Studies in Economic Nationalism

SECTION I

THE INHERITANCE FROM THE PAST

CHAPTER IV

THE MERCANTILIST HERITAGE

I

Two major revolutions against mercantilism took place in the last quarter of the eighteenth century. One of them, highlighted by the Boston Tea-Party of December 16, 1773, led to the formation of the United States of America. The other, heralded by the publication by Adam Smith on March 9, 1776, of An Inquiry Into the Nature and Causes of the Wealth of Nations; was to lead to the adoption of free trade by England as a national policy some three quarters of a century later. The death of mercantilism seemed as definitive as anything could possibly be. In the doctrinal field it was superseded by laissez faire, in the practical field by economic liberalism. Both were checked in due course by the growth of collectivist movements in the nineteenth century and their prevalence in the twentieth. Of mercantilism Proessor Eli Heckscher, its most authoritative modern student, wrote that, once superseded by laissez faire, it “has never been able to raise its head again and, indeed, … no one has tried to revive it.” This, he says of mercantilism as a form of society; individual ideas of mercantilism have proved to have a far greater vitality than that, and among them “the idea of protection … has undoubtedly been the most vital of all.” 1

The “mercantile system” was the name given by Adam Smith to a conglomerate of economic ideas and policies which, prevalent in his day, he regarded as wrong intellectually and harmful in practice. At the hands of nineteenth century writers the “mercantile system” was contracted into “mercantilism” and became a standard term in the economist’s vocabulary. Thus “mercantilism” is a name given, after the fact, to a long period of economic thought and practice. Chronologically, mercantilism covers three centuries, the sixteenth, seventeenth and eighteenth; geographically, its scope includes England and the continental countries of western Europe. It was a system of great complexity. Its manifestations and expressions varied not inconsiderably in time and in space. It may even be questioned whether a single concept can cover so much territory. Professor Heckscher was led by his studies to the conclusion that mercantilism had enough of a “fundamental outlook, uniform in essence, which was expressed in all [its] measures”. A uniformity, he found, “does exist, though certainly never without inconsistencies and not always clear even to the people involved”. He concluded that mercantilism must be treated “as a uniform, coherent system and not merely as a chronologically determined period”.2 As far as I am able to ascertain, this is the view of the principal contemporary students of mercantilism and it is in this spirit that the discussion that follows is conducted.

But what is mercantilism? In the popular mind, it is most closely associated with the determination of a country to accumulate gold and silver by means of a “favourable” balance of trade, this favourable balance to be sought by means of trade restrictions of various kinds. It is because this represents the popular concept of mercantilism that its revival was so generally heralded during the decade of the thirties, when countries — all of them — competed for an export surplus, or in our own days, when many of them are so greatly concerned about the acquisition of gold-convertible dollars.

We shall presently see that there was more to mercantilism than this; there is no doubt, however, that the popular view is largely justified in its belief, for these were the features of mercatilism which contributed most to the intellectual and political reactions against it. As good a way as any to explain what mercantilism was is to quote the criticism levied against it by Adam Smith. His attack was directed against those features of the system which he considered to be intellectually absurd or politically dangerous. Considering that he lived at a time when mercantilism was still the ruling system, that he took part in many of the intellectual debates of his day, and that he had a very keen perception of practical realities, the judgement of Adam Smith deserves to be heard wherever mercantilism is discussed in our own times:

The two principles being established, … that wealth consisted in gold and silver, and that those metals could be brought into a country which had no mines only by the balance of trade, or by exporting to a greater value than it imported; it necessarily became the great object of political economy to diminish as much as possible the importation of foreign goods for home consumption, and to increase as much as possible the exportation of the produce of domestic industry Its two great engines for enriching the country, therefore, were restraints upon importation, and encouragements to exportation.

The restraints upon importation were of two kinds.

First, restraints upon the importation of such foreign goods for home consumption as could be produced at home, from whatever country they were imported.

Secondly, restraints upon the importation of goods of almost all kinds from those particular countries with which the balance of trade was supposed to be disadvantageous.

These different restraints consisted sometimes in high duties, and sometimes in absolute prohibitions.

Exportation was encouraged sometimes by drawbacks, sometimes by bounties, sometimes by advantageous treaties of commerce with foreign states, and sometimes by the establishment of colonies in distant countries.

Drawbacks were given upon two different occasions. When the home-manufactures were subject to any duty or excise, either the whole or a part of it was frequently drawn back upon their exportation ; and when foreign goods liable to a duty were imported in order to be exported again, either the whole or a part of this duty was sometimes given back upon such exportation.

Bounties were given for the encouragement either of some beginning manufactures, or of such sorts of industry of other kinds as were supposed to deserve particular favour.

By advantageous treaties of commerce, particular privileges were procured in some foreign state for the goods and merchants of the country, beyond what were granted to those of other countries.

By the establishment of colonies in distant countries, not only particular privileges, but a monopoly was frequently procured for the goods and merchants of the country which established them.

The two sorts of restraints upon importation above-mentioned, together with these four encouragments to exportation, constitute the six principal means by which the commercial system proposes to increase the quantity of gold and silver in any country by turning the balance of trade in its favour.3

II

This was Adam Smith’s view of the system against which he launched his devastating, and eventually successful, attack. It might be noted, in passing, that it were the colonial policies of mercantilism and the monopoly power they conferred upon British merchants that aroused the greatest resentments and were instrumental in the advent of the American Revolution. Paradoxically, as has already been stressed in Chapter III, the new American republic did not embrace the free trade doctrines of Adam Smith; it may even be doubted that the connection between the two reactions against mercantilism, noted at the beginning of the present chapter, were even perceived by the fathers of the republic.

“Wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value.” Such was, in the words of Thomas Mun, the quintessence of the mercantilist policy. 4 “It would be too ridiculous to go about seriously to prove that wealth does not consist in money, or in gold and silver; but in what money purchases, and is valuable only for purchasing.” This is the reply of Adam Smith. 5

The first contrast, therefore, between the mercantilist conceptions and those of later times relates to the notion of wealth. Mercantilists associated wealth with the possession of precious metals. Their successors regarded as wealth the goods and services which people consume and the means of producing them.

Because mercantilists attached such importance to the importation of precious metals into the country, they aimed at an excess of exports over imports as a means of achieving the inflow of gold and silver. Since, however, movements of precious metals could take place only if one country were to lose some of its stock to the benefit of another, it was considered by the mercantilists that what was one country’s advantage in trade had to be another country’s disadvantage. The notion of mutually beneficial trade can arise only out of a realization that what matters in trade is the exchange of goods and not the acquisition of cash. The following few lines from The Wealth of Nations point out the contrast between the mercantilist concepts and those of Adam Smith. Similar views can be found in the writings of David Hume, the great philosopher, predecessor and friend of Adam Smith.

It is not by the importation of gold and silver, that the discovery of America has enriched Europe. … By opening a new and inexhaustible market to all the commodities of Europe, it gave occasion to new divisions of labour and improvements of art, which, in the narrow circle of the ancient commerce, could never have taken place for want of a market to take off the greater part of their produce. … The commodities of Europe were almost all new to America, and many of those of America were new to Europe. A new set of exchanges, therefore, began to take place which had never been thought of before, and which should naturally have proved as advantageous to the new, as it certainly did to the old continent.6

Because mercantilists believed that a country’s gain in trade must be matched by another country’s loss, trade itself became an abundant source of friction and conflict. But the three centuries of mercantilism were also the period in which modern states were being formed on the ruins of feudalism, and this formation of states had also as its counterpart instability and conflict. In order better to understand the economic ideas of mercantilism, it is necessary to place it against the background of the history of these three hundred years, and this is what is done by its most prominent students.

III

It is only fair to note that the late Professor Edwin Cannan of the University of London, the editor of the best modern edition of The Wealth of Nations, protested against a broadening of the concept of mercantilism:

…the “mercantile theory” should be the doctrine that States must not leave the balance of trade to take care of itself, but must encourage exportation and discourage importation, and “mercantilism” should be [according to the context] either this theory or the practice which it recommends. This is quite a convenient sense for the term and I fail to see any convenience whatever in the sense which some German writers and English writers following them have given to mercantilism by treating it as equivalent to economic nationalism inspired by military consideration.7

Whatever the convenience of the more restrictive interpretations of the term, there are great benefits to be derived from the broader interpretation when trying to establish the exact impact of the mercantilist heritage upon our own doctrines and practices.

This broader definition mercantilism in terms of the national state seeking by methods of economic control to secure its own unity and power underlies Professor Heckscher’s monumental work on the subject8, which must be regarded as the most important guide to this long and intricate period in the history of economic thought and practice. Professor Heckscher defines mercantilism in five different and concurrent ways. Mercantilism is, in the first place, a system of internal national unification 9 ; it is, second, a system of power; third, a system of protection; fourth, a monetary system; and finally, a conception of society. It would go far beyond the scope of the present chapter to elaborate on all these aspects of mercantilism; it is important, however, to realize that elements of the mercantilist doctrines which are of special concern to us in the present context are an integral part of a larger and more inclusive system. Indeed, there are vagaries of mercantilism which could not be understood otherwise; or, more correctly, there are mercantilist doctrines which are reasonable enough as parts of the entire system, but which, taken out of it, acquire all the qualities of the absurd.

Thus it must be realized that in their quest to establish unified national states, mercantilist statesmen were fighting both against the universalist traditions inherited by the Middle Ages from the old Roman Empire and against the excessive particularism that followed upon the disintegration of feudalism. The reaction against universalism was very general in the sixteenth and seventeenth centuries, especially in the religious field, and it had political concomitants. To assert itself against rivals in the quest for territory and power, the modern national state had to be consolidated and strong within. To achieve that unity was one of the main objectives of statescraft in the mercantilist period. It is interesting to note, with Professor Heckscher, that mercantilism “had to leave much of its work of unification for its successors to complete”.10

As a policy of power, mercantilism “followed two different methods; the first consisted in deflecting economic activity directly towards the particular ends demanded by political, and more especially military, power; the second in creating a kind of reservoir of economic resources generally, from which the policy of power could draw what it required”.11 The first method involved the use of comprehensive economic controls throughout the national economy. In contrast with what was to follow in the age of liberalism and laissez faire, although not so much in contrast with what came before, mercantilism involved comprehensive government regulation of economic life. The second method let to what was one of mercantilism’s most important features: its concept of colonialism.

Colonies “opened up the possibility of providing a system of supply within a self-contained empire”.12 Here, as we might have expected, entered the self-sufficiency aspect of mercantilism. This aspect never became its dominant feature, but it has resulted in the desire of metropolitan countries to acquire and control outlying territories. On that aspect, our guide Heckscher has an interesting comment to offer; the policy of self-sufficiency had the function of preventing the colonies “from so developing their potentialities that they would be able to stand on their own feet and become politically independent”.13

Although this explains the resentments which were to lead to revolutions and wars of independence, it is not one on which we need to dwell at great length in this book. Having noted it, we must turn to the mercantilist conceptions of money and of foreign trade. That mercantilism never quite succumbed to the temptation to seek national self-sufficiency was presumably due to the importance attached to precious metals. To obtain these — not only symbols of wealth but wealth itself — foreign trade was indispensable. This is an important point to note, for the self-sufficiency ideal would rule out foreign trade as essentially undesirable, whereas mercantilism regarded foreign trade as an important method of acquiring wealth (on condition, of course, that it produced an export surplus and thereby an influx of precious metals). There was more agreement between the mercantilists and Adam Smith on the importance of foreign trade than between them and the advocates of national self-sufficiency, such as Fichte. The contrast is important to note, for in the period of neo-mercantilism in the 1930’s the idea that, as a matter of sound national policy, foreign trade should be kept at the lowest possible level was widely accepted in intellectually influential circles.

The attraction of gold and silver is not a very easy one to understand otherwise than in relation to military power in the anticipated international strife. A country which wanted to command resources lying outside its boundaries needed precious metals with which to make payments, especially at a time when the credit mechanism was in its infancy. In an age of professional armies gold and silver were also the only means by which a ruler could acquire and hold the services of mercenaries. Hence precious metals were important, in power terms, as a war chest. This argument in favour of acquiring gold and silver is very persuasive and it is all the more interesting to read in the studies of Professor Jacob Viner, another leading authority on mercantilist literature, that in England at least “there is little mention of state treasure in the mercantilist literature and its use as an argument for a favourable balance of trade is extremely rare”.14 This, however, should not by itself lead to discard the explanation, the less so as Professor Viner himself observes that “there are… passages in the mercantilist literature which may have state treasure in mind, even though they do not explicitly refer to it. Such perhaps are the frequent references to money as the ‘sinews of war’, and especially to its importance in diplomacy and in conducting war in foreign territory with mercenary troops”.15

It is all very well to attribute the mercantilist policies to a confusion between money and wealth; it is very difficult to suppose that for three hundred years or so economic policies would be conducted in a certain fashion solely because of such a misconception. The relationship between the possession of precious metals in those days and the country’s power in war is too important to be easily brushed aside. It stands to reason that should, at another point in time, governments again be concerned with power and anticipate conflict, they would so direct their economic and commercial policies as to acquire either gold or other resources of military significance. Although the mercantilist literature did not apparently refer to such “other resources”, they are included in the foregoing sentences as a means of bringing mercantilism, as it were, up to date on that particular point. Given the motivation, manifestations may vary in detail but not in essence.

IV

We now come to another aspect of mercantilism which has considerable bearing upon our own times, namely, its views on protection and employment. It appears from the studies carried out by Heckscher and others that the acquisition of precious metals was not the only reason for the protectionist policies of the mercantile system. Actually, and this is a point to which scholars like Heckscher attach a great deal of importance, mercantilists were animated by a “fear of goods”. This notion he explains as follows: “People were … influenced simply by a naive fear of buying and an equally naive eagerness for selling. The most extreme formulation of this attitude is, perhaps, to be found in the writings of Johann Joachim Becher, the most famous of German mercantilist authors. The third of his ‘mercantilist rules and axioms’ was ‘that it is always better to sell goods to others than to buy goods from others, for the former brings a certain advantage and the latter inevitable damage’.” And Heckscher adds not unreasonably: “It was hardly possible to push the argument any further than that.” 16

To state this argument in its extreme form is to reveal its utter absurdity. It is less absurd, however, for a country to try to expand its exports by subsidy, exchange depreciation and other devices, while at the same time erecting higher and more insuperable barriers to imports? Yet, wasn’t this exactly what most countries were doing during the depression of the thirties? “Export”, notes Heckscher, “was an end in itself.” 17 A strange delusion, surely. And yet how much effort has to be spent in our own times in the United States on trying to persuade politicians and the public that trade is a two-way street and that a country cannot sell abroad and be paid unless it buys too. It seems that some elements, at least, of the mercantilist heritage — and not the most sensible ones at that — are still with us today.

The next comment by our guide through the mercantilist jungle is of particularly great interest: “The mercantilist ‘fear of goods’ was nourished, among other things, by the idea of creating work at home and of taking measures against unemployment.” 18 The mercantilist concern about unemployment had led to further measures against imports, since imported goods might displace home produce and reduce employment. This concern seems to go back very far in modern history, for Heckscher quotes an English Act of Parliament of 1455 placing the blame for unemployment in the silk industry on foreign competition, while a later Act, of 1463, stated that “all workers in the silk industry, both men and women, are impoverished by the lack of occupations” due to imports.19 Keeping out foreign goods for the sake of creating employment at home seems to have been a frequently recurring argument in the mercantilist literature. Although the attitude of mercantilist to labour was at great variance with the contemporary view — they generally believed in low wages and child labour — the connection in their doctrines between trade restrictions and the furtherance of employment has a very modern ring to it.

Reference has already been made to the mercantilist notion that in trade transactions there must always be a loser and a winner. “Within the State”, Heckscher remarks, “mercantilism pursued thoroughgoing dynamic ends. But the important thing is that this was bound up with a static conception of the total economic resources in the world; for this it was that created that fundamental disharmony which sustained the endless commercial wars. Both elements together implied that the position of a particular country could change and was capable of progress, but that this could only happen through acquisitions from other countries. This was the tragedy of mercantilism. Both the Middle Ages with their universal static ideal and laissez faire with its universal dynamic ideal avoided this consequence. Without grasping this it is impossible to understand mercantilism either in theory or practice.”20

It was the mercantilist insistence on a gold influx as the main object of trade which led to the doctrine of one-sided trade advantage and to the practice of trade wars. Adam Smith — and David Hume before him — exposed this fallacy of the mercantilists. The following passage from Hume’s essay “The Jealousy of Trade” is a brilliant refutation of one of the most unfortunate mercantilist doctrines:

The increase of domestic industry lays the foundation of foreign commerce. Where a great number of commodities are raised and perfected for the home market, there will always be found some which can be exported with advantage. But if our neighbours have no art or cultivation, they cannot take them; because they will have nothing to give in exchange. …

Nor need any State entertain apprehensions, that their neighbours will improve to such a degree in every art and manufacture, as to have no demand from them. Nature, by giving a diversity of geniuses, climates, and soils to different nations, has secured their mutual intercourse and commerce, as long as they all remain industrious and civilized. Nay, the more the arts increase in any State, the more will be its demands from its industrious neighbours. The inhabitants, having become opulent and skilful, desire to have every commodity in the utmost perfection; and as they have plenty of commodities to give in exchange, they make large importations from every foreign country. The industry of nations from whom they import receives encouragement; their own is also increased, by the sale of the commodities which they give in exchange.21

It is a token of the prevalence of the mercanlist concepts in our own midst that the above passage still does not strike us today as a commonplace, and that all of us who stand for freer trade have to use similar arguments in the controversies in which we become engaged. David Hume was by no means a free trader; he was in point of fact a moderate protectionist himself. What he objected to was the fear of mercantilist governments at seeing the growth of the prosperity and welfare of other countries. The conclusion of his essay, in all its forcefulness and eloquence is one of the classic pages of economic literature:

Were our narrow and malignant politics to meet with success, we should reduce all our neighbouring nations to the same state of sloth and ignorance that prevails in Morocco and the coast of Barbary. But what would be the consequences? They could send us no commodities; they could take none from us: our domestic commerce itself would languish for want of emulation, example, and instruction: and we ourselves should soon fall into the same abject condition to which we had reduced them. I shall therefore venture to acknowledge that, not only as a man, but as a British subject, I pray for the flourishing commerce of Germany, Spain, Italy, and even France itself. I am at least certain that Great Britain, and all those nations, would flourish more, did their sovereigns and ministers adopt such enlarged and benevolent sentiments towards each other.22

Because a favourable attitude towards free trade is often confused with a lack of patriotism, the concluding lines are particularly worth quoting, and the reader will note, in Chapter VI, the contrast between Hume’s final sentences and Keynes’ opinions expressed in his General Theory, which put the blame for wars on trade, a curious mercantilist throwback. Adam Smith, as usual, has the clinching phrase, the mot juste, on this subject:

The wealth of a neighbouring nation…, though dangerous in war and politics, is certainly advantageous in trade.23

Adam Smith also observes, very much in Hume’s vein, that “a nation that would enrich itself by foreign trade, is certainly most likely to do so when its neighbours are all rich, industrious, and commercial nations. … The modern [i.e., mercantilist] maxims of foreign commerce, by aiming at the impoverishment of all our neighbours, so far as they are capable of producing their intended effect, tend to render that very commerce insignificant and contemptible.” 24

In the field of foreign trade policy, there is another mercantilist concept which must be mentioned in the present discussion. It is the idea that exports should be made a condition for imports. Heckscher finds the earliest provision of this kind in pre-mercantilist times already, in a treaty between Venice and Ancona of 1264 stipulating that the proceeds of goods sold to Venice be used by Ancona only for purchases in Venice.25 This is the practice which, since the 1930’s, has been called, bilateralism. Adam Smith included it in his indictment, in a passage which remains a classic criticism of a malpractice that, to the great detriment of all concerned, is again very widespread in our days:

The restraints upon the wine trade in Great Britain… favour the wine trade of Portugal, and discourage that of France. The Portuguese, it is said, indeed, are better customers for our manufactures than the French, and should therefore be encouraged in preference to them. As they give us their custom, it is presented, we should give them ours. The sneaking arts of underling tradesmen are thus erected into political maxims for the conduct of a great empire; for it is the most underling tradesmen only who make it a rule to employ chiefly their own customers. A great trader purchases his goods always where they are cheapest and best, without regard to any little interest of this kind.26

V

The temptation to speak of other aspects of mercantilism is indeed very great. Since, however, we are primarily interested in the mercantilist heritage for our times rather than in mercantilism per se, we have gone far enough in quoting, chapter and verse, the mercantilists themselves, the expert historians who have written about them, and their early influential opponents. What then, exactly, is the mercantilist heritage? Let us begin by saying what it is not. It is not the colonialism of the mercantilist era; that is past history, superseded by other developments. In a sense, free trade paved the way for the downfall of colonialism even though Great Britain built an empire at the very time she was promoting free trade throughout the world. But then Britain’s colonial empire developed into the British Commonwealth of Nations, an evolution that is still under way. The break-up of empires and the end of colonialism is a characteristic of our times. Nor is internal unification an object of major concern on the part of governments, at least of the western countries, and in the countries where it remains an objective, such as the Soviet Union or China, totalitarianism has taken the place of mercantilism. The nineteenth century having brought about national unifications, there is no mercantilist heritage to carry forward.

The third and basic concern of mercantilism, over the acquisition of precious metals, although still present — especially in times of crisis — no longer plays the important role it had in days gone by. In the nineteenth century this concern was largely overcome. The function of precious metals was to circulate, not to stand still. Under the rules of the gold standard, a country would regard losses of gold as much a part of the game as gold earnings. The value of trade consisted not in the balance but in the volume. But with the breakdown of monetary internationalism we are partly back where we were in older days. In the thirties there was a great recrudescence of mercantilist policies for the purpose of creating or accumulating monetary reserves, and today restrictive trade policies are applied by many countries for the same purpose.27

The mercantilist heritage consists, however, primarily of other elements than those already mentioned. They are the following:

(1) The deliberate management of balances of payments, instead of allowing them “to take care of themselves”.

(2) The promotion of domestic employment by restricting imports and promoting exports.

(3) Deliberate state action to control the structure and the volume of imports and exports (and of financial operations as well, which played a relatively small role before the nineteenth century).

(4) The manifold practices of protectionism and the remaining vestiges of the idea that it is better for a country to sell abroad than to buy abroad.

(5) The concept that one should buy from one’s customers, a relatively minor element in the mercantilist doctrines but one that has blossomed in our day into “bilateralism”.

(6) The concept that it is the raison d’état rather than individual decisions which should guide the country’s foreign economic relations.

This, then, is our inheritance from mercantilism. That it all adds up to economic nationalism hardly needs saying. What needs very much saying, however, is that although the mercantilist heritage carries with it the notion of the state’s superiority over the individual, it would be greatly overstating the case to say that modern collectivism has mercantilist roots. We must look elsewhere for theories which regarded the determination, regulation, and control of every aspect of individual activity and of economic life as proper functions of the state. These we shall find in the writings of Johann Gottlieb Fichte.

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