The Rise of Mercantilism

Oscar B. Johannsen

[Reprinted from The Gargoyle, November, 1971]

In 1776, Adam Smith delivered a death blow to the mercantilist philosophy in his classic, The Wealth of Nations -- or so it was thought.

Mercantilism was the system which arose in Europe as power was centralized in what were called nation-states. It was predicted on a belief that government regulation was necessary in order to insure the growth and prosperity of a nation. Thus, it brought into existence controls over industry and commerce, with the imposition of discriminatory tariff and quota laws, creation of trade monopolies as well as increasing monopolistic control of banking and money.

Underlying this philosophy was the belief that a nation should have a favorable balance of trade. This meant that there were to be more exports than imports. The difference was to be made up by the importation of money, which meant primarily gold.

Adam Smith demonstrated clearly that the "unseen hand" of the free marketplace regulated commerce and industry equitably and efficiently; that, on the contrary, controls by government were inhibitory and harmful to a nation. He also showed, as others as David Hume had before him, that a nation wasn't better off merely because it had more money (gold). AS a matter of fact, with no barriers to trade, the country with a so-called favorable balance of trade would find that the importation of money (gold) tended to raise its price level. This discouraged exports from that nation as now its goods cost relatively more. At the same time, the nation with the so-called unfavorable balance of trade, as it was losing money, found its price level falling. This encouraged foreigners to buy there as its prices were now relatively cheaper. Thus, just as water seeks its own level, so the tendency was for any imbalances to be evened out, so prices tended to be the same no matter where (after taking into account such problems as transportation costs.)

The United States was the example par excellence of the truth of Adam Smith's thesis of free trade in its broadest concept -- that is, of freedom from controls by the government.

But, now, because of the fundamental disequilibrium caused by our unsound system of land tenure, Adam Smith's wisdom has been dumped into the ash can, and Mercantilism is coming into its own. This, of course, has not been a changeover night. The government has increasingly been adopting mercantilistic principles -- as a matter of fact -- the United States never had a completely free economy. But, for the extent of land concerned, and number of people involved, America has approximated a free economy closer than any other nation in the world.

What was a marked departure was the overnight change made on August 15th with the imposition of the New Economic Program of the Administration. This was the first time in peacetime that wage-price-rent controls were imposed on the nation. It was Mercantilism at its worst.

What has been the result? A predictable one. Other nations, claiming the necessity to protect their own economies, are also adopting more and more mercantilistic principles. Denmark has just announced that it is instituting controls over exports to counter America's 10% import surcharge. This is just the beginning.

It means an increasing isolation of the nations of the world as one after another impose more and more controls over commerce. Unless this process is reversed, the trade war will bring in its train increasing strains among the peoples of the world, with prejudice and other social problems arising which almost inexplicably seem to divide up the peoples of the world.

What can be done to reverse the present trend? Probably not too much as long as the sacrosanct land question is ignored. Economists can stand on 42nd Street and Broadway day and night shouting the advantages of free trade; they can prove indisputably that mercantilism is harmful, and people may even agree with them. But just as a confirmed smoker will listen to all the arguments why he should not smoke, will nonetheless continue that habit, so will the people continue to go on their merry way assuming that government controls will stop the rise in prices, will increase employment and will rescue the nation from economic disaster. And just as a smoker may agree that ultimately he will have to pay a price for his habit, so the people may realize that ultimately they, too, will have to pay a price. But, in both cases, it is something in the future, and as long as it seems to be far enough away, no corrective action may be taken.

Only something dramatic will stop the smoker -- that may be a physical breakdown. For the nation, it may well mean a war or revolution.

There is no escaping it. For good health, you must follow the rules of good health. For a sound economy, you must follow the rules of a sound economy-the most important rule of which is no government interference (no mercantilism) but instead freedom to the greatest possible extent.

But life without hope is meaningless. So we can hope that through education of the land question, possibly, just possibly, the present trend may be stopped and reversed. Certainly, all of us who feel we do have some little understanding of the problem and solution must do whatever we can to educate and hope that our work has an effect. One never knows when the spark of knowledge may ignite a fire which will burn away the ignorance surrounding man.