What is mercantilism?

Spanis seaport by Claude Lorrain. Source: Wikimedia

Mercantilism is a national economic policy designed to maximize the accumulation of currency reserves through trade. It promotes government regulation of an economy to augment a nation’s economic power at the expense of rival national powers. When politicians complain about a nation’s trade balance, they’re looking at the world with mercantilist glasses.

Mercantilism becomes more popular when a country suffers from repeated shortages. If a country doesn’t have enough iron for its growing railroad network, it’s relatively simple to put export restrictions on iron and other strategic goods. If there aren’t enough goods-producing jobs in the economy, provide government subsidies to industries that produce and export goods. This ignores the long-term, innovation-killing effects of government assistance.

David Hume and Adam Smith pointed out the problems with mercantilism a long time ago. The system confuses money with wealth. If a nation is able to gather most of the world’s bullion within its borders, prices would rise in that country relative to other countries and those countries would be able to provide cheaper goods. A nation’s weath doesn’t consist of its money supply, it resides in its ability to produce goods and services. That’s why Adam Smith called his book, “The Wealth of Nations.”

Mercantilism (and its economic cousins) depends on a false premise: that resources are finite, and that economic progress depends on securing these resources. It’s led to nationalistic wars and colonial exploitation, all in the name of securing raw materials and capturing markets for finished goods. But the last two decades have shown us that global resources are only limited by human ingenuity and incentives. North Dakota is now a larger crude oil producer than most of the nations in OPEC.

Just as important, mercantilism confuses competition with hostility. You can seek to win a competition without wishing your competitor ill. As a young man, my best friends were also my competitive rivals from sports. In a modern economy, companies both compete and cooperate. Apple may try to out-design Samsung with its phones, but then uses Samsung’s chips in other products. JP Morgan may try to beat Morgan Stanley in deal-making, then cooperate on a loan syndication. They call each other “cust-petitors.”

When you see the world as a basic struggle for raw survival, that creates expectations that lead to aggression and violence. But it doesn’t have to be that way. In sports, you never improve yourself by tearing down your competitors. And in economics it’s far cheaper to trade with your rivals than to steal from them.

Douglas R. Tengdin, CFA