Compare and Contrast --- Economic Analysis of Mercantilism and Its Contemporary Relevance

|Peter Boettke|

Here is Dani Rodrik writing on Januray 9th of 2013.

Here is Murray Rothbard writing in November 1963.

Rodrik claims that "The liberal model has become severely tarnished, owing to the rise in inequality and the plight of the middle class in the West, together with the financial crisis that deregulation spawned."  But the reason for this is precisely because for the past 6 decades it hasn't only been the Asian countries that have pursued Mercantlist policies (as Rothbard explained 50 years ago).

So while Rodrik is basically right when he says: "The history of economics is largely a struggle between two opposing schools of thought, liberalism' and 'mercantilism.'" He is off the mark when he states that: "Economic liberalism, with its emphasis on private entrepreneurship and free markets, is today’s dominant doctrine."  This is true only in rhetoric, but not in the reality of economic policy practice.

I often wonder what world folks are looking at, let alone studying, when they make claims that the laissez faire model of economic liberalism is dominant.  Every where we turn in our economic lives we can see the grabbing hand of the state.  Throughout the western world we have bloated public budgets, the manipulation of money and credit, obstructionist regulations, and numerous measures to weaken the discipline of profit and loss.  In short, we have state controlled market economies.  We are living the policy reality of mercantilism, while rhetorically emphasizing economic liberalism.

Time to read Rothbard closely and straighten this mess out.

 

Comments

[Daniel Kuehn]

I think the source of your confusion about "what world folks are looking at" stems from the fact that you seem to be identifying Rodrik's liberalism with libertarianism. I'm not sure that's justified. I'd agree with Rodrik that liberalism is the dominant paradigm (and a good thing!) but certainly I'd agree with you that it's not a libertarian version of liberalism.

You're going to have a rough time convincing anyone that didn't already agree with you that the mere fact that it's not going to make a libertarian happy makes it illiberal.

[Tom]

I think if you read Rodrik's article, and his citations to the Adam Smith, it's fairly clear that he's comparing mercantilism to classical liberalism and not modern American liberals. And the argument is one of comparative economic systems, rather than "what makes a libertarian happy". The fact is that we do not have even Adam Smith's version of liberalism, and to argue that we do seems somewhat at odds with reality. We are not in a system with 'emphasis on private entrepreneurship and free markets". Rather, we are in a system of heavy regulation and protection for the American workers, at the expense of consumers. Which is a mercantilist system.

[Alex Salter]

Daniel,

From Rodrik's essay: "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."

Do you really think the "dominant paradigm" views the state as "necessarily predatory"? I think you're conflating welfare liberalism/social democracy with the liberalism that Rodrik portrays in his essay. When Rodrik classifies liberalism thus, how can you *not* interpret that as liberalism's classical-enlightenment strand?

[glennd1]

Sigh, the semantic fetishism evident in the comment stream is a huge part of the problem. So many in the social science or political philosophy fields are so in love with theories and abstractions, and love to act like they are being intellectually rigorous, when ultimately, there are very few axioms at all in social science.

Boettke is making a plain point. We don't have a laissez faire economy, we have a mercantilist economy here and globally. He uses the word liberal to connote laissez faire and his meaning is plain. The only argument one can actually have with him is whether we are truly mercantilist or not, and clearly, I'm with Pete - and if you can't see that, you really do live in another world.

Anyone not able to comprehend Boettke immediately should read Naseem Taleb to see why being fetishistically obessed with abstruse definitions leads to disaster in planning and policy. We don't have theories in economics for most anything that really stand up to scientific scrutiny, but rather have a set of heurisitics we use to make judgments in most cases. What guys like Boettke, and Rothbard ultimately represent is an intellectual humility about what they actually know (except when Rothbard goes on to drink his own musings as gospel and ergo becomes an anarhchist).

One would think I wouldn't have to point this out on an Austrian economics site.

[Troy Camplin]

Regardless, I think it incumbent on those of us who do in fact believe we should have a liberal free market economy that we use the right terms in our own discussions. We should always refer to the current U.S. economy as mercantilist. If we do that enough, with enough people, it will in fact spread over time. As both Plato and Aristotle pointed out, having clear definitions with proper divisions clarifies thought and makes philosophical thinking possible. Calling unlike things the same thing muddies thought -- for some, no doubt, purposefully.

[Mariorizzo.wordpress.com]

I have experience teaching a course on classical liberalism in one form or another for twenty years. I can say with some confidence that economists generally have very little clear knowledge of what it is. One economics major thought economic liberalism meant the "efficient markets" hypothesis.

We must also remember that Keynes made a mess of the definition of "liberalism" with his dichotomy between the macro sector, including the "socialization" of investment, and the micro world where mom and pop firms could do what they want.

It is also the case that some economists do not consider big redistributionist schemes as in any way hindering the liberal economic order. I guess they believe something like John Stuart Mill's split between the laws of production and the laws of redistribution.

Of course, we can argue about the purity of liberal policies but I do not think it is too much to ask that people recognize the mixed- economy interventionism is the dominant view in the west.

(On a contentious political note, one could hardly listen to Obama Inaugural address and think economic liberalism is the dominant ideology.)

[Daniel Kuehn]

Tom and Alex -
Right, I am talking about classical liberals not American liberals. I thought that was clear from Rodrik's post too.

Why do you think I'm specifically talking about welfare state liberalism. Obviously that is predominantly the sort of thing we've got these days, but that is well within the liberal tradition along with libertarianism. It's true, we do not have libertarianism but that hardly means we don't have liberalism in the sense that Rodrik means it.

[Daniel Kuehn]

glennd1 -
re: "Boettke is making a plain point."

Yes, it was plain. The problem is I think he misreads Rodrik because Pete interprets classical liberalism or the liberal tradition to exclusively mean libertarianism.

Rodrik discusses Smith and that's apt here too. Think of the economists in the last century that have been the most famous for doing fundamentally Smithian economics - working on Smithian problems and getting Smithian answers: Ken Arrow, Paul Krugman, Paul Romer. But these guys don't usually make the list of the Smithian tradition.

The misunderstanding with Rodrik is simple: Peter is reading him say "libertarian" when he's clearly not saying "libertarian", he's saying "classical liberal".

[Daniel Kuehn]

* don't usually make Pete's list of the Smithian tradition when he raises the issue, I should clarify. It's widely recognized that those three guys have pushed forward Smithian economics in the 20th century.

[Argosyjones]

@Troy
"We should always refer to the current U.S. economy as mercantilist. If we do that enough, with enough people, it will in fact spread over time."

Correct. Your abuse of terminology will spread among those ignorant of economics and history. Eventually, the term may be rendered meaningless for purposes of public discussion.

Muah-ha-ha-ha!

Brilliant!

[Jim Rose]

So they can pick winners did they? Consider Japan. Those at MITI must have excellent investment appraisal skills? How would you test that?

Look at their investment portfolio after they retired. Much less inside information but those picking winners skills can be used to trade on their private accounts. the human capital is general.

My professors at graduate school in Tokyo were retired from MIT, ministry of finance, the lot. Worked at those ministries in the high growth years picking winners.

The retired MITI and other professors kept their wealth well hidden. Clothes were the same as others. Their children went to normal schools and Japanese public universities. They all looked forward to the bi-annual salary bonuses (5.15 months salary in all).

I thought all would be revealed when where invited to their houses for lunch. Alas no: an ordinary Japanese suburban house. Many still lived in their ministry apartment.

Bureaucrats who could pick winners – beat the market – should be excellent investors on their private portfolios after they retire. They have the core skills.

If special investing skills somehow appeared from the air inside MITI, people would pay to work there, and there would be tell-all books written on the investment skills passed on by word of mouth.

[Troy Camplin]

No, I am calling for the use of more accurate, more precise terminology, in the hopes that that will spread. Anyone who calls what we have in the U.S. a free market is either wrong or lying. It is a strongly regulated market. It is controlled by a variety of governments, from local to state to federal. It is demonstrably not a free market, and we should stop calling it one. It is equally demonstrably mercantilist, and thus we should start calling it one. Getting our terms right matters. We need to be the first to stop misusing them.

[Daniel Kuehn]

Troy -
If you want to define "free market" as "not regulated" I would dispute the value of the definition, but on that definition certainly the U.S. isn't a "free market".

I am a little more confused about how they are "mercantilist". I could see how some emerging markets might be mercantilist, but other than that I don't see a case that there have been any mercantilist polities for a very long time.

[Mathieubedard.wordpress.com]

Daniel Kuehn,

What do you think are the significant differences between classical liberalism and libertarianism that are relevant to Rodrik's discussion? When I think about the Paris school I see none, but maybe I'm missing something.

[Daniel Kuehn]

So libertarianism obviously has expectations not just of a limited government and a market economy, but an extremely non-active government. There are clearly a lot of people in who advocated limited government and a market economy with a fairly active government within its limited scope (and thus are not libertarians). I'm one of them.

The liberalism that Rodrik discusses is Smithian/Lockean/Madisonian liberalism.

A lot of libertarians like to think this is libertarianism, but the reason why Pete doesn't get Rodrik here is that that is not Rodrik's understanding (or Wolfe's or or a whole host of other peoples' understanding). Pete can stick by his insistence that I'm fooling myself when I say I'm in the classical liberal tradition of Smith, Locke, and Madison (sans natural rights for me, but I don't think that's all that damning), but he's got to understand Rodrik and many others don't think that sort of narrow reading is defensible. There are different definitions at work here. My first comment was making the point that the whole reason why Pete doesn't get Rodrik is because he and Rodrik are working off of very different understandings.

I'm not sure exactly what you mean by "the Paris school" - do you just mean French classical liberals?

[Daniel Kuehn]

All this fretting about definitions is besides the point. If you want to claim that the classical liberals would be libertarians if they were around today, you're welcome to think that.

I just think it's important to understand that a lot of people would take issue with that. People should at least recognize that "classical liberal" or "liberal tradition" and "libertarian" are not synonymous for a whole lot of non-libertarians, which is - I think - the source of Pete's disagreement with Rodrik.

[Mathieubedard.wordpress.com]

Your distinction is mostly an anachronism, holding classical liberals to a standard that didn't exist in their time. IIRC a paper by Steve Horwitz argues more or less the same thing about the "Rothbardian anarchism" vs "Hayekian classical liberalism" dichotomy. But most of all this is all irrelevant to this discussion. The world today is not classical liberal, even by your definition. The scope of the government is nowhere near limited.

[Daniel Kuehn]

I don't see how I'm presenting the anachronism here. It's precisely because the standards did not exist in their time that I'm against this idea of identifying them with libertarians! If Adam Smith were alive in 2013 I am not comfortable saying whether he would be a libertarian, a right wing liberal, or a left wing liberal. I really don't know. I'm only comfortable saying he'd be in the liberal tradition.

As for the second half of your paragraph we obviously disagree. That's not to say the world is some sort of liberal ideal. And certain parts of it are simply illiberal. But it's still best to call it "liberal" and it's getting more liberal every day.

[Mathieubedard.wordpress.com]

The anachronism is not saying that there are difference between the policies advocated by thinkers 200 years apart, but insisting that a key part of their intellectual identity is their opposition to ideas they were in fact never exposed to.

Is the world Smithean (or increasingly Smithean) because the scope of government intervention is limited (or increasingly so), or because the government is "fairly active" (or increasingly so), or both? Are both of these parameters equally defining of how classical liberal the world is?

[glennd1]

@ Daniel Kuehn - You think the U.S. currently is a classically liberal society? With 47 million on food stamps, all the elderly on welfare and state run health care? With 1 trillion in means tested welfare programs - enough money for a 60k check to go to each household below the poverty line? With a tax system that now takes 63% of the last dollar a fellow like Phil Mickelson makes, in California? You think that's anything remotely resembling "liberty"? Lol.

[Daniel Kuehn]

Mathieu -
You have lost me. I don't see how I'm insisting on that.

glennd1 -
Yes, although I won't vouch for California's taxes. I'm not sure what a top marginal rate is worth reporting on, though, even if it is a bad one. We don't have "state run health care" that I'm aware of, and all the elderly aren't on welfare that I'm aware of.

[Troy Camplin]

Miriam-Webster defines mercantilism as:

"an economic system developing during the decay of feudalism to unify and increase the power and especially the monetary wealth of a nation by a strict governmental regulation of the entire national economy usually through policies designed to secure an accumulation of bullion, a favorable balance of trade, the development of agriculture and manufactures, and the establishment of foreign trading monopolies"

We have strict governmental regulation of the entire national economy, money-creating policies, and policies designed to develop ag and trade (subsidies).

Even more extensively:

http://www.econlib.org/library/Enc/Mercantilism.html

We don't have to dehistoricize the language all that much to see similar patterns. As Wittgenstein pointed out, if there is a family resemblence, you pretty much have the same thing.

Or if you prefer, neo-mercantilist. Or Keynesian. Same thing.

[Roger McKinney]

According to a graph in Roger Miller's econ text, the pages in the Federal Register of new regulations has increased on average about 70K pages every year since 1970. How does that show a classical liberal society?

Classical liberalism protected private property. But property requires control. If the state takes control of your property you no longer have property even though you still retain the paper title.

Title to property without control fools the gullible into thinking they still have property.

[Daniil Gorbatenko]

Daniel, could you explain precisely how the government of say the US is strictly limited?

For me it's sufficient just to recall what a surprise it was for an ovwerwhelming majority of the US constitutional lawyers to hear the US Supreme Court say that the federal government cannot force Americans to buy things. Even such a clear insult to the idea of limited government was rebuffed only by a happy accident.