Mercantilism is an economic theory and practice that promoted governmental regulations, and rapidly transformed Europe into an industrial economy from the 16th to the 18th century, and, thus, drew the ire of famous Scottish economist Adam Smith in his Wealth of Nations in 1776.
At the peak of the presidential campaign, Donald Trump strongly argued “for protectionism (another word for mercantilism), asserting that decades of free-trade policies were responsible for the collapse of the American manufacturing industry, for example, by bringing cheap consumer goods into the country, costing domestic jobs and depressing wages. Outsourcing of jobs to cheaper markets has also been a concern. Against that backdrop, Trump’s stance on trade is, perhaps, the clearest of his economic policies,” the Guardian says.
As a backgrounder, classical or neoclassical economists were the forerunners of physiocrats who originated from the school of physiocracy founded by François Quesnay, a Frenchman who lived in France from 1694 to 1774. A surgeon by profession, Quesnay was the personal doctor of Madame de Pompadour, the famous mistress of King Louis XVI.
Smith became acquainted with Quesnay and other powerful physiocrats who exerted much influence on his thinking while writing his book Wealth of Nations in France, which he completed and published in England in 1776, coincidentally the year of the American Declaration of Independence.
Two of the commonly held important teachings of the physiocrats, known as laissez faire or natural law and their adherence to economic growth through agriculture, underlie Smith’s book and the economic policies of the Philippines.
Indeed, Smith devoted 220 pages, in eight chapters, in the Wealth of Nations, attacking mercantilism, as having, in particular, evil effects on agriculture.
The physiocrats mounted a strong opposition against mercantilism, which was then rapidly transforming France, Italy and other European countries from feudal agrarian states into industrializing countries.
In their relentless campaign, the physiocrats held that the accumulation of wealth through commerce and industry, not agriculture, was contrary to laissez faire, causing confusion, dissatisfaction among the people, and should, therefore, be removed. The mercantilists, led by Jean Baptiste Colbert, who served as the King’s minister of finance for 25 years, just ignored the physiocrats and guided France with his policies to become a great power that rivaled England.
In America in 1791, exactly 15 years after Smith’s economic ideas had entered the consciousness and imagination of American policy-makers, President George Washington, the first nonpartisan candidate elected to the White House, appointed Alexander Hamilton, his brilliant military aide, secretary of the treasury and ordered him to formulate an
economic strategy.
As a military man, Hamilton knew that behind England’s and France’s relative land and naval military superiorities was not agricultural but a mercantilist economy, largely based on commerce and industry.
Wasting no time, Hamilton went to Congress with a mercantilist economic strategy, convinced its members and turned America from an agrarian union into an industrial colossus that stood after the end of World War I as the world’s unrivaled economic empire.
After that war, the US surprisingly abandoned its mercantilist policies and sought, as Smith did, the universal application of free trade. America subsequently removed its protective tariffs and opened her huge market to imported goods.
England abandoned mercantilism only in 1846, 70 years after the publication of the Wealth of the Nations. Its experience with Smith’s economics, however, proved disappointing, and England, in the late- 1930s, adopted a new economic strategy, laden with mercantilist ideas introduced by John Meynard Keynes, a traditional classicist like Smith, who changed his economic policy on the basis of the bad economic policies of the dogmatic classicists who were largely responsible for the Great Depression.
In his book The General Theory of Employment, Interest and Money, Keynes attacked some of his former classicist colleagues by calling them “orthodox economists whose common sense has been insufficient to check their faulty logic.”
As the economy moved to recover from the Great Depression, World War II broke out, forcing governments to mobilize their economies to meet the challenge of armed conflict. Governments had to assume full control of their limited resources, rationing fuel, food commodities, fixing prices, sequestering factories and limiting the movements of people.
In the rigor of the war, the depression banished, as Keynes’s idea of government intervention, which he called the new economic orthodoxy, had predictably worked and, as a result, humiliated some of the classicists of the old school of orthodoxy.
After the war, England’s electorate unseated the conservative Winston Churchill, the great statesman who brilliantly led his country to victory against the fascist alliance, and elected Clement Atlee, a socialist from the powerful labor party.
Upon assumption in office, Atlee, a mercantilist, immediately put under government control a large sector of the economy, including the steel industry, and mobilized its labor force to manufacture small, medium and heavy industries that saw Britain rise from the destruction of war and depression.
Atlee’s pro-labor, pro-industrial economic policy, in effect, disproved Smith’s pro-agricultural doctrine to accumulate wealth.
In 1944, exactly eight years after the publication of Keynes’s General Theory, the US government initiated the organization of the International Monetary Fund and the World Bank for the purpose of creating a new-world economic order based on the neoclassical free-trade economic theory.
Ironically, this was the same America that spurned free trade in favor of mercantilism, which made her a great power up to this day.
Despite the creation of the new economic order, however, many countries in Europe, including Germany, France and Britain; India in the subcontinent; and those from East Asia, including Japan, South Korea, Taiwan and Singapore, have pursued a mercantilist economy.
In essence, they are the economic powerhouses in their respective regions today, because mercantilism cared more about economics and little of politics.
To reach the writer, e-mail cecilio.arillo@gmail.com.