The Resurgence of Mercantilism

On the left and the right, there's been a resurgence of a long-ago discredited economy theory.

I do not get Donald Trump’s (or anyone else’s like Bernie Sanders) argument for protectionism/mercantilism. I do not understand why trade between nations is viewed a fundamentally different than trade between states in the U.S. or even between individuals and firms. To quote Don Boudreaux, I have been running a trade deficit with my grocery store ever since I started shopping for groceries. I always buy from them, but they in turn never buy anything from me. Clearly using the “logic” of these neo-mercantilists I must clearly be worse off with this arrangement. In fact, I would be so much better off if I would stop going to the grocery store and instead produce all the stuff I buy at the grocery store myself. Let me see, I’ll need some cows, some pigs. I’ll have to grow wheat and corn, I’ll need quite a bit more land too….oh yes, this will make me so much more better off. And I can spend all of my time doing this, so I’d better quit my job too.

Some might say, but it is different when it is another country. I’m still waiting for a good explanation of that one. How is it different? They aren’t Americans? So? Why should that matter? That Americans might lose their job? Okay. So what you are saying is that we should keep these people employed at a job that could be done with less cost. How is that different than welfare? It is no less a transfer of some of my income to those workers than if it were a literal cash transfer. Is that it? Are Trump and the neo-mercantilists espousing nothing more than workfare? Keeping people employed at a job that is actually more costly? That is a recipe for economic prosperity? I don’t think so.

What these neo-mercantilist are missing is that we are far, far better off today because of specialization. Specialization allows workers to be more productive than if they were a jack-of-all-trades (and master of none). Competition drives the payments to the factors of production up to their marginal revenue product. And that is determined in part by the workers productivity. Further, international trade encourages additional specialization. If one country’s workers are good at doing X and another country’s workers good at Y, each country specializing in X (or Y) and then trading can make both countries better off. That is what we do every day in the economy here inside the U.S. This what we do in each state and between each state. Why should it be different between countries?

Or to flip it around. Why is it not a big deal if Montana is running a trade deficit with say, California? Why is that not a problem? And if trade barriers are good between countries, why not erect them between states? Why not change the laws so that we can have trade barriers between states. Each state will see its employment levels explode right?

My guess is we all know that such a policy wouldn’t work out. Having less trade in general is not a recipe for having more trade. Donald Trump and the neo-mercantilists favor trade barriers. Barriers. That is they are literally arguing for less trade not more. Less trade is not a route to prosperity and thinking like that puts you in the same category as Randy Marsh in terms of understanding the economy.

Yes, we buy more stuff from Mexico than they buy from us. To Donald Trump and the neo-mercantilists this is bad. My guess is they see that we are spending more money than were are receiving as a bad thing. But we have to go back to the relationship between me and my grocery store. Yes, I am running a trade deficit with my local Albertsons (and Trader Joe’s too) but I am strictly better off because of this. I can walk into those stores and buy lots of stuff at low prices. And that is what Donald Trump and the neo-mercantilists appear to be missing. We are getting goods and services from these countries. We are getting goods and services we want otherwise we wouldn’t buy them. Free trade agreements also lower the prices of these goods and services we want. But somehow this is all bad.

FILED UNDER: Donald Trump, Economics and Business
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. michael reynolds says:

    Why can’t our politicians explain it this simply and elegantly?

    You can also look at history. Cities and city-states and peoples and nations that traded extensively, prospered. Look at the Mediterranean, cradle of western civilization, birthplace of more great city states and empires than you can easily count, and all of them exploiting the geography of the Med with its relative compactness and abundance of ports for trade.

    Or flip it and see what happens to places that lose their importance in trade and end up being archeological digs, or at best declining tourist curiosities like Venice.

    One of the essential ingredients in the success of the United States was that we had the incredible good luck to have the Missouri-Mississippi-Ohio river system, which allowed us to grow corn in Iowa and mine iron in Minnesota and cheaply and easily send it down the river to New Orleans and the world. (Best deal probably in all of history – 15 million in 1803 dollars for trillions of dollars worth of assets.)

    And again, flip it the other way. Why has Russia never become a wealthy nation? No ice free ports, rivers that don’t go anywhere particularly useful, and terribly long distances over hard-to-cross terrain make trade infinitely more difficult than for the US which has a multitude of excellent natural harbors on two oceans plus the Caribbean. By contrast, Germany has the Rhine, the Main, the Danube, the Ruhr and more, making trade within Germany and with the rest of Europe easy.

    The correlation between trade and wealth is unmistakable.

    Excellent piece, Mr. V.

  2. Michael Robinson says:

    Because Montana and California are subject to the same minimum federal environmental protection standards, health and safety standards, labor standards, housing standards, etc.

    The jobs that are going abroad are not going because those performing the jobs are more specialized or more efficient. Nobody is complaining about American jobs that have been lost to Germany.

    They are going abroad because the work is being done by underpaid people working in unsafe and unhealthy conditions for employers who are easily able to evade the unpriced externalities of their operations due to corrupt and ineffective regulatory structures.

    When “comparative advantage” becomes a synonym for “race to the bottom”, yes, expect a backlash.

  3. Jen says:

    I think a lot of Americans don’t have even a slight understanding of economics. They simply look at before and after. Before, the textile manufacturing jobs were here; after–they’ve gone overseas. Before, steel jobs were here; after, overseas.

    Trade is far more complex and dynamic than people care to spend the time or energy understanding.

    There is another angle to trade that is less acknowledged. I was watching one of Anthony Bourdain’s “Parts Unknown” episodes about Koln, Germany. Bourdain asked one of the interviewees–I think some local political type–why Koln had a reputation of being so open and welcoming to diversity. The casual, offhand answer was (I’m paraphrasing) “oh, it’s the river–we’ve developed because of trade. Trade brings in other cultures, and they become part of our growth.”

    Trade is immensely important, but that can only be truly appreciated when the benefits are evident. Right now they aren’t; people just see jobs moving overseas. And not just the hard labor ones, not anymore. Increasingly, the coding and software development jobs–the high paying ones–are going away too.

  4. Pch101 says:

    Trump’s trade complaints are an extension of his xenophobia. Sanders is more motivated by job creation and preservation. They aren’t really comparable.

    Sanders has the wrong solution but he raises a fair question. If you don’t have any money, then you have no advantage with either Albertson’s or Trader Joe’s because neither of them are charities and they won’t feed you for free.

    The US is able to maintain a massive trade deficit because it has much of the world’s GDP and the reserve currency. A smaller nation could not possibly do what the US is doing.

    There will come a point when the US won’t be able to continue to do it, either. That will be a difficult day for ordinary Americans, since all of those cheap imports won’t be so cheap if the dollar loses its dominance. To the extent that prosperity is measured by our ability to consume, we will be a lot less prosperous.

    It isn’t enough for a nation to consume; it must also produce. What the US needs to do is to innovate so that it has more goods and services to export, which would create jobs in the process. That’s a nice theory but it is difficult to implement in practice, as there aren’t many things that the US can do particularly better than anyone else and the IP that Americans are good at producing isn’t that valuable when it is easily stolen.

    Saying that you run a trade deficit with the supermarket isn’t really much of a solution when the underlying problem is being unable to pay for what you need at the supermarket.

  5. Mu says:

    Hey, it always works great in the Tom Clancy novels. No reason why that can’t work in real life.

  6. MBunge says:

    I don’t have the energy to have this argument again with people too blinkered to accept the obvious truth. Economic policy is not theology. There is not one answer that is always right. The policies that worked in the 18th century may not work in the 21st century, but neither may the policies of the 20th. Suggesting that such policies should change to reflect reality is about as common sense as one can get.

    Economies prospered before we bowed down to the graven image of free trade. Economies are prospering RIGHT NOW that don’t follow free trade dogma. And economies will prosper in the future when “free trade” then looks even more ridiculous than mercantilism does today.

    Don’t take my word for it. Just ask Paul Krugman.

    Mike

  7. Lit3Bolt says:

    It’s about taxes.

    It’s why “free trade” is bunk. Nothing is really free, the costs have just shifted elsewhere. The flight of corporations and capital from the US to some spit of land in the middle of Caribbean tells you all you need to know.

    Also, foreign markets still to this day protect themselves from US goods. US steel? Tariff. US transistors? Tariff. US made anything? Tariff tariff tariff.

    But in the name of “free trade” we spread our markets wide open! Cheap goods everywhere! None of them from US companies! And so US factories close and industry after industry fled US soil, because they couldn’t sell their goods aboard, and they couldn’t sell them at home, and yes, it was cheaper to build a factory in dictatorships where workers were “eager” to work for pennies instead of dollars in squalid conditions.

    Free trade means nothing without fair trade, and tax revenue to pay for the US Navy and US satellites and US Internet and quality US regulations which ensure there’s no antifreeze in your Two Buck Chuck.

    But sure, go ahead and clap with delight as every US corporation resettles overseas to evade taxes and health regulations, every wealthy person in the US renounces their citizenship, or that every US job slowly becomes automated and outsourced, and every country shamelessly steals our intellectual property. At least you’ll always have money to shop at the grocery store….right?

  8. grumpy realist says:

    Except that there are a few things that you leave out:

    1) National security. We could use the same logic to “outsource” all of our military hardware as well to the nation with the lowest cost–why don’t we do that? Heck, we could outsource all of our MILITARY outside this country, arms and the man together–why don’t we do that?

    2) Moving everything in the direction of cheapest cost will prove to be a false economy if your populace-without-jobs decides to have a revolution.

    3) Don’t be so enamored of the “oh if we pay any more than the absolute bottom of the economy it’s welfare” idea. Wage supports may be the one thing keeping the lumpenproletariat from invading your house and looting everything. Driving everything down to Chinese wages means the workers can only afford Chinese prices, Chinese level of environmental protection, and Chinese safety. You really want to take a chance on that?

    4) Ever heard the term “race to the bottom”?

  9. grumpy realist says:

    P.S. I notice that those who sneer at the insecurity of American workers losing their jobs to Chinese workers never have to worry about the security of their own. When you aren’t working in an economics think-tank with a steady job but in something that can get moved to Vietnam at the whim of the owner get back to us.

  10. Tyrell says:

    @michael reynolds: good point about the river system. This was a blessing that literally fell into the laps of our leaders and workers back in the early days. Think about it: Jefferson was so upset when Lewis and Clark returned to give him the bad news: no large east-west rivers.

  11. Slugger says:

    I think economic theory is too abstract and too glib. My last US made car was a 1980 Jeep Cherokee, and I and most Americans are better off due to imports, but not everybody. These large shifts in customer allegiance hurt somebody, and often the people who are hurt are the most vulnerable segments of the population. Image a town with one guy making a million a year and ten workers making fifty thou. As a result of opening trade barriers, the millionaire’s income increases to 1.5 million, and each small guys ‘ income drops to forty thou. Looking simply at the numbers that is a good net increase for the town. However, if you look at marginal utility or at human happiness/suffering the town is not better off. Economic theory treats people as fungible widgets, but in reality switching to a different enterprise or moving to a more dynamic part of the country comes with real human costs. In the US, income for middle class people has been stagnant while a tiny elite gets richer. Sadly, there are very few NFL starting quarterback slots available.
    Economic theory looks at dollars through a mathematical prism. It needs to account for human happiness and suffering from economic displacement. I sort of understand the Schumpeterian argument about the positive values of dismantling less efficient sectors, but I do think that every job has a human face and every closed plant has some tears with the hopes for a better future. I guess that’s what makes me of the left.

  12. Ben Wolf says:

    It’s not a big deal for Montana to run a trade deficit with California because the currency monopolist called the U.S. government makes large block grants to replenish the lost financial assets.

    Suggesting the deficit of a customer with Wal-Mart is equivalent to a trade deficit with Germany is asinine

    P.S.: Mercantilism was a policy of ensuring maximum generation of national wealth by balancing trade to support domestic wellbring. It was never anti-trade.

  13. Pch101 says:

    @Ben Wolf:

    Mercantilism was the belief that nations should run trade surpluses in order to preserve their currencies, which were then based upon gold and silver.

    It was essentially an argument in favor of colonialism and was a motivating factor for the age of exploration. Find foreign lands, colonize them and take their resources.

  14. Franklin says:

    I do not understand why trade between nations is viewed a fundamentally different than trade between states in the U.S. or even between individuals and firms.

    I do not understand why a post about trade between nations would totally ignore the points in Michael Robinson’s first sentence:

    Because Montana and California are subject to the same minimum federal environmental protection standards, health and safety standards, labor standards, housing standards, etc.

    Seriously, Verdon, are these complete non-issues to you? If so, why? Or were you not aware of them?

    Yes, trade is generally good. But you wouldn’t actually understand the issues by reading this piece by Mr. V.

  15. Ben Wolf says:

    @Pch101: Thst is incorrect. Mercantilism was wholistic, not trade-centered and emphasized subsidies to the poor for population and workforce growth, development of domestic industry and maximizing social wealth. It was already being supplanted by capitalism in the early modern period and was eliminated follwing the work of Ricardo and Malthus.

  16. Pch101 says:

    Mercantilism, economic theory and practice common in Europe from the 16th to the 18th century that promoted governmental regulation of a nation’s economy for the purpose of augmenting state power at the expense of rival national powers. It was the economic counterpart of political absolutism…

    …It was believed that trade balances must be “favourable,” meaning an excess of exports over imports. Colonial possessions should serve as markets for exports and as suppliers of raw materials to the mother country…

    …Human wants were to be minimized, especially for imported luxury goods, for they drained off precious foreign exchange.

    https://www.britannica.com/topic/mercantilism

  17. Ben Wolf says:

    Mercantilist countries were wary of running trade surpluses due to domestic inflationary pressures (see Eichengreen’s Golden Fetters.) Trade balance was the goal. It was thought better to err on the side of surpluses than deficits to avoid mass unemployment.

    Also, historians don’t reference encyclopedias because they’re considered inaccurate.

  18. JKB says:

    Unfortunately, the author here did not seek to consider what alternatives might solve the problems being blamed on free trade. And some of those alternatives is to roll back the business and licensing regulations in the US and free up out markets and enterprises so that innovators can create new businesses and jobs that utilizes the labor displaced by low and semi skill jobs moving to low-wage countries.

    Before it starts, I don’t mean doing away with all environmental and other regulations, but it is apparent the regime we have is strangling enterprises and the economy. Forced unionization, licensing cartels, overbearing business formation hurdles, cumbersome tax accounting requirements all inhibit those with business ideas from risking their life savings (capital) as trying to start a business is a good way to bleed your life savings into the hands of the local politicians and bureaucrats with nothing left to show for it when you run out. You can then throw in the dangers of having employees to your business, not to mention the increasingly government mandated cost of employing workers.

    Now, do we throw all the rules out? Well, we know that isn’t going to happen, but it is possible to look to reducing the cost of compliance, open up the laws and regulations to new, lower cost, innovative ways to achieve the original goals, etc. But government has no incentive as they just threaten businesses to comply with how the bureaucrats have mandated or die. More and more of the businesses are dying, either completely or pruning off their US operations. And fewer people are hopeful about opening new businesses in the face of the mass of interventionist government mandates.

    It’s conceivable that prying the strangling hand over government off the throat of enterprises and markets could provide enough breathing room that entrepreneurs and new businesses could not only revitalize the economy, but also change the attitude toward low-skill immigration as well as free trade.

    But such an action does not favor the office holder as socialism does and has fewer opportunities for graft, so I think it would take a larger throwing a larger bomb than Donald Trump into the Beltway to accomplish.

  19. Ben Wolf says:

    @Franklin: Monsieur Verdon is of the opinion that trillions sitting in the reserve accounts of foreign central banks can have no impact on domestic production and employment incentives. Say’s Law thinking.

  20. Pch101 says:

    The ordinary means therefore to increase our wealth and treasure is by Forraign Trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value. For suppose that when this Kingdom is plentifully served with the Cloth, Lead, Tin, Iron, Fish and other native commodities, we doe yearly export the overplus to forraign Countreys to the value of twenty-two hundred thousand pounds; by which means we are enabled beyond the Seas to buy and bring in forraign wares for our use and Consumptions, to the value of twenty hundred thousand pounds: By this order duly kept in our trading, we may rest assured that the kingdom shall be enriched yearly two hundred thousand pounds, which must be brought to us in so much Treasure; because that part of our stock which is not returned to us in wares must necessarily be brought home in treasure

    -Thomas Mun

    That’s mercantilism in a nutshell. Sorry, Ben, but you’re wrong again.

  21. Ben Wolf says:

    @Pch101: You are confusing mercantilism with bullionism and thereby confusing theory with practice. Stop using online sources, go to the library and see Grampp: The Liberal Elements in English Mercantilism.

    You cannot understand mercantilism without understaning the context of money, monetary theory and international central bank and trade arrangements of the period. I’ve already given you two references to study.

  22. Pch101 says:

    Stop using online sources

    Just because you don’t know how to perform basic research does not mean that everyone else should follow your example.

    Thomas Mun isn’t an “online source” He wrote about economics 400 years ago, and was a proponent of mercantilism. If we want to understand what the mercantilists were thinking, then we should refer to his work.

    You want to claim that we can’t cite him as a source for understanding mercantilism because his work is now posted on the internet? Seriously?

    Incidentally, the Encyclopedia Britannica was the gold standard of encyclopedias back before the internet, and still is. One would not cite it in a research paper because it is not an original work, but it is useful for explaining the basics to those who do not understand them.

    The Constitution can be found on the internet. I suppose that we shouldn’t bother to use it, since it can be found via Google, Bing and Yahoo. Such is the “logic” of Ben Wolf.

  23. Ratufa says:

    I do not understand why trade between nations is viewed a fundamentally different than trade between states in the U.S. or even between individuals and firms. To quote Don Boudreaux, I have been running a trade deficit with my grocery store ever since I started shopping for groceries

    Your description omits something: Yes, people trade money for goods and services from individuals and firms, and usually don’t think much about that “trade deficit”. But, people also trade their own goods and services to individuals and firms for money (i.e. they have jobs). As long as they have jobs, and don’t feel their jobs are threatened by trade, most people don’t give a fig about international trade deficits per se. Also, one difference between trade between states and trade between nations is that there is free migration between states, so job seekers in the US can easily (relative to moving to another country) move to states that have more jobs.

    I’m not denying the benefits of international trade. The US economy has benefited enormously from trade. But, international trade produces net winners and net losers within a country. The political question is what, if anything, should be done by the winners to help those who have lost the most. I don’t think that trade restrictions are a good answer, though some of the recent trade pacts (e.g. TPP), may be worth opposing because of their intellectual property provisions.

  24. Ben Wolf says:

    @Pch101: Scholarship happens in the library and you are cutting and pasting quotations the context of which you do not and cannot understand without considerable study. You do fit right in with Monsieur Verdon in your approach, however.

  25. Pch101 says:

    I have a guy who doesn’t even know who Thomas Mun was lecturing me about quoting Mun in the context of mercantilism.

    I suppose that for your next trick that we will be told not to mention Darwin when discussing evolution because, well, internet.

    It takes all kinds to make an internet, but we don’t really need more kinds like this.

  26. Ben Wolf says:

    @Pch101: Now you’re on to outright inventing things. I never said anything at all regarding Mun and yet this uncontrollable aggression of yours has led you to make up something about me. Stop behaving childishly.

  27. Pch101 says:

    I quote Mun, and your response is to tell me to not use the internet.

    The fact is that a printed copy of Mun’s Englands Treasure by Forraign Trade would be identical to what I have cited. Putting on the internet does not change the fact that it is a seminal work in the area of mercantilist economic theory.

    And if the library doesn’t have a hard copy of Englands Treasure by Forraign Trade, then guess what the reference librarian would do? That’s right: Look it up on the very same internet that you are telling me to avoid.

    The fact remains that you don’t understand what mercantilism is, and there is no getting through to you. Even citing the guy who is considered to be one of the fathers of mercantilism isn’t good enough for you because, well, internet. This is beyond ridiculous.

  28. Ben Wolf says:

    @Pch101: Do you understand anything at all, son? Do you understand that a web quote doesn’t convey Mun’s classification in the field of economic history as a bullionist or “primitive mercantilist?” Do you understand that if you make your argument to an economic historian they’re unlikely to accept it? I’ll go with the scholarship of the field I was trained in; you go with Instant Internet Expert and see how far that gets you.

  29. Pch101 says:

    I’ll go with the scholarship of the field I was trained in

    I’ll take my top ranked MBA any day over your associates degree in misinformation.

  30. Ben Wolf says:

    @Pch101: You don’t know my level of education and so are behaving like an aggressive child, making things up. If your MBA renders you an economic historian than it must also make you an expert in the sciences, law, medicine. . .your knowledge is clearly boundless.

  31. R. Dave says:

    If one country’s workers are good at doing X and another country’s workers good at Y, each country specializing in X (or Y) and then trading can make both countries better off. That is what we do every day in the economy here inside the U.S. This what we do in each state and between each state. Why should it be different between countries?

    Part of it is this: If you live in Ohio, and your skill set is linked to doing X, but the jobs in X start shifting to California, that’s a move you can maybe make to follow the jobs. If the jobs in X start shifting to Bangladesh, though, that’s probably not a move you want to make. In shot, jobs that move overseas are “lost” to the current American workers in that industry, whereas jobs that move from one state to another are not.

  32. Ben Wolf says:

    @R. Dave: Monsieur Verdon is assuming that each country has its comparative advantage stamped all along its borders so that production is perfectly efficient. He’s also assuming perfect exchange rates and perfectly balanced financial flows between countries.

    So in a perfect world. . .

  33. Pch101 says:

    @Ben Wolf:

    I didn’t need a graduate degree in order to know that one should avoid the kind of “No True Scotsman” argument that you made about Mun.

    You’ve decided to play the role of modern revisionist when it comes to defining mercantilism, and then you get upset when someone else has the audacity to refer to a legitimate source from one of its most important theorists that highlights your mistake.

    Ironically, this seems to be a problem with the internet age, with those of you who insist on reinventing the terminology whenever the actual definitions are inconvenient. But of course, I’m not permitted to quote Mun because, well, internet.

  34. Ben Wolf says:

    @Pch101: Nope. You don’t need anything at all, such are your mental abilities. You have the power of overturning whole fields with a single blog comment.

  35. Steve Verdon says:

    So apparently according to mercantilist and statist Ben Wolfe, Project Gutenberg is an unmitigated bad.

  36. Just 'nutha ig'rant cracker says:

    @grumpy realist: My reading of “comparative advantage” was that Ricardo seemed to at least presume that workers not making object X or growing crop Y would not be doing so because producing Z would be a better use of the labor resources of the country. When the workers making X or growing Y become simply become unemployed because their jobs are outsourced, while the company that employed them gains, the net effect on the overall wealth of the whole nation can be a drag on the overall productivity.

  37. Just 'nutha ig'rant cracker says:

    @Ben Wolf: P.S.: Mercantilism was a policy of ensuring maximum generation of national wealth the crown’s wealth by balancing trade to support domestic the crown’s wellbring. It was never anti-trade.

    FTFY