Adam Smith and Mercantilism
By: F. A. Hayek Program
Tags: The Wealth Of Nations, Trade, Adam Smith, Economics, Mercantilism

Contemporary Mercantilism

Ask Us Anything: Adam Smith and Proud Mercantilism

What does the mercantilist debate have to say about current debates surrounding industrial and trade policy?

Trade policy has been a popular topic for decades, but it is especially prominent today. And though in the past Americans have been reticent to openly embrace mercantilist principles, the last few years have seen a reemergence of what Boudreaux calls “proud mercantilism” on both sides of the aisle. Proud mercantilism often manifests in industrial policy, a kind of protectionism that uses import tariffs and export subsidies to choose economic winners and losers from domestic industries. The justification for this policy is an extension of mercantilism’s proposition that trade is a zero-sum game: no nation can get rich without impoverishing another. However, the rapid global economic growth over the last 200 years debunks this theory by showing that it is possible for all nations to experience simultaneous economic growth.[7] In fact, industrial policy is more likely to harm the global economy than help any one nation, although it will benefit the particular industries and companies protected by the policy. As Smith writes, “[Protectionism] comes from an order of men, whose interest is never exactly the same with that of the publick, who have generally an interest to deceive and even oppress the publick, and who accordingly have, upon many occasions, both deceived and oppressed it.”[8]

Ask Us Anything: Adam Smith and Modern Mercantilism

What recent versions of mercantilist policies hamper trade relations today?

Though many parts of our present-day reality would be unfamiliar to Adam Smith, our trade rhetoric would sound all too familiar. From exceptions for national security to retaliatory tariffs and from protectionist impulses to industries campaigning for concentrated benefits, the fundamentals of the trade debate have not changed since Smith wrote The Wealth of Nations. Although the countries that bear the brunt of trade-related fears change over time — Boudreaux names Japan and China as examples [9] — protectionists continue to maintain that industrial policies are necessary for economic growth.

The market process and resulting trade, not industrial policy, deserve the credit for economic growth.

However, by erecting barriers to trade, modern mercantilism hampers the very economic growth it claims to advance. Since World War II, the global economy has grown while tariffs have simultaneously decreased. Boudreaux explains that Japan’s industrial policy hindered rather than helped its economy, and China grew after transitioning from central planning to a market economy, not the other way around. The market process and resulting trade, not industrial policy, deserve the credit for economic growth.

Ask Us Anything: Can We Forgo Balance-Of-Trade Accounting?

Is it feasible to do away with balance-of-trade accounting?

Mercantilism began with concern for trade’s effect on the royal household, and for the monarchies of the time, it was not a far leap from accounting for the royal household to the entire country. Balance-of-trade, or international trade, accounting reflects this aspect of mercantilist thought by attributing common household economic indicators, such as budgets and incomes, to countries. However, countries do not have budgets and incomes in the same way that households do, so it is not as much of a cause for concern if a country imports more than it exports.

For instance, the most prominent feature of international trade accounting is the trade deficit. A trade deficit is often assumed to be a sign of impending doom, but it is nothing of the sort. In the simplest terms, the United States runs a trade deficit when it receives more goods and services from other nations than it sends abroad — but other nations are not sending us free goods out of pity, nor are they hoarding the dollars that Americans spend on their exports. Those dollars are used to invest in new ventures and to buy goods and services, fueling the global economy. This outcome is hardly worthy of alarm. Yet, few ideas are as adept at stirring up economic anxiety as the trade deficit, making international trade accounting useful fodder for demagogues.

Ask Us Anything: Adam Smith and the Role of Ideas

How important are ideas in terms of policy? For example, most economists today would agree that tariffs reduce general welfare, and yet they still exist to a great degree.

Humans are an ideas-driven species. We communicate with each other not only to warn each other of impending danger as other species do, but also for the purpose of transferring and discussing ideas. Those ideas are crucial for human interaction and societal coordination: the formal institutions that affect our political, economic, and social lives are unlikely to stick unless they are supported by informal institutions such as ideas.[10] Put simply, ideas matter, and promoting good ideas and debunking bad ones is of paramount importance. Deirdre McCloskey advances this line of thought in her Bourgeois Trilogy, in which she posits that the “Great Enrichment” — the explosion in global economic growth that occurred during the last few centuries — resulted from increasingly favorable views of commerce, trade, and entrepreneurship. McCloskey argues that seeing those pursuits as noble rather than merely tolerable enabled unprecedented economic growth.[11]

The Wealth of Nations itself is one example of the power of ideas. Though Smith invented neither capitalism nor self-interest, he explained how the market works and extolled its benefits. His work further paved the way for the wider acceptance of the market that, according to McCloskey, was necessary for economic growth. Ideas have power: Smith’s ideas and those of his contemporaries changed history.

The Story of Society

Ask Us Anything: Adam Smith and the State of the Economics Profession

If Adam Smith explains what wealth actually means, why do you think there are economists that do not get it yet? What economic theory supports their position?

Generally, economists understand markets and trade better than non-economists, but the economic profession’s understanding of markets and trade has diminished in recent years, Boudreaux contends. Economists have turned from big questions to narrow analyses, viewing economics as an observational, objective science. Though economics is indeed a science, it is a social science of complex, ever-changing societies rather than replicable natural phenomena. Studying economics is a matter of not only collecting data, but also understanding the stories behind them.

Studying economics is a matter of not only collecting data, but also understanding the stories behind them.

In a 1986 paper, Don Lavoie draws from F. A. Hayek’s work to distinguish between knowledge, which is inarticulate and personal, and data, which are articulate and objective.[12] Statistics are important, but they cannot speak for themselves. Allowing them to do so separates cut-and-dry data from the unarticulated knowledge behind them. Smith illustrates this principle in The Wealth of Nations by presenting data through the lens of theory, telling a story about what he observes.

Data must be contextualized in the story of society, and to tell that story, economists need to engage with society in all its complexity. This requires not only a solid grasp of basic economic theory — including the works of Armen A. Alchian, Ronald H. Coase, James M. Buchanan, and Harold Demsetz — but also an understanding of fields like philosophy, history, political science, and literature. As F. A. Hayek put it, “Nobody can be a great economist who is only an economist.”[13]

Ask Us Anything: Adam Smith and How He Did Economics

Today, the profession of economics seems divided into so many subdisciplines, whereas Smith’s economics seemed more general, interdisciplinary, and philosophical. Do you think economics should go back to those roots?

Despite the many economic textbooks depicting dollar signs on their covers, economics is not the study of money, Boudreaux observes. Instead, it is an aspect of the study of society, and society is composed of human beings who (among other interactions) exchange with one another. James M. Buchanan recognizes this in his 1963 Presidential Address to the Southern Economic Association (SEA) entitled “What Should Economists Do?”[14] Buchanan argues that economists should return to their Smithian roots by studying human beings’ unique “propensity to truck, barter, and exchange.”[15]

In a way, Buchanan is warning economists against viewing society through a mercantilist lens. At the time that Buchanan gave his SEA Presidential Address, mainstream economics had become a science of resource allocation. Economists analyzed society as if it was one big household or firm. Yet, although a household or firm has a set of purposes, society does not. Rather, society emerges from the interactions of purposeful people. Instead of measuring economic activity against the national interest or social welfare, Buchanan argues, economists should return to studying interactions between individuals, making economics a study of society and exchange once again.