What was Adam Smith's contribution to mercantilism

Conclusion - the business blog

Jean-Baptiste Colbert was not inclined to diplomacy. With the “iron hand of authority”, the finance minister of the “Sun King” Louis XIV implemented his ideas, according to a description by the public servant. The man who in the 17th century worked his way up from a merchant family to become the second most important person in the state, pursued a clear agenda: France first!

In order to make the nation, which had been badly shaken by war and mismanagement, “grand” again, Colbert revolutionized economic policy: He increased import tariffs, kept wages low and boosted domestic production. He considered local craftsmen to be the real guarantors of prosperity. The minister invested in the infrastructure, had better roads built and set up a new merchant fleet. French goods should flood the world and make the state rich. The concept worked.

Economists later christened this economic policy mercantilism - and made it disappear in the moth box of outdated ideas. At the end of the 18th century, the Scottish economist Adam Smith ridiculed the, in his eyes, absurd idea of ​​wanting to create real prosperity through protectionism and export promotion. Because despite all the gold and silver that had flowed into the treasury for French products, the people did not have enough to eat. Balance the prosperity in precious metal? A wrong track for Smith. He advocated the “laissez-faire principle”, that is, as free trade as possible. Then David Ricardo took the stage and taught the free trade opponents with his theory of “comparative advantage”: In the end, all parties benefit from the unhindered exchange of goods.

While Smith is hailed as the founder of economics and Ricardo has become the patron saint of free trade, the early advocates of mercantilism are now treated more like lepers. They are mentioned in textbooks, but not adequately appreciated. Xiao Jiang and Sohrab Behdad (both from Denison University, Ohio) criticize this in a work that has not yet been completed, which they recently presented at the most important economics conference of the year in Chicago. The researchers are not singing the praises of mercantilism. You present Colbert and his colleagues as pioneering economists with enormous influence to this day.

It is too seldom recalled that mercantilists were the first to be concerned “about an inherent contradiction in capitalism”: low wages for the rank and file on the one hand and weak aggregate demand on the other. “According to the mercantilists, the export market is the solution to this contradiction”, write the two authors. The money from abroad was supposed to fill the gap that opened up domestically because people were not consuming enough.

The goal of Colbert and other mercantilists was trade surpluses. States should sell more abroad than import from there. It is obvious that this calculation can never work out for all states. Because the surplus of one is the deficit of the other. Especially in the long term, this can lead to dangerously high mountains of debt, say economists today.

But that does not reduce the performance from back then. The modern view, which assumes an interest in the welfare of other states, was alien to the Sun King's finance minister. The young nation-states of that time had very different problems than the debts of their neighbors: the next war, the empty state treasury, the king's new palace. With this in mind, mercantilism was definitely a promising strategy.

Today it sounds questionable to build an economic model on keeping large masses away from the fruits of their labor. At that time, however, no ruler had an interest in making large sections of the people rich. On the contrary: “Every idiot knows that the lower class must be kept poor, or they will never be diligent,” wrote the English publicist Arthur Young in 1771. The intention behind this statement was not just to make people docile workers. Even then, it was about labor costs: in the time before the industrial revolution, they played an even more important role than the costs of machines. In order to keep the production process profitable, "it was key for all capitalists to keep labor costs down," write Jiang and Behdad.

The purely national economic policy made France an economic power. However, mercantilism did not become a successful model for the global economy. Because the states acted more against each other than with each other. “No wonder that there were permanent trade wars between states that pursued a mercantilist strategy,” the researchers conclude.

Big gains in prosperity for everyone came later: through innovation, globalization and the insight that trade is not a zero-sum game. Today we know that trade can enlarge the cake to be distributed. However, this progress does not mean that the mercantilist way of thinking has disappeared from people's minds. In the mid-1960s, British economist Joan Robertson stated that increasing one's share of world trade was “an integral part of any government's economic policy”.

In the past few decades this endeavor was nowhere to be seen as clearly as in China. The People's Republic owes its increased prosperity to its export-driven growth model. While the life of foreign companies was made more difficult, China rose to be the export champion. But wages remained very low for a long time. In the long run this cannot work, the central government finally realized. With a great show of strength, the country is trying to break away from its dependency on exports and let the people participate in the prosperity - as it turns out, with considerable difficulties.

Researchers Jiang and Behdad praise the intellectual achievement of the mercantilists. They do not want a renaissance. But that's exactly what is happening right now. If Jean-Baptiste Colbert were still alive, he would have a good chance of becoming the second most important man in the state again. This time not in Versailles, but in the White House.

Keywords: Colbertism, David Ricardo, free trade, mercantilism, protectionism
To press
Send post by email

You have to stay outside!

By Johannes Pennekamp

Isolation is a strategy of the day before yesterday, but it was once really revolutionary: the first criticism of capitalism.

An error has occurred. Please check your entries.

Send post by email

Many Thanks
The post was sent successfully.