Tuesday, June 10, 2008

Modern Mercantilism

I just explained the difference between modern mercantilism and 16th century mercantilism in my response to a comment by Twofish on Brad Setser's blog. Twofish wrote:

Historically the first example of a mechantilist economy was that of Spain. During the 17th century, you had massive amounts of gold and silver entering Spain. The basic problem with accumulating gold, silver or dollars is that unless you spend it, gold, silver, and dollars don’t produce anything, and China and the Middle East are ending up with inflation for many of the same reasons that Spain did. You have massive amounts of dollars coming in, and they aren’t doing anything useful.

I responded:


Your discussion of Spanish mercantilism is a bit inaccurate. The relevant century was the 16th Century, which is the century that France, England and the other mercantilist powers succeeded with stealing Spanish industry. That century ended with the failure of the Spanish Armada’s attempted invasion of England, marking the end of Spain’s rein as the dominant power.

Adam Smith justly derided mercantilism as being based upon the wrong goal. Indeed, the goal of the mercantilism of the day was to collect as much gold as possible because gold gave a monarchy the power to engage in foreign wars. The Spanish got their gold by stealing it from the Incas. England and France got their gold by encouraging their exports and restricting their imports. One of the main points of Smith’s “Wealth of Nations” is that a nation’s well being should be measured by its GDP (though he didn’t call it that), not the amount of gold in its treasury.

As you point out, when the goal of mercantilism was to collect gold, it eventually failed. The additional gold becomes part of the money supply and causes inflation.

The goal of the modern mercantilist nations is quite different. Their goal is to steal industries, not collect dollars or gold. When they get dollars, they lend them back to Americans (directly or indirectly) just as fast as they can.

I completely disagree with your analysis that the inflation in China at the moment is directly caused by their dollar accumulations. Unlike the gold of the 16th century, dollars in 21st century China are not a medium of exchange. That medium in China is the yuan (RMB).

The rising inflation in China is probably either due to the rising cost of imported oil and/or the expansion of the Chinese money supply. I suspect that it is due to both.


Follow the following link to read the entire entry and the responses there: http://blogs.cfr.org/setser/2008/06/10/shhh-don%e2%80%99t-tell-any-one-the-us-trade-deficit-is-getting-worse-not-better/#comment-108385


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