The fallacy of Keynesianism and Mercantilism

The always informative and entertaining Dr. Gary North wrote about mercantilism, Keynesianism, and China some time ago. In that post he told us:

Keynesianism is an economic philosophy based on the idea that the free market requires intervention from the civil government in order to maintain justice and efficiency. The free market is both inefficient and unfair to the common man, Keynesianism teaches.

So does mercantilism.

Keynesianism is almost universally believed today. Therefore, mercantilism is almost universally believed. This connection is not intuitive, but it is nonetheless true. What the economics textbooks do not say, because they are written mostly by Keynesians, is that Keynesianism is mercantilism with equations.

The textbooks are officially anti-mercantilistic. There is a reason for this. Mercantilism is officially wrong, because it is undeniably old. Textbooks promote that which is new: “The latest is the greatest.” Mercantilism was believed from 1650 to 1750. It is therefore outmoded.

Yet it is in fact the dominant economic philosophy today. But it operates under cover. The cover is called “managed trade.” It is sometimes called “fair trade.” The high priests of mercantilism baptize the new convert in the name of free trade, but then they catechize him in terms of modified mercantilism. Modern mercantilism is “free trade with modifications for justice’s sake.” “Justice” is defined operationally as “protecting a politically favored voting bloc.”

Keep your eye on the modifications. Here is where the sleight-of-hand operates. Here is where slick-talking fellows from the best economics departments separate the rubes from their money.

The British Empire of old was a mercantilist country and they believed at that time that a nation grows wealthy by exporting more than it imports and so Britain used its military might to enforce that concept on its colonies. The original mercantilism was widely believed. Adam Smith and David Hume both refuted that fallacy and so has the entire Austrian School of Economics.

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It should be obvious that a nation gets rich when its residents get rich. The Austrians tell us that the residents get rich by trading freely without governmental interference. Free trade and liberty is a wealth building combination. The Classical Liberals believed in the free market. The residents of a country increase their productivity when the government remains out of the picture and voluntary cooperation rules the day.

In an odd twist on the old fallacy, modern academic mercantilism in the western countries claim that a country grows rich by importing more than it exports. The utter craziness of the idea does not seem to bother the academics. This is the idea that one can borrow his way to riches. Governments love the idea that it should “borrow and grow rich” because that empowers the government to control the economy — bureaucrats and politicians love control.

Dr. North tells us that the mercantilism of China and the eastern nations is that old time mercantilism of “export and grow rich” which is certainly more logical than the “go deeply into debt and grow rich” idea of the current US politicians. The older mercantilism makes a lot more sense but is still far inferior to the free trade path that made the west wealthy in the first place.

The American public wants the older style mercantilism. They want protection from foreign imports and an export-based economy. The academic Keynesian mercantilists tell the political leaders that they should want more imports funded by debt. Politicians and bureaucrats in the West and in the East reject free market economics. Why? Because free market economics tells us we need a tiny government (or none at all) and that is not the message that a government worker or political leader wants to hear.  All bureaucrats want government’s control over people’s lives expanded and not reduced.

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Modern Keynesian economics is just a variant of the discredited mercantilism with charts, graphs, and mathematical equations. If you want to understand what governments should do, then study the results of the Austrian School of Economics and see that the Classical Liberals were on the right path.

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