Keynes and Rothbard Agreed: Today‘s Economics is Mercantilism
January 23, 2014
(This item originally appeared at Forbes.com on January 23, 2014.)
Today’s high priests of economic foofoo actively promote a narrative: that our mainstream economic understanding is the culmination of decades of steady improvement and research. Earlier times, particularly the pre-Keynesian times before 1950, are regarded as a dark age of superstition and fallacy.
This is a narrative that seems plausible, because it applies to technology. There’s no question that electronics, materials science, manufacturing and so forth have made steady progress, which, over decades, have amounted to almost unbelievable advancements.
However, this narrative does not apply to economic understanding at all. We actually live in a dark age of economic understanding right now — a time of superstition and fallacy. Most of today’s prominent economic ideas are really just warmed-over versions of Mercantilism, the patterns of British economic thinking dating from about 1600 to their culmination in the writings of James Denham Steuart in the 1760s. Adam Smith’s great triumph, in the 1770s, was to finally flush away the last vestiges of Mercantilism from British economic debate.
All of today’s premier economic policies, notably monetary manipulation and floating fiat currencies, attempts to “manage the economy” via government deficit spending, and the never-ending concern over “imbalances” in trade, are straight-up Mercantilism.
We really won’t make much progress in our economic understanding until this is recognized. The entirety of today’s Mercantilist agenda should be discarded; first, at an intellectual level, and then at the level of public policy. Britain did this, and went from an economic backwater overshadowed by tiny Holland, to the birthplace of the Industrial Revolution and the center of the largest empire of the nineteenth century.
The trend towards Mercantilism was actually led by politicians and governments. In dealing with the Great Depression of the 1930s, they did what governments often do in crisis — devalued the currency, and spent a lot of money. Not a lot of economic understanding is needed for this. Politicians do this in much the way that dogs bark and fish swim.
Economists were actually late to the party. The significance of Keynes’ General Theory of Employment, Interest and Money of 1936 was not that it showed a new way — by that time, world governments had been busily implementing Mercantilist policies for over six years. Rather, it showed economists how they could update their blather to the new political realities, so that they could reclaim their prized sinecures as elaborate justifiers for what politicians wanted to do anyway. Keynes’ book is essentially unreadable; the title alone tells you where Keynes intended to get his employment from.
Keynes himself understood what he had done. An entire chapter of the General Theory (chapter 23, Notes on Mercantilism …) is dedicated to cheering the return of the Mercantilist agenda.
“[the Mercantilists] were emphatic that an unduly high rate of interest was the main obstacle to the growth of wealth … and several of them made it clear that their preoccupation with increasing the quantity of money was due to their desire to diminish the rate of interest.”
Does that sum up the past several years of Bernanke and Quantitative Easing?
Murray Rothbard wrote extensively and wonderfully on this topic, especially in his fantastic book Economic Thought Before Adam Smith. This used to be a little-known text buried in university libraries, but it is now available for free in eBook form from mises.org.
One of Rothbard’s points is that Mercantilism reflected big government; the Classical or “laissez-faire” view reflected small government. Today’s Mercantilism is a reflection of the expansion of the U.S. government, from 7% of GDP in 1900 to about 40% today. This brief excerpt is also from mises.org:
”As the economic aspect of state absolutism, mercantilism was of necessity a system of state-building, of big government, of heavy royal expenditure, of high taxes, of (especially after the late 17th century) inflation and deficit finance, of war, imperialism, and the aggrandizing of the nation-state. In short, a politicoeconomic system very like that of the present day.”
That sounds a little familiar …
Here’s Rothbard, talking about Mercantilism in 1963:
”Mercantilism has had a ‘good press’ in recent decades, in contrast to 19th-century opinion. In the days of Adam Smith and the classical economists, mercantilism was properly regarded as a blend of economic fallacy and state creation of special privilege. But in our century, the general view of mercantilism has changed drastically.
Keynesians hail mercantilists as prefiguring their own economic insights; Marxists, constitutionally unable to distinguish between free enterprise and special privilege, hail mercantilism as a “progressive” step in the historical development of capitalism; socialists and interventionists salute mercantilism as anticipating modern state building and central planning.
Mercantilism, which reached its height in the Europe of the 17th and 18th 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.”
It appears to me that we are in a crisis period, which may last until 2020 or so. This crisis era should clear out the old forms and allow for the creation of new forms. It is too early to do much now. Rather, today is a time to get things clear, in your head, about what the next era should look like.
The crisis of the Great Depression and World War II resulted in the transition from small government to big government worldwide. The transition from Classical to Mercantilist economic thinking was just one aspect of this.
Ideally, the next era will be a time of smaller government and a return to Classical economic understanding — what I call 21st Century Capitalism. Abandoning contemporary Mercantilism, in all its forms, is one step on that path.