Mercantilism Reconsidered

*By Dani Rodrik

CAMBRIDGE: A businessman walks into a government minister's office and says he needs
help. What should the minister do? Invite him in for a cup of coffee and ask how the
government can be of help? Or throw him out, on the principle that government should not
be handing out favors to business?
This question constitutes a Rorschach test for policymakers and economists. On one side are freemarket enthusiasts and neo-classical economists, who believe in a stark separation between state
and business. In their view, the government's role is to establish clear rules and regulations and
then let businesses sink or swim on their own.
Public officials should hold private interests at arm's length and never cozy up to them. It is
consumers, not producers, who are king.
This view reflects a venerable tradition that goes back to Adam Smith and continues a proud
existence in today's economics textbooks. It is also the dominant perspective of governance in the
United States, Britain, and other societies organized along Anglo-American lines - even though
actual practice often deviates from idealized principles.
On the other side are what we may call corporatists or neo-mercantilists, who view an alliance
between government and business as critical to good economic performance and social harmony.
In this model, the economy needs a state that eagerly lends an ear to business, and, when
necessary, greases the wheels of commerce by providing incentives, subsidies, and other
discretionary benefits. Because investment and job creation ensure economic prosperity, the
objective of government policy should be to make producers happy. Rigid rules and distant
policymakers merely suffocate the animal spirits of the business class.
This view reflects an even older tradition that goes back to the mercantilist practices of the
seventeenth century. Mercantilists believed in an active economic role for the state - to promote
exports, discourage finished imports, and establish trade monopolies that would enrich business
and the crown alike. This idea survives today in the practices of Asian export superpowers (most
notably China).
Adam Smith and his followers decisively won the intellectual battle between these two models of
capitalism. But the facts on the ground tell a more ambiguous story.
The growth champions of the past few decades - Japan in the 1950's and 1960's, South Korea
from the 1960's to the 1980's, and China since the early 1980's - have all had activist governments
collaborating closely with large business. All aggressively promoted investment and exports
while discouraging (or remaining agnostic about) imports. China's pursuit of a high-saving, largetrade-surplus economy in recent years embodies mercantilist teachings.
Early mercantilism deserves a rethink too. It is doubtful that the great expansion of
intercontinental trade in the sixteenth and seventeenth centuries would have been possible
without the incentives that states provided, such as monopoly charters. As many economic
historians argue, the trade networks and profits that mercantilism provided for Britain may have

been critical in launching the country's industrial revolution around the middle of the eighteenth
century.
None of this is to idealize mercantilist practices, whose harmful effects are easy to see.
Governments can too easily end up in the pockets of business, resulting in cronyism and rentseeking instead of economic growth.
Even when initially successful, government intervention in favor of business can outlive its
usefulness and become ossified. The pursuit of trade surpluses inevitably triggers conflicts with
trade partners, and the effectiveness of mercantilist policies depends in part on the absence of
similar policies elsewhere.
Moreover, unilateral mercantilism is no guarantee of success. The Chinese-US trade relationship
may have seemed like a marriage made in heaven - between practitioners of the mercantilist and
liberal models, respectively - but in hindsight it is clear that it merely led to a blowup. As a result,
China will have to make important changes to its economic strategy, a necessity for which it has
yet to prepare itself.
Nonetheless, the mercantilist mindset provides policymakers with some important advantages:
better feedback about the constraints and opportunities that private economic activity faces, and
the ability to create a sense of national purpose around economic goals. There is much that
liberals can learn from it.
Indeed, the inability to see the advantages of close state-business relations is the blind spot of
modern economic liberalism. Just look at how the search for the causes of the financial crisis has
played out in the US. Current conventional wisdom places the blame squarely on the close ties
that developed between policymakers and the financial industry in recent decades. For textbook
liberals, the state should have kept its distance, acting purely as Platonic guardians of consumer
sovereignty.
But the problem is not that government listened too much to Wall Street; rather, the problem is
that it didn't listen enough to Main Street, where the real producers and innovators were. That is
how untested economic theories about efficient markets and self-regulation could substitute for
common sense, enabling financial interests to gain hegemony, while leaving everyone else,
including governments, to pick up the pieces. (Project Syndicate)
*Dani Rodrik, Professor of Political Economy at Harvard University's John F. Kennedy School of
Government, is the first recipient of the Social Science Research Council's Albert O. Hirschman
Prize. His latest book is One Economics, Many Recipes: Globalization, Institutions, and
Economic Growth.