Mercantilism: Is it Local, Is it Logical?

February 15, 2012

Mercantilism: Is it Local; Is it Logical?

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In Northern Indiana, a few things remain for which politicians cannot claim credit: amber waves of grain in the summer, Chocolate Charlie at Christmas, paczki for Madi Gras. We can be cheerleaders for local things yet question the role of officials in selecting which industries to attract and protect.  

The American Heritage Dictionary defines mercantilism as a theory of political economy based on accumulating gold and silver. The goal is for the home area to export more than it imports in order to earn precious metals or bring in foreign revenue. Mercantilism is a flawed philosophy. In mercantilism, those associated with government accumulate wealth but the general population experiences soaring prices through inflation, higher-priced imports and inferior products.

Contrast mercantilism with classical economic theory in which individuals, not government, own the fruits of their labor and can freely trade and purchase goods in global as well as domestic markets. The primary economic goal of any region should be general well-being, not merely the prosperity of the state.

Mercantilism, unfortunately, is an economic philosophy yet to be relegated to the trash bin of history. Rather, for most of the 20th century much of Latin America experienced widespread poverty as a direct result of prohibitive trade restrictions, an import-substitution tariff structure and runaway inflation. Governments never learn; only people do.

Wherever an oligarchy is empowered to manipulate exports and imports and to determine which industries succeed or fail, an elite group of individuals amasses personal wealth while the general population experiences a rising cost-of-living and stagnant real incomes.    

George Melloan, writing in the Wall Street Journal on Japan’s first trade deficit in 31 years, argues that the government-industry alliance that many assumed was responsible for turning Japan into an export machine was highly overrated. Japan’s export success had little to do with bureaucratic intervention, but rather was due to private Japanese corporations becoming good at making products that appealed to consumers across the globe.

One might ask two questions:

  • What’s wrong with encouraging exports in order to achieve a positive international balance of trade?
  • What’s the difference if an area develops in free markets as compared with government manipulation that prompts an advantage to certain industries and corporations?

The answer to the first question lies in the process through which a balance of trade is achieved. International trade freely entered into and based on comparative and absolute advantage tends to balance to the mutual gain of ordinary people in whatever country. The answer to the second is that although we acknowledge the political skills of our officials they lack the ability to direct industry — nationally or regionally — toward economic growth.


A physician recently lamented economic decline in his local community, “How can we survive if the people working at the mall on the north side of town shop at the south-side mall and vice-versa? No one is making anything.”

He is right, of course, and he should not be branded a mercantilist merely for posing the question. The easy answer is to lament that the international rules of the game are against us and that we are not going to take it any longer. But to restrict imports with the intention of protecting  local industries is unwise. Wherever this course has been followed, consumers have paid the price. High-cost inefficient producers and officials catering to protectionist interest gain.

Unfortunately, import restrictions and export subsidies appear, on surface, logical. “It’s about jobs, jobs, jobs,” is one argument, and another is “Do we want to join the race to the bottom by paying low wages to American workers?” These concerns are real and legitimate, but perhaps there is a better way to address them without restricting liberty and reducing the overall standard of living in the country.

The first exercise is to face facts. Import restrictions in the U.S. will be countered by Import restrictions abroad that affect U.S. exports. Import restrictions on intermediate goods make U.S. products less competitive. The U.S. is presently the second-largest exporter in the world, and our exports are the source of many domestic jobs. Home-grown local products are fine, and we all could enjoy more of them. U.S. residents and the globally rising middle-class, however, have strong preferences for goods and services that can only be provided internationally. In order to pay for these products, we must have something to transfer abroad — besides debt.


The experience of countries adopting mercantilist policies offers a warning. Similarly, the experience of countries such as Singapore, Australia, South Korea and Germany offers insight in how to proceed in the face of global competition. Admittedly, in many cases these countries try to identify industries with potential. However, the reason for their export success cannot be primarily attributed to subsidies and protection of favorite industries. Competitive countries do not expend great effort in attempting to control other countries’ trade policies, and they do not aspire to be self-sufficient. They compete through competent individuals who analyze where and how their country’s comparative advantage fits into the global supply chain. Then, the government and the less-adventurous stand back and permit individuals and firms, willing to assume risk, take their chances.

Of course, we are free to root for the home team. We exercise our preference by purchasing mustard, wine, automobiles and caskets made in Indiana by Hoosiers. This is different, however, from lobbying for tariffs at the federal level or encouraging local officials to obstruct or support certain industries for political gain with little or no economic benefit.

Maryann O. Keating, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation living in South Bend, is co-author of Microeconomics for Public Managers, Wiley/Blackwell, 2009.

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Jan. 1, 2012
A Reading List
For Legislators

The Tuesday Lunch |The Meaning of Self-Government’
Neal | ‘The Role of Church and State in Cultivating Democracy’
M. Keating | ‘A Limited Vision for State and Local Financing in Indiana’
Jefferson | Notes on the State of Virginia’
Constant | The Liberty of Ancients Compared with that of Moderns’
Paine | ‘Common Sense: On the Origin and Design of Government General’
Bastiat | ‘On the State’, ‘On the Fallacy of the Broken Window’
The Reality Check | If You Could Give Three Books to Your Legislator, Which Would They Be?

The foundation’s analysis represents research in progress and are published to invite comment and discussion as preparation for their submission to academic journals and other professional publications. The authors are solely responsible for the content of their research and analysis. The foundation encourages research and discussion on the widest range of Indiana public-policy issues. Although the philosophical and economic prejudices inherent in its mission might prompt disagreement, the foundation strives to avoid political or social bias in its work. Those who believe they detect such bias are asked to provide details of a factual nature so that errors may be corrected

Private property rights Milton Freidman

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