like saying you can screw for virginity – a blatantly self evident rubbish point.

    Anyway, Lincoln is more myth than anything else by now:

    Lincoln Unmasked: What You’re Not Supposed to Know About Dishonest Abe

    http://mises.org/misesreview_detail.aspx?control=312

    You can argue about if it is for the better or worse, but for sure nowadays politicians and everyone in general, really, can operate in a far more nuanced way, or at least in a more flexible manner, not least because of the information revolution.

    Our good friend John Locke vsd the Mercantilists and Inflationists, though!

    http://mises.org/daily/4702

  16. If this does not make clear what is now at stake. Well, I do not know what will! The

    Elliott Management Loses Its Argentinian Warship On UN Orders

    http://www.valuewalk.com/2012/12/elliott-management-loses-its-argentinian-warship-on-un-orders/

    “As long as I’m president, you can take our frigate, but nobody is going to take the liberty, the sovereignty and dignity of this nation” – says the crazy lady signing up ‘her citizens’ onto debt they never voluntarily agreed to. The (political) of the “nation” IS ALIEN. A “nation” can ever be one person or group at anyone point in time. This much should be very obvious.

  17. The (political) idea of a “nation” IS ALIEN to common sense. A “nation” can only ever be one person or group at anyone point in time. This much should be very obvious. To deny this blindingly obvious fact is to give yourself into servitude in the name of a a stupid slogan used by an idiot politician so she can abandon on responsibility and get in the way of the rule of law

  18. global attention is beginning to focus on “E1″ – the plot of land. this needs to be auctioned off to the highest bidder

  19. For example, Pinker writes that “early states were more like protection rackets, in which powerful Mafiosi extorted resources from the locals and offered them safety from hostile neighbors and from each other” but does not give good reason why we should view contemporary states much differently. In fact, one can even argue (as individualist anarchists like Lysander Spooner have done) that modern democratic states do not only extort protection money but in turn use this against the victim in the form of “regulation.”

    http://againstpolitics.com/2012/09/12/the-better-angels-of-our-nature/

  20. No where on Earth does this thinking equate with reality more than it does vis a vis the politics of “E1″

    If the cost of rebellion is high, if the expected (“risk-adjusted”) value of its success is not very much higher, and if the very possibility of collective action against the sovereign is problematical (at least in normal peacetime conditions), then two plausible conjectures suggest themselves. The equilibrium strategy of the sovereign will be to use its discretionary power to satisfy its preferences, perhaps by exploiting all its subjects in the service of some holistic end, perhaps by exploiting some of them to benefit others. The equilibrium strategy of the subjects will be, not to resist, but to obey, adjust, and profit from the opportunities for parasitic conduct that coalition forming with the sovereign at the expense of the rest of society may offer.

  21. Pingback: Economists vs the Public « azizonomics

  22. and has maintained a stable overall GDP growth rate, a moderate unemployment rate, and high levels of research and capital investment . It has been the world’s largest national economy (not including colonial empires) since at least the 1890s .

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