Tuesday, September 16, 2008


For two and a half centuries beginning in 1500, the Western world was mercantilist. That is, the prevailing economic system emphasized production over consumption, exports over imports, and the amassing of national treasure in the form of gold and silver.

Then along came Adam Smith and The Wealth of Nations in 1776. Followed by Ricardo, Hume, and other free marketers, Smith preached the virtues of consumption, efficiency, and freer -- in effect balanced -- trade. Progressive “free trade” became the trump card over backward mercantilism.

Perfectly free trade, of course, depends on a set of assumptions rarely if ever seen in the real world. Nonetheless, the powerful logic of greater economic freedom and efficiency helped to raise living standards among industrial countries over the past two and half centuries. Mercantilism came to be debunked as a benighted relic of a by-gone era, both unfashionable and thoroughly discredited.

Today’s economists see “protectionism” as the enemy of free trade. Like obscenity, protectionism is immediately recognizable to the individual observer. However, reasonable people rarely are in complete agreement on what they are looking at. I see predatory pricing and trade-distorting subsidies as protectionist; others may not. I see government ownership and control over key sectors of commerce and finance as protectionist; others may not.

As Robert Samuelson posited in a notable Newsweek column more than a year ago:

It is not "protectionist" (I am a longstanding free trader) to complain about policies that are predatory; China's are just that. The logic of free trade is that comparative advantage ultimately benefits everyone. Countries specialize in what they do best. Production and living standards rise. But the logic does not allow for one country's trade systematically to depress its trading partners' production and employment. Down that path lies resentment and political backlash.

So, after all this time a funny thing has happened. Mercantilism refuses to die in Japan, China, and other emerging economies. What Samuelson was complaining about is simply mercantilism by another name. Not unlike the French in the 16th, 17th and 18th Centuries, today’s “neo-mercantilists” promote national power by protecting their industries, promoting one-way trade, and piling up the hard currency assets far beyond the level required to finance needed to finance their imports.

Mercantilism and free trade are mortal enemies and have been for 500 years. Mercantilism subverts free markets, distorts competition and promotes the interests of the state over those of the people. Dedicated “free traders” should confront and contain mercantilism wherever it appears. If they turn a blind eye to the intrusions of mercantilist government policies in their own market, they are simply appeasing predators and marching backwards to the 17th Century.

Abraham Lincoln argued that a nation could not long endure half slave and half free. My friend Clyde Prestowitz of the Economic Strategy Institute argues that the world cannot endure half mercantilist and half free trade. Both are right.

Charles Blum

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