Mercantilism - Legacy

Legacy

Adam Smith rejected the mercantilist focus on production, arguing that consumption was paramount to production. He added that mercantilism was popular among merchants because it was what is now called "rent seeking". However John Maynard Keynes argued that encouraging production was just as important as consumption,and he favoured the "new mercantilism". Keynes also noted that in the early modern period the focus on the bullion supplies was reasonable. In an era before paper money, an increase for bullion was one of the few ways to increase the money supply. Keynes said mercantilist policies generally improved both domestic and foreign investment. Domestic because the policies lowered the domestic rate of interest. And it increased investment by foreigners in the nation by tending to create a favorable balance of trade.

Keynes and other economists of the 20th century also realized the balance of payments is an important concern. Since the 1930s, all nations have closely monitored the inflow and outflow of capital, and most economists agree that a favorable balance of trade is desirable. Keynes also supported government intervention in the economy as necessity, as did mercantilism.

As of 2010, the word "mercantilism" remains a pejorative term, often used to attack various forms of protectionism. The similarities between Keynesianism, and its successor ideas, with mercantilism have sometimes led critics to call them neo-mercantilism. Indeed, Paul Samuelson, writing within a Keynesian framework, defended mercantilism, writing: "With employment less than full and Net National Product suboptimal, all the debunked mercantilist arguments turn out to be valid."

Some other systems that do copy several mercantilist policies, such as Japan's economic system, are also sometimes called neo-mercantilist. In an essay appearing in the 14 May 2007 issue of Newsweek, business columnist Robert J. Samuelson argued that China was pursuing an essentially mercantilist trade policy that threatened to undermine the post-World War II international economic structure.

Murray Rothbard, representing the Austrian School of economics, describes it this way:

Mercantilism, which reached its height in the Europe of the seventeenth and eighteenth centuries, was a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state. Thus, mercantilism held exports should be encouraged by the government and imports discouraged.

In one area economists rejected Smith well before Keynes: in the use of data. Mercantilists, who were generally merchants or government officials, gathered vast amounts of trade data and used it extensively in their research and writing. William Petty, a strong mercantilist, is generally credited with being the first to use empirical analysis to study the economy. Smith rejected this, arguing that deductive reasoning from base principles was the proper method to discover economic truths. Today, many schools of economics accept that both methods are important.

In specific instances, protectionist mercantilist policies also had an important and positive impact on the state that enacted them. Adam Smith himself, for instance, praised the Navigation Acts as they greatly expanded the British merchant fleet, and played a central role in turning Britain into the naval and economic superpower from the 18th Century onward. Some economists thus feel that protecting infant industries, while causing short-term harm, can be beneficial in the long term.

Nonetheless, the publication of The Wealth of Nations in 1776 had a profound impact on the end of the mercantilist era and the later adoption of free-market policy. By 1860, England removed the last vestiges of the mercantile era. Industrial regulations, monopolies and tariffs were withdrawn.