Philadelphia Reflections

Mercantilism Dies Hard

Mercantilism to Americans

Whatever mercantilism was supposed to mean can be debated by captive college students; mercantilism to Americans is and was just a bad thing having to do with economics, mentioned only when the speaker is searching for an epithet. Our present understanding of the mercantilist term is that brutal government action, even war, was employed to benefit favored citizen merchants, while the economics of a whole nation of consumers was subverted toward enhancing state power. All of this rapacity was for the betterment of one nation at the expense of its neighbors, and at the expense of its colonies. The surprisingly vague but more modern term of fascism is often substituted, to denote evil uses of government to promote the interest of combined military and industrial elite, to the general disadvantage of everyone else. Because so many opponents of mercantilism were upset about specific forms of mercantilist activity, Adam Smith is associated with the idea that mercantilism was the opposite of international free trade, and the American founding father are associated with the idea that mercantilism embodied everything we disliked about colonialism. Some prominent 18th Century leaders constructed a body of theory to defend mercantilism and firmly established the idea that the whole approach was founded on long-discredited sophistry. In recent times, the only reputable economist to defend parts of mercantilism was John Maynard Keynes, who approved of the idea of emphasizing third-world exports in order to assist developing countries into a modern economy. Whatever is the underlying idea behind this mercantilist idea that has caused so much trouble, and includes so many disconnected features?

Allow an amateur theory. In my view the fundamental misconception underlying mercantilism was the idea that economic relations between individuals and nations are a zero-sum game; what I gain must be at the expense of someone else's loss. Almost every child believes that many or even most everyday transactions seem to confirm it, and vast multitudes of mankind believe it to the end of their days. But as part of the Industrial Revolution, the counter-intuitive realization began to spread that cooperative behavior, within limits, could sometimes result in all participants becoming better off, harming no one. Perhaps it was even a universal idea. Adam Smith popularized the idea that when two parties freely participate in the free trade of a marketplace, each one can come away from the trade feeling better off; one party would rather have the goods, the other party would rather have the money, and they trade. Multiplied millions of times, the expansion of free trade would enrich whole nations, even the whole world. George Washington may not have understood all that, but he did know that England was injuring him with rules about insisting British subjects must conduct all foreign trade in British sailing vessels, must not manufacture locally, must do this, must not do that.

Exporting was good, importing was bad, manufacturing was to be concentrated in the mother country, consuming was to be discouraged -- what was the unifying theory behind all this? It would seem to have been the gold standard. Gold was durable, and its supply was limited. It had certain undeniable advantages, but its overall effect was to restrain industrial progress. If the economy is constantly expanding, but the supply of gold is relatively limited, the price or value of everything will go steadily down over time. In George Washington's time that was particularly irksome with regard to the value of his plantation, and his vast land holdings of Ohio land. It was also true of everything else that was reasonably durable. If everything is measured in gold, and gold is limited, then the accumulation of gold is ultimately the only way to accumulate wealth. The English nobility who were profiting from the system might not perceive it, but the colonists could perceive it in their bones. Small wonder that modern banking, economics and innovative finance took root in the American colonies. If not first, at least most vigorously. Small wonder we had a revolution men would die for, while the British were merely annoyed and mystified.

Vast areas of Asia, Africa and the Middle East are still committed to the idea that the only way to get rich is to steal from others; since everyone wants to get rich, everyone steals. Someone has reduced this idea to a simple game theory called the Prisoner's Choice. If two prisoners tattle on each other, both will be severely punished. If both prisoners refuse to testify, both will go free. If one tattles and the other remains mum, the tattler will go free and the loyal comrade will get hanged. Reduced to its simplest level in a series of repeated games, the theory states that it's better for everybody to cooperate most of the time, but you must be willing to play tit for tat if the other party cheats. Be cooperative as much as you can, but never forget to wallop a cheater, and then forgive him later so he can have a chance to play nice. Lots of people will think you are a sucker if you play nice, so, unfortunately, it is necessary to retaliate -- swiftly and painfully -- when someone cheats. Centuries of American history are explainable with this simple game theory.

And not just with tribesmen and Nazis. When Winston Churchill finally realized that the Bretton Woods Conference was going to mean the end of the British Empire, he was almost tearfully plaintive with his friend Frank Roosevelt, but he said he understood.

And six years later, when Churchill's protege Anthony Eden invaded Egypt over the Suez Canal, Dwight Eisenhower the hero of the Normandy Invasion that saved England, suddenly turned nasty. England would immediately abandon that invasion, or Eisenhower would foreclose on British debts and ruin them.

That was the end of British colonialism, and in a sense, it was the final end of the Revolutionary War.

Originally published: Thursday, October 30, 2008; most-recently modified: Sunday, July 21, 2019