Short Assignment

Emily Cherlet

7735681

University of Manitoba

October 13, 2016

POLS 3270

Radhika Desai
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A dominant misconception of mercantilism is that mercantilist policies such as infant

industry protection cannot and should not be used as a form of economic development. The

ideology of the free market and free trade (FMFT) is perpetuated, as the West demands that

developing countries adopt FMFT policies under the rhetoric that comparative advantage will

ensure that all countries will benefit. This misconception is at once false, hypocritical, and

detrimental to developing countries attempts to industrialize.

Mercantilism has as a main goal the economic development of a nation (Wiles, 1987).

Wiles discusses how many mercantilists also viewed full employment as an important goal

(1987). An effective way to achieve economic development and create good jobs is infant

industry protection, as can be seen from Western countries use of the practice. Contrary to

misconceptions and mainstream neoliberal thought, FMFT was never truly implemented in

Western nations. From the period after the repeal of the Corn Laws, to the age of the gold

standard, the Keynesian welfare state and even the neoliberal era, FMFT has never been a reality

(Desai, 2016). The Industrial Revolution itself was made possible by numerous different

methods of state intervention (Desai, 2016). There has indeed always been a large gap between

rhetoric and reality when it comes to economic policy. While many would argue that England

was a proponent of free trade in the 19th century, it in fact became rich through the use of

various customs duties and tariffs (Reinert, 2007). A similar gap is found in the United States.

Reinert argues: Paul Krugman, who has been very influential on trade and industrial policy

outside the United States, complains that no one listens to standard Ricardian trade theory at

home (2007, p. 23). The United States has been known to subsidize a great many of its

industries, and it is in fact those countries who adhered least to global free trade policies while

they were industrializing that developed the most successful economies (Reinert, 2007).
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Infant industry protection is an integral part of a countrys development. When

protectionist policies are put in place, an industry is permitted to develop until it is strong and

fully formed. Reinert discusses the example of Norway, in which tariffs were put on Swedish

goods to ensure the growth of Norways industry (2007). He points out: everybody at the time

[19th century] knew that a country without industry was doomed to be a poor country (2007, p.

60). It seems that once todays rich countries were able to industrialize, they conveniently forgot

this information.

The push for FMFT policies is hypocritical because Western countries used state

interventionist policies to develop their economies and are now denying developing countries the

chance to do the same. Mercantilist thought asserts that in order to have a successful economy,

state intervention is necessary; state-directed policies that ensure high wages, full employment,

investment in education and skills, and corrections of the many market failures are essential to

the development of countries economies (Desai, 2016).

Dominant neoliberal thought, on the other hand, proclaims that FMFT policies are the path

to development. Many mainstream economists argue that it is foolish and futile to interfere with

free trade, and even that nations that attempt to do so will becomes impoverished (Keynes 1936).

They also engage in what Reinert terms as palliative economics (2007, p. 63), or aid efforts to

reduce the worst symptoms of poverty, while ignoring the realities of what could be done to

encourage industrialization. He discusses how wealthy countries turn a blind eye to their own

advantages when spouting rhetoric for the rest of the world to follow: the models that have

virtually monopolized the discourse tend to exclude precisely those factors that create wealth,

factors that are present in wealthy countries but not in poor ones: imperfect competition,

innovations, synergies between economic sectorsand the presence of economic activities

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which make these factors possible (2007, p. 30).

The West likes to espouse an economic ideology that is based on abstract models and

theories, numbers and calculations, and that does not take into account what is actually

happening in the world. Keynes discusses how mercantilists were able to perceive economic

problems that laissez-faire advocates seemed to ignore (1936). While he criticizes certain aspects

of mercantilists focus on national interests, he sees that it is even more dangerous to adopt

FMFT thinking (1936), which while not inherently nationalist causes many wealthy nations to

benefit at the expense of their poor neighbours. Without a doubt, the price of adopting policies

based on FMFT falls disproportionately on poor nations (Reinert, 2007).

For these countries, the pressure to adopt FMFT policies has devastating effects on their

economies. While Ricardos theory of comparative advantage may be beneficial for countries

that produce high value-added goods, developing countries often have the misfortune of

specializing in basic agricultural products or primary goods (Reinert, 2007). As a result, they are

never able to develop their economies. They are not able to achieve technological progress or

develop national synergies (Reinert, 2007). This international division of labour under FMFT

means that essentially, poor countries are specializing in being poor, or as Reinert puts it:

specializing in the world economy according to a comparative advantage in washing dishes

(2007, p. 27). The very idea of comparative advantage does not account for real world

economies, as it assumes an equal playing field among nation-states, which of course is not

realistic.

The misconception that mercantilist policies are beggar-thy-neighbour (Desai, 2016) is

ironic since in fact it is FMFT policies that strengthen certain (rich) countries economically at the

expense of others (the poor). Reinert argues that the real-world results of the adoption of these
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FMFT policies ensure that the gap between rich and poor nations continues to grow (2007). As

the gap widens, poor countries lose power and become more dependent upon their wealthy

counterparts. While it is true that mercantilists were concerned with the uses of colonies to drive

the economic growth of mother countries (Wiles, 1987), today under FMFT doctrine these

countries, no longer officially colonized, remain in a relationship of exploitation. Poor countries

produce primary goods that they sell to rich countries, who then use these goods in

manufacturing and sell the manufactured goods back to the poor nations. It is impossible for poor

countries to get ahead in a system such as this. Not only are poor countries becoming poorer

while the rich become richer, middle income countries also appear to be disappearing as

polarization increases (Reinert, 2007). It is indeed only the mercantilist policies of nation

building through infant industry protection and other state intervention that can help these

countries on their quest to develop.

Misconceptions around mercantilism and the effectiveness of its policies, including infant

industry protection are prominent, especially in mainstream neoliberal rhetoric. The contrasting

idea that is presented is that of FMFT policies as a path to development. This idea is not only

historically inaccurate, it is hypocritical as wealthy countries themselves used infant industry

protection to develop. It is also evident that FMFT policies are detrimental to poor countries and

their chances at building strong national economies, leaving them in positions of dependency and

arrested development. It will not be until mainstream economics questions its misconceptions of

mercantilism and gives up its insistence on the pursuit of dangerous FMFT policies that it will be

possible to build a world with fair and prosperous economies for all nations.
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References

Desai, R. (2016). Class Notes.

Keynes, J.M. (1936). Notes on mercantilism. In The general theory of

employment, interest and money. London: Macmillan.

Reinert, E. (2007). The evolution of two different approaches. In How rich countries
got rich and why poor countries stay poor. London: Constable.

Wiles, R. (1987). The development of mercantilist economic thought. In S.T. Lowry

(ed.), Pre-classical economic thought. Boston-Dordhrecht, Lancaster:
Kluwer Academic Publishers.