Keith Rankin.
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Analysis by Keith Rankin

What is Mercantilism?

Keith Rankin.

Mercantilism is the form of public policy that was dominant in Europe – especially Northern Europe – in the ‘early modern’ period; meaning in the period loosely between 1500 and 1800 (sixteenth to eighteenth centuries). In a political sense it represented a coalition of autocratic rule and big business privilege. In an economic policy sense it represented an obsession with the balance of payments, with the idea that economic success was measured by the size of the balance of trade (or current account) surplus. Thus, economic policy was understood as a zero‑sum game, with the countries whose banks and treasuries accumulated the most gold and silver being the winners.

In today’s terms, Donald Trump in an unreconstructed mercantilist, in the sense that he sees the China-USA trade balance as indicating that China is winning and the USA is losing. His mission is to reverse this.

However, mercantilism is not embedded in America’s DNA; indeed the United States became independent from Great Britain in 1783 as a reaction to British mercantilist policies towards Britain’s American colonies.

Mercantilism is however embedded in the DNA of northern Europe, in particular Sweden, Netherlands and Germany. While Germany was not a nation in the mercantilist era, mercantilist assumptions underpinned economic thought in Germany, underpinned the unification of Germany under Bismarck, and played a substantial role in the economic arms races that brought about World War 1. (Mercantilism has sometimes been regarded as a policy of economic warfare.)

In the mercantilist era, the Netherlands and Sweden were two of the most powerful nations in Europe. Indeed the Netherlands – through the Dutch East India and West India Companies – exploited as much of the world as it could for a country of its size. In the seventeenth century Swedish armies run rampage in Europe, and it was in resisting Swedish imperialism that Russia’s Tsar Peter the Great earned himself the moniker ‘the Great’.

For Sweden, World War 2 was more an economic opportunity than a global tragedy. Sweden was happy to export to all sides during the war. And Sweden is – and always has been – a significant exporter of military hardware.

Sweden is a particularly interesting case study, because much of the meagre academic literature on mercantilism comes from Sweden.

Today, economists understand mercantilism to the same extent as orthodox doctors understand homeopathy, or astronomers understand astrology. Yet, while most orthodox doctors do not practice homeopathy, many modern economists unwittingly do include mercantilism in their practice. They do so because they never learned about it in their economics or public policy degrees, and therefore they do not recognise it in their contemporary practice.

As I wrote in 2018, 21st century western capitalism is best described as liberal-mercantilism. The mercantilist roots of capitalism have never been successfully exorcised by economists, despite the modern economics project that Adam Smith’s valiant critique of ‘the mercantile system’ in 1776.

Northern Europe and Covid-19

Sweden and Netherlands are characterised by their diametrically opposite approach to Covid-19, compared to New Zealand. Both countries have been attempting to run as normal, with mainly advisory messages around staying home and minimising physical socialisation. Sweden has been most explicit is arguing that the economy comes first. Further, there is a Social Darwinist undertone, conveying the sense that it doesn’t especially matter if there are higher deaths among the old and the weak; these deaths are acceptable costs in the mercantilist quest to increase Sweden’s current account surplus.

As I wrote two weeks ago:

Many of us think of money as if it is tangible, like gold; something that is naturally scarce, and that must be won through toil.

Sweden’s mercantilist mission is to make money – conceived of, as gold – by exporting to and investing in the rest of the world. (Money is in fact a medium created through double-entry bookkeeping, not through mining and minting.) As such, Sweden is a rich country, but a country that emphasises work to the nth degree. The patriotic purpose of life in Sweden is to make money, in particular as an ‘exporting nation’. Swedish frugality reflects this mission.

Sweden has not taken Covid-19 testing seriously, and clearly has a larger undercount than most other countries. For a country of just 10 million people, at last count it has 687 Covid19 deaths (96 in the last 24 hours) and only 205 listed recoveries. It has done 54,700 tests, with 8,419 Covid19 cases, a case to test ratio of 15.4 percent. (Compare with Australia: 319,784 tests, 6,013 cases, 50 deaths; a case to test ratio of 1.9 percent. New Zealand also has a case to test ratio of about 2 percent, and falling.)

Netherlands, with 17 million people, has 101,534 tests, 20,559 cases, and 2,248 deaths; 147 deaths yesterday. Its case to test ratio is 20.2 percent, even higher than Sweden’s. Covid-19 is more rife in the Netherlands than Sweden or Germany. (Sweden is luckier than Netherlands, in that it is much more sparsely populated, and, as I understand it, has a larger proportion of people than just about any other country who choose to live alone.)

Germany has a more nuanced response to Covid19. While it has been reluctant to do anything that impacts on its export economy – with its massive current account surpluses since the global financial crisis (GFC) – it has shown a strong commitment to testing, and to physical distancing. Germany’s comparatively low death rate indicates that its case undercount is one of the lowest in Europe, probably similar to China’s undercount.

Germany and Netherlands – leaders of the European Union – have used the Eurozone as a mechanism to play the mercantilist game. By creating the Euro, they conduct their commerce in a currency that is substantially undervalued compared to what the Deutschmark or Guilder would have been. These countries have found a way to undermine the floating exchange rate mechanism that is supposed to regulate world trade like a thermostat.

Their mercantilist strategy was the main cause of the post-GFC Eurozone crisis which struck southern Europe with a vengeance. The policy response to the post-GFC Eurozone crisis has been an austerity that replaces the external deficits of southern Europe with external deficits in the likes of economically fragile Africa and Latin America. (Because the mercantilist game is a zero-sum game, the current account surpluses of ‘the north’ are necessarily matched by deficits in ‘the south’.)

The situation is worse, because Germany applies policies to its own vulnerable regions (especially to eastern Germany) that are not extended to the other vulnerable parts of the European Union.

To understand Covid19 in Europe, it helps to think of the Italian government as being like the New York State government, and the European Eurocracy (dominated by Germany) as equivalent to the United States Federal Government. When we look at the USA, we tend to point the finger at President Trump rather than Governor Cuomo. If we apply this stance to Europe, then we have to blame poor EU governance rather than the poor Italian governance for allowing the problem to go unrecognised for too long, and for taking too little action once the problem was acknowledged. (When this is all over, we will need to look to Brussels and Berlin – and not to China – to discover how the epidemic became the most consequential pandemic since the Black Death of the 14th century. Even the 1918 influenza epidemic was all over by early 1919.)

What Comes Next?

This crisis gives us a great opportunity to re-evaluate our liberal-mercantilist form of capitalism. Capitalism is not the problem, but the way our elites interpret and practice capitalism is the problem.

While normally an optimistic person, I am pessimistic here. At the shallow global-media level, I fear that we in the west will point the finger at China, substantially exacerbating existing east-west tensions. And, at the grass roots level, multiple businesses collapses around the world – and a likely refusal in Europe to address insolvency difficulties through the monetary methods that were pioneered in Japan in the 1990s – may lead to the end of liberal democracy as we know it. My sense is that it will lead to the further emergence of Mussolini type political leaders (‘populists’ if you will); leaders who will seek to give simple answers by pointing their fingers at various scapegoat groups – faiths and ethnicities – of which China will be but one.

Much better than dystopia driven by petty nationalism, we can protect democracy by extending it. And to protect capitalism by using democratic people-power as a means to render unacceptable the substantial inequalities that have already undermined industrial capitalism.


Reference Links:

Liberal Mercantilism:

Sweden’s Unique Approach:

Money and Public Debt

Balance of Payments:

Germany, the Eurozone and Mercantilism:

2011 Conference paper: