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Mercantilism, "realism" and reality

By Daniel M. Ryan
web posted June 16, 2008

Recently on CNN, there was a discussion of China's growing influence in Africa. This written report on the same subject from the Heritage Foundation casts the same theme into a "Wake Up, America!" narrative. One of its own themes is that the government of China is moving in on Africa on the basis of national interest, which seems to be confined to economic aims but might not be so in the future. The chief complaint in the article is that China is doing so in a pragmatic manner, one that does not add the goal of fostering or aiding freedom and respect for human rights in Africa.

That paper makes for an interesting touchstone in the largely American debate over how the Chinese economy has grown so rich. Mercantilists would point to the various subsidies the Chinese government has put in place for Chinese companies. The most notable one is the dollar-sterilization policy, which has not only kept the renminbi down but has also kept the Chinese credit markets awash in loan money. On the other hand, free traders can point to the Chinese government's Africa initiatives as further evidence that American hands seem allergic to Chinese dirt: the Chinese are yet again showing Americans that the latter would rather not compete full throttle.

It's at this point, of course, that the arguments start. Rather than join in them, I myself will argue that the free traders are formally correct but as professional economists tend to be facile. A broader look will show that the protectionists have a point when it comes to the source of China's recent growth.

As far as mercantilistic polices are concerned, there is a glaring counterexample that puts the debunk on mercantilists' favourite arguments and policies. It's the country I happen to live in, Canada.

Almost from the beginning, the government of Canada put mercantilistic policies in place; Canadians have been selling them through the same arguments that American mercantilists use nowadays. Americans may find it hard to believe, but the "Chinese threat" featured in Canadian mercantilists' selling jobs was none other than the United States itself. Ever since Sir John A. Macdonald's National Policy, the standard line has featured the rapacious, trade-unfair Yankee driving the ‘umble and fair-minded Canadian into penury.

In addition to tariffs, Canadian policy has taken turns into substantially all of the policies that the Chinese government has been accused of – with the possible exception of using "safety standards" in a mercantilistic way. The others, though - tariffs; deliberate low-dollar policies; both real and disguised subsidies, including consumers' subsidies for essential goods as compensation for high-tariff higher prices; goosing the economy through inflation – have been tried by the Canadian government. It wouldn't be too far-fetched to claim that the Canadian government has come up with mercantilistic measures that Chinese government officials haven't even thought of.

After all these policies were enacted, from time to time to hopeful time, Canadian mercantilists and neomercantilists would sit back and wait for the "Canadian Tiger" to emerge roaring. It never did.

Canada, in fact, is a classic case study showing the impotence of mercantilistic policies, in and of themselves, in promoting national economic greatness. Had those policies worked as advertised, the Canadian-American income gap should be reversed, or at the very least erased. Canada's tax rates haven't always been higher than the U.S.', after all.

Does this mean that American protectionists are wrong and the free-traders right? In the narrower sense, yes, but there's an important element that's missing from both sides' analyses which puts a point behind the protectionists' complaints. Mercantilist policies, in and of themselves, don't work…but what does work is a kind of "mercantilistic spirit" if added. Mercantilist policies work when coupled with official encouragement to get rich, to the point of making wealth acquisition a patriotic duty. One pronouncement to that effect, such as Deng Xiaoping's "It is glorious to be rich," does more for GDP growth than ten domestic-manufacturer subsidy programs do. That governmental sponsorship (subject to chain-yanking) of monied people is what China has, and what Canada never had.

To be blunt about it, most Canadians didn't want such official exhortations. The cultural costs were seen as being too high – particularly the risk of plain avarice sporting an O.H.M.S. badge. Many Americans have similar qualms, resulting from the age when some of the Robber Barons had the penchant for using the Union flag as a bludgeon.

If any American really wants America to recapture its economic supremacy, the above should indicate what the cultural cost would be. It would be straightforward to initiate: just convince the President to use the bully pulpit primarily to push the idea that there's no better way of life than wealth acquisition, and convince top government officials in both the legislative and executive branches to make the businessperson somewhat of a pampered pet when it comes to policy. This "program" is the one that does work, as the above sketch of comparative economic history shows.

It does, however, invite the old stockbroker's question: "Are you sure you want to do this?" ESR

Daniel M. Ryan is a regular columnist for LewRockwell.com, and has an undamaged mail address here.

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