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Monday, July 13, 2009


Dani Rodrik says "mercantilism deserves a rethink":

Mercantilism Reconsidered, by Dani Rodrik, Commentary, Project Syndicate: 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 free-market 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. ... This view reflects a venerable tradition that goes back to Adam Smith...

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. ... This view reflects an even older tradition that goes back to the mercantilist practices of the seventeenth century. ...

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..., South Korea..., and China... - have all had activist governments collaborating closely with large business. ... China's pursuit of a high-saving, large-trade-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...

None of this is to idealize mercantilist practices... Governments can too easily end up in the pockets of business, resulting in cronyism and rent-seeking instead of economic growth. ... The pursuit of trade surpluses inevitably triggers conflicts with trade partners...

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...

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.

If policymakers had listened just as much as before to Wall Street, somehow listening to Main Street would have saved the day and we would have avoided the financial crisis? I'd like to hear a bit more about how that would have happened since exactly how listening to Main Street would have prevented the crisis is left unexplained, and it's not at all clear to me how that would have avoided the problems in the financial sector. (And aren't there examples of countries that followed these types of polices, but still had some sort of financial meltdown?)

    Posted by on Monday, July 13, 2009 at 09:30 PM in Economics, International Trade, Regulation | Permalink  Comments (52)


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