Mercantilism Reconsidered
JUL 10, 2009
This view reflects a venerable tradition that goes back to Adam Smith and
continues a proud existence in today’s economics textbooks. It is also the
dominant perspective of governance in the United States, Britain, and other
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Mercantilism Reconsidered by Dani Rodrik - Project Syndicate 07/11/2016, 13*25
On the other side are what we may call corporatists or neo-mercantilists, who view
an alliance between government and business as critical to good economic
performance and social harmony. In this model, the economy needs a state that
eagerly lends an ear to business, and, when necessary, greases the wheels of
commerce by providing incentives, subsidies, and other discretionary benefits.
Because investment and job creation ensure economic prosperity, the objective of
government policy should be to make producers happy. Rigid rules and distant
policymakers merely suffocate the animal spirits of the business class.
This view reflects an even older tradition that goes back to the mercantilist
practices of the seventeenth century. Mercantilists believed in an active economic
role for the state – to promote exports, discourage finished imports, and establish
trade monopolies that would enrich business and the crown alike. This idea
survives today in the practices of Asian export superpowers (most notably China).
Adam Smith and his followers decisively won the intellectual battle between these
two models of capitalism. But the facts on the ground tell a more ambiguous story.
The growth champions of the past few decades – Japan in the 1950’s and 1960’s,
South Korea from the 1960’s to the 1980’s, and China since the early 1980’s –
have all had activist governments collaborating closely with large business. All
aggressively promoted investment and exports while discouraging (or remaining
agnostic about) imports. China’s pursuit of a high-saving, large-trade-surplus
economy in recent years embodies mercantilist teachings.
Early mercantilism deserves a rethink too. It is doubtful that the great expansion
of intercontinental trade in the sixteenth and seventeenth centuries would have
been possible without the incentives that states provided, such as monopoly
charters. As many economic historians argue, the trade networks and profits that
mercantilism provided for Britain may have been critical in launching the
country’s industrial revolution around the middle of the eighteenth century.
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Mercantilism Reconsidered by Dani Rodrik - Project Syndicate 07/11/2016, 13*25
None of this is to idealize mercantilist practices, whose harmful effects are easy to
see. Governments can too easily end up in the pockets of business, resulting in
cronyism and rent-seeking instead of economic growth.
Indeed, the inability to see the advantages of close state-business relations is the
blind spot of modern economic liberalism. Just look at how the search for the
causes of the financial crisis has played out in the US. Current conventional
wisdom places the blame squarely on the close ties that developed between
policymakers and the financial industry in recent decades. For textbook liberals,
the state should have kept its distance, acting purely as Platonic guardians of
consumer sovereignty.
Learn more
But the problem is not that government listened too much to Wall Street; rather,
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Mercantilism Reconsidered by Dani Rodrik - Project Syndicate 07/11/2016, 13*25
the problem is that it didn’t listen enough to Main Street, where the real producers
and innovators were. That is how untested economic theories about efficient
markets and self-regulation could substitute for common sense, enabling financial
interests to gain hegemony, while leaving everyone else, including governments,
to pick up the pieces.
Read more from our "The Clash of the Capitalisms" Focal Point.
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