Mercantilism: A Lesson for Our Times? M.N. Rothbard

MERCANTILISM: A LESSON FOR OUR TIMES? MERCANTILISMhas had a "good press" in recent decades, in contrast to nineteenth century opinion. In the days of Adam Smith and the classical 'economists, mercantilism was properly regarded'as a blend of economic fallacy and state creation of special privilege. But in our century, the general view of mercantilism has changed drastically: 'Keynesians hail mercan tilis ts as prefiguring their own eco nomic insights; Marxists, constitutionally unable to dis tinguish between free enterprise and special privilege, hail mercantilism as a "progressive" step in the historical development of capitalism; socialists and intervention ists salute mercantilism as anticipating modern state· building and central planning. lVIercantilism, which reached its height in the Europe of the seventeenth and eighteenth centuries, was a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special sub sidy and monopolistic privilege to individuals or groups Dr. Rothbard is a consulting economist in New York City. Among his works are the comprehensive two-volume treatise, Man, Econ O1ny, and State (1962) and America's Great Depression (1963).

182 MERCANTILISM: A LESSON FOR OUR TIMES? 183 favored by the'state. Thus, mercantilism held that ex ports should be encouraged by the government and im ports discouraged. Economically, this seems to be a tissue of fallacy; for what is the point of exports if not to pur chase imports, and what is the point of piling up mone tary bullion if the bullion is not used to, purchase goods? T he Mercantilists \\7ere Practical But mercantilism cannot be viewed satisfactorily as merely an exercise in ,economic theory. The mercantilist wri ters, indeed, did not" consider themselves economic theorists, but practical men of affairs who argued and pamphleteered for specific economic policies, generally for policies which would subsidize activities or companies in which those writers were interested. Thus, ,a policy of favoring exports and penalizing imports, had two impor tant practical effects: it subsidized merchants and manu facturersengaged in the export trade, and it threw up a wall of privilege around inefficient manufacturers who formerly had to compete with fo~eign rivals. At the same time, the network of regulation and its enforcement built up,the state bureaucracy as well as national' and imperial power.

The famous English Navigation Acts, which played 'a leading role in provoking the American Revolution, ate an ,excellent,example" of the structure and' purpose of mercantilist regulation. The network of restriction great lypep.alized 'Dutch, and other' European shippers; as well as American shipping and manufacturing,. for the' benefit 184 MURRAY N. ROTHBARD of English merchants and manufacturers, whose compe tition was either outlawed or severely taxed and crippled. The use of the state to cripple or prohibit one's competi tion is, in effect, the grant by the state of monopolistic privilege; and such was the effect for Englishmen en gaged in the colonial trade. A further consequence was the increase of tax revenue to build Up the power and wealth of the English govern ment, as well as the multiplying of the royal bureaucracy needed to administer and enforce the regulations and tax decrees. Thus, the English government, and certain Eng~ lish merchants and manufacturers, benefited from these mercantilist laws, while the losers included foreign· mer chants, American merchants and manufacturers, and, above all, the consumers of all lands, including England itself. The consumers lost, not only because of the specific distortions and restrictions on production of the various decrees, but also from the hampering of the international division of labor imposed by all the regulations.

Adant Smith's Refutation Mercantilism, then, was not simply an embodiment of theoretical fallacies; for the laws were only fallacious if we look at them from the point of view of the consumer, or of each individual in society. They are not fallacious if we realize that their aim was to confer special privilege and subsidy on favored groups; since subsidy and privi lege can only be conferred by government at the expense of the remainder of its citizens, the fact that the bulk of MERCANTILISM: A LESSON FOR OUR TIMES? 185 the consumers lost in the process should occasion little surprise. 1 Contrary to general opinion, the classical economists were not content merely to refute the fallacious econom ics of such mercantilist theories as bullionism or protec tionism; they also were perfectly aware of the drive for special privilege that propelled the "mercantile system." Thus, Adam Smith pointed to the fact that linen yarn could be imported into England duty free, whereas heavy import duties were levied on finished woven linen. The reason, as seen by Smith, was that the numerous English yarn-spinners did not constitute a strong pressure-group, whereas the master-weavers were able to pressure the gov ernment to impose high duties on their product, while making sure that their raw material could be bought at as low a price as possible. He concluded that the motive of all these regulations, is to extend our own manufac tures, not by their own improvement, but by the depression 1 "The laws and proclamations ... were the product of conflicting interests of varying degrees of respectability. Each group, economic, social, or religious, pressed constantly for legislation in conformity with its special interest. The fiscal needs of the crown were always an important and generally a determining influence on the course of trade legislation. Diplomatic considerations also played their part in influencing legislation, as did the desire of the crown to award special. privileges, con amore, to its favorites, or to sell them, or to be bribed into giving them, to the highest bidders ... The mercan tilist literature, on the other hand, consisted in the main of writ ings by or on behalf of 'merchants' or businessmen ... tracts which were partly or wholly, frankly or disguisedly, special pleas for spe cial economic interests. Freedom for themselves, restrictions for others, such was the essence of the usual program of legislation of the mercantilist tracts of merchant authorship." Jacob Viner, Studies in the Theory of International Trade (New York: Harper Be Bros., 1937), pp. 58-59.

186 MURRAY· N. ROTHBARD· of those of all our neighbors, and by putting an end, as much as possible, to the troublesome competition of such odious and disagreeable rivals . . . Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only ~o far as it may be necessary for promoting that of the con sumer ... But in the mercantile system, the interest of the con sumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce. In the restraints upon the importation of all foreign com modities which can come into competition with those of our own growth, or manufacture, the interest of the home-con sumer is evidently sacrificed to that of the producer. It is alto gether. for the, benefit .of the latter, that the former is obliged to pay that enhancement of price which this monopoly 'almost always occasions. ' It is altogether for the benefit of the producer that bounties are granted upon the exportatiqn of some of .his. productions.

The home-consumer is obliged to pay, .first, the tax which is necessary for paying the bounty, and secondly, the still greater tax which necessarily arises from enhancement of the price of the commodity in the home. market. 2 . . .Before· Keynes l\1ercantilism was not only a policy of intricate gov.. ernment regulations; it was also a pre~Keynesian policy of inflation,' of lowering interest rates artificially, and of increasing "effective demand" by heavy government spending and sponsorship of measures to increase the quantity of mOtley. Like the Keynesians, the mercantilists thundered against "hoarding," and urged the rapid cir:> Adam Smith, An Inquiry into the Nature and Caus~s of the Wealth of Nations (New York: :Modern Library, 1937), p. 625.

MERCANTILISM: A LESSON FOR OUR TIMES? 187 culation· of money throughout the economy; ,·further more, they habitually pointed' to an alleged "scarcity of money" as the cause of depressed trade or unemploy ment} Thus, in a prefiguration of the Keynesian "multi plier,". William. Potter, one of the first advocates of paper moneyin the Western world (1650), wrote: . The greater quantity ... of money .. '. the more commodity tl1ey sell, that is,. the greater is their trade. For whatsoever is taken amongst men ... though it were ten times more than now it is, yet if it be one way or other laid out by each man, as fast as llereceives it •.. it doth occasion a quickness in the revolution of commodity from hand to hand much more than proportional to such increase of money 4 And the German mercantilist F. W. von Schrotter wrote of the importance of money changing hands, for one per s?n's spending is another's income; as money "pass[es] from one hand to another . . . the more useful it is to· the c?untry, ifor ... the sustenance of so many people is mul~ tt:pHed," and employment increased~ Thrift, according to von Schrotter, causes unemployment, since' saving with~ draws money from circulation. And John Cary wrote that if everyone spe~t~ore, everyone would obtain larger in comes, and "might then live more plentifuIly."5 3 See 'the laudatory "Note on Mercantilism" in Chapter 23 of John Maynard Keynes, The General. Theory. of Employment, In terest, and Money (New York: Harcourt, Brace, 1936).

,,4 Quoted in· Viner, op. cit., p. 38. IIQuoted in Eli F. Heckscher, Af,ercantilism (2nd Edition,New York: Macmillan Co., 1955), II, 208-09. Also see Edgar. S. Furniss, The Position of the Laborer in a System of Nationalism (New York:' Kelley.and Millman, 1957), p. 41.

188 MURRAY N. ROTHBARD Historians have had an unfortunate tendency to depict the mercantilists as inflationists and therefore as cham pions of the poor debtors, while the classical economists have been considered hardhearted apologists for the status quo and the established order. The truth was al most precisely the reverse. In the first place, inflation did not benefit the poor; wages habitually lagged behind the rise in prices during inflations, especially behind agri cultural prices. Furthermore, the "debtors" were gener ally not the poor but large merchants and quasi-feudal landlords, and it was the landlords who benefited triply from inflation: from the habitually steep increases in food prices, from the lower interest rates and the lower purchasing-power of money in their role as debtors, and from the particularly large increases in land values caused by the fall in interest rates. In fact, the English government and Parliament was heavily landlord-domi~ nated, and it is no coincidence that one of the main argu ments of the mercantilist writers for inflation was that it would greatly raise the value of land.

Exploitation of Workers Far from being true friends of laborers, the mercantil ists were frankly interested in exploiting their labor to the utmost; full employment was urged as a means of maximizing such exploitation. Thus, the mercantilist William Petyt wrote frankly of labor as "capital material ... raw and undigested ... committed into the hands of supreme authority, in whose prudence and disposition it MERCANTILISM: A LESSON FOR OUR TIMES? 189 is to improve, manage, and fashion it to more or less advantage."6 Professor Furniss comments that "it is char acteristic of these writers that they should be so readily disposed to trust in the wisdom of the civil power to 'im prove, manage and fashion' the economic 'raw ma terial' of the nation. Bred of this confidence in statecraft, proposals were multiplied for exploiting the labor of the people as the chief source of national wealth, urging up on the rulers, of the nation divers schemes for directing and creating employment. .... "7 The mercantilist's atti tude toward labor and full employment is also indicated by their· dislike of holidays, by which the "nation" was deprived of certain amounts of labor; the desire of the individual worker for leisure was never considered worthy of note .

.Compulsory Employment The· mercantilist .writers realized frankly that corollary to a guarantee of full employment is coerced labor for those who don't wish to work or to work in the employ ment desired by the guarantors. One writer summed up the typical view: "It is absolutely necessary that employ ment should be provided for persons of every age that are able and willing to work, and the idle and refractory should be sent to the house of correction, there to be detained and constantly kept to labor." Henry Fielding wrote that "the constitution of a society in this country having a claim on all its members, has a right to insist on 6 Quoted in Furniss, op. cit., p. 41. 7 Ibid.

190 MURRAY N. ROTHBARD the labor of the poor as the only service they can render.." And George Berkeley asked rhetorically "whether tempo rary servitude would not be the best cure for idleness and beggary? ... Whether sturdy beggars may not be seized and made slaves to the public for a certain term of years?"8 William Temple proposed a scheme to send the children of laborers, from the age of four on, to public workhouses, where they would be kept "fully employed" for at least twelve hours a day, "for by these means we hope that the rising generation will be habituated to constant employment .... " And another writer expressed his amazement that parents tended to balk at these pro grams: Paren ts . . . from whom to take for time the idle, mischiev ous, least useful and most burdensome part of their family to bring them up without any care or expense to themselves in habits of industry arid decency is a very great relief; are very much adverse to sending their children •.. from what cause, it is difficult to tell.9 Perhaps the most misleading legend about the classical economists is that they were apologists for the status quo; on the contrary, they were "radical" libertarian oppo nents of the established Tory mercantilist order of big government, restrictionism, and special privilege. Thus, Professor Fetter writes that. during the first half of the nineteenth century, the Quarterly Review and Blackwood's Edinburgh Magazine~ staunch supporters of the established order, and opponents 8 See Furniss, op. cit., pp. 79-84.

9 Ibid.~ p. 115.

MERCANTILISM: A LESSON FOR OUR TIMES? 191 of change in virtually all fields, had no sympathy with political economy or with laissez-faire, and were constantly urging main tenance of tariffs, expenditures by government, and suspension of the gold standard in order to stitnulate demand and increase employment. On the other hand the Westminster's [journal of the classical liberals] support of the gold standard and free trade, and its opposition to any attempt to. stimulate the econ omy by positive government action, came not from believers in authority or from defenders of the dominant social force behind authority, but from the· most articulate intellectual radicals of the time and the severest critics of the established order. tO Southey Favors Nationalization In contrast, let us consider the Quarterly Review~ a high Tory journal which always "assumed that the un reformed Parliament, the dominance of a landed aris toctacy ... the supremacy of the established church, dis crimination of some sort against Dissenter, Catholic, and Jew, and the keeping of the lower classes in their place were the foundations of a stable society." Their leading writer on economic problems, the poet Robert Southey, repeatedly urged government expenditure as a stimulant to economic activity, and attacked England's resumption of specie payments (return to the gold standard) after the Napoleonic Wars. Indeed, Southey proclaimed that an increase in taxes or in the public debt was· never a cause for alarm, since they "give a spur to the national industry, and call forth national energies." And, in 1816, 10 Frank W.·Fetter, "Economic Articles in the Westminster Review and their Authors, 1824-51," Journal of Political Economy (Decem ber, 1962), p. 572.

192 MURRAY N. ROTHBARD Southey advocated a large public works program for re lief of unemployment and depression. ll The Quarterly Review's desire for stringent govern ment control and even ownership of the railroads was at least frankly linked with its hatred of the benefits that railroads were bringing to the mass of the British popu lation. Thus, where the classical liberals hailed the ad vent of railroads as bringing cheaper transportation· and as thereby increasing the mobility of labor, the Quar~ ter ly's John Croker denounced railroads as "rendering travel too cheap and easy-unsettling the habits of the poor, and tempting them to improvident migration."12 The arch-Tory, William Robinson, who often de nounced his fellow Tories for compromising even slightly on such principles as high tariffs and no political rights for Catholics, wrote many pre-Keynesian articles, advo cating inflation to stimulate production and employ ment, and denouncing the hard-money effects of the gold standard. And the Tory, Sir Archibald Alison, inveterate advocate of inflation who even ascribed the fall of the Roman Empire to a shortage of money, frankly admitted that it was the agricultural class that had suffered from the lack of inflation since resumption of the gold standard. 13 11 See Frank W. Fetter, "The Economic Articles in the Quarterly Review and their Authors, 1809-52,'· Journal of Political Economy (February. 1958), pp. 48-51.

12 Quoted in Ibid., p. 62. 13 See Frank W. Fetter. "The Economic Articles in Blackwood's Edinburgh Magazine, and their Authors, 1817-1853;· Scottish Jour nal of Political Economy (June, 1960), pp. 91-96.

MERCANTILISM: A LESSON FOR OUR TIMES? 193 Controls Under Elizabeth A few case studies will illustrate the nature of mercan tilism, the reasons for mercantilist decrees, and some of the consequences that they brought to the economy. One important part of the mercantilist policy was wage controls. In the fourteenth century, the Black Death killed one-third of the laboring population of England, and naturally brought sharp advances in wage rates. Wage controls came in as wage-ceilings, in des perate attempts by the ruling classes to coerce wage rates below their market price. And since the vast bulk of employed laborers were agricultural workers, this was clearly legislation for the benefit of the feudal landlords and to the detriment of the workers. The result was a persistent shortage of agricultural and other unskilled laborers for centuries, a shortage miti gated by the fact that the English government did not try to enforce the laws very rigorously. When Queen Elizabeth tried to enforce the wage controls strictly, the agricultural labor shortage was aggravated, and the land lords found their statutory privileges defeated by the more subtle laws of the market. Consequently, Elizabeth passed, in 1563, the famous Statute of Artificers, impos ing comprehensive labor control.

Attempting to circumvent the shortage caused by previous interventions, the statute installed forced labor on the land. It provided that: (1) whoever had worked on the land until the age of 12 be compelled to remain there and not leave for work at any other trade; (2) all 194 MURRAY N. ROTHBARD craftsmen, servants, and apprentices who had no great reputation in their fields be forced to harvest wheat; and (3) unemployed persons were compelled to work as agri cultural laborers. In addition, the statute prohibited any worker from quitting his job unless he had a license proving that he had already been hired by another em ployer. And, furthermore, justices of the peace were or dered to set maximum wage rates, geared to changes in the cost of living. The statute also acted to restrict the growth of the woolen textile industry; this benefited two groups: the landlords, who would no longer lose laborers to indus try and suffer the pressure of paying higher wage rates, and the textile industry itself, which received the privi lege of keeping out the competition of new firms or new craftsmen. The coerced immobility of labor, however, led to suffering for all workers, including textile crafts men; and to remedy the latter, Queen Elizabeth imposed a minimum wage law for textile craftsmen, thundering all the while that the wicked clothing manufacturers were responsible for the craftsmen's plight. Fortunately, textile employers and workers persisted in agreeing on terms of employment below the artificially-set wage rate, and heavy textile unemployment did not yet arise.

Enforcing Bad Laws The program of wage controls could not cause undue dislocations until they were stringently enforced, and this came to pass under King James I, the first Stuart king of MERCANTILISM: A LESSON FOR OUR TIMES? 195 England. Upon assuming the throne in 1603, James de cided to enforce the Elizabethan control program with great stringency, including extremely heavy penalties against employers. Rigorous enforcement was imposed on minimum wage controls for textile craftsmen, and on maximum wage decrees for agricultural laborers and servants. The consequences were the inevitable result of tamper ing with the laws of the market: chronic severe unem ployment throughout the textile industry, coupled with a chronic severe shortage of agricultural labor. Misery and discontent spread throughout the land. Citizens were fined for paying their servants more than ceiling wages, and their servants fined for accepting the pay. James, and his son Charles I, decided to stem the tide of unemploy ment in textiles by compelling employers to remain in business even when they were losing money. But even though many employers were jailed for infractions, such Draconian measures could not keep the textile industry from depression, stagnation, and unemployment. Cer tainly the consequences of the policy of wage controls was one of the reasons for the overthrow of the Stuart tyranny in the mid-seventeenth century.

Mercantilist Practices in Colonial Massachusetts The young colony of Massachusetts engaged in a great many mercantilist ventures, with invariably unfortunate results. One attempt was a comprehensive program of wage and price controls, which had to be abandoned by 196 MURRAY N. ROTHBARD the 1640's. Another was a series of subsidies to try to create industries in the colony before they were economi cally viable, and therefore before they would be created on the free market. One example was iron manufacture. Early iron mines in America were small and located in coastal swamps ("bog iron"), and primary manufac tured, or "wrought," iron was made cheaply in local bloomeries, at an open hearth. The Massachusetts gov ernment decided, however, to force the creation of the more imposing-and far more expensive-indirect proc ess of wrought iron manufacture at a blast furnace and forge. The Massachusetts legislature therefore decreed that any new iron mine must have a furnace and forge constructed near it within ten years of its discovery. Not content with this measure, the legislature in 1645 granted a new Company of Undertakers For An Iron Works in New England, a 2l-year monopoly of all ironmaking in the colony. In addition, the legislature granted the com pany generous subsidies of timberland.

But despite these subsidies and privileges, as well as additional large grants of timberland from the town gov ernments of Boston and Dorchester, the Company's ven ture failed dismally and almost immediately. The Com pany did its best to salvage its operations, but to no avail. A few years l~ter, John Winthrop, Jr., the main pro moter of the older venture, induced the authorities of New Haven colony to subsidize an iron manufacture of his at Stony River. From the governments of New Haven colony and New Haven township, Winthrop was granted a whole host of special subsidies: land grants, MERCANTILISM: A LESSON FOR OUR TIMES? 197 payment of all costs of building the furnace, a dam on the river, and the transportation of fuel. One of Win throp's partners in the venture was the deputy-governor of the colony, Stephen Goodyear, who was thus able to use the power of government to grant himself substantial privileges. But again, economic law was not to be denied, and the ironworks proved to be another rapidly failing concern.

One of the most vigorously-held tenets of the domi nant neo-Marxist historians of America has been the view that inflation and debtors' relief were always meas ures of the "lower classes," the poor farmer-debtors and sometimes urban workers, engaging in a Marxian class struggle against conservative merchant-creditors. But a glance at the origins of debtors' relief and paper money in America easily shows the fallacy of this approach; in flation and debtors' relief were mercantilist measures, pursued for familiar mercantilist ends. Debtors' relief began in the colonies, in Massachusetts in 1640. Massachusetts had experienced a sharp eco nomic crisis in 1640, and the debtors turned immediately to special privilege from the government. Obediently, the legislature of Massachusetts passed the first of a series of debtors' relief laws in October, including a minimum appraisal law to force creditors to accept insolvent debtors' property at an arbitarily inflated assessment, and a legal-tender provision to compel creditors to accept payment in an inflated, fixed rate in the monetary media of the day: corn, cattle, or fish.

Further privileges to debtors were passed in 1642 and 198 MURRAY N. ROTHBARD 1644, the latter permitting a debtor to escape foreclosure simply by leaving the colony. The most drastic proposal went to the amazing length of providing that the Massa chusetts government assume all private debts that could not be paid! This plan was passed by the upper house, but defeated in the house of deputies. The fact that this astounding bill was passed by the upper house-the council of magistrates-is evidence enough that this was not a proto-Marxian eruption of poor debtors. For this council was the ruling group of the colony, consisting of the wealthiest merchants and land owners. If not for historical myths, it should occasion no surprise that the biggest debtors were the wealthiest men of the colony, and that in the mercantilist era a drive for special privilege should have had typically mercantilist aims. On the other hand, it is also instructive that the more democratic and popularly responsible lower house was the one far more resistant to the debt relief program.

Massachusetts has the dubious distinction of having promulgated the first governmental paper money in the history of the Western world-indeed, in the history of the entire world outside of China. The fateful issue was made in 1690, to pay for a plunder expedition against French Canada that had failed drastically. But even be fore this, the leading men of the colony were busy pro posing paper money schemes. The Rev. John 'tVood bridge, greatly influenced by William Potter's proposals for an inflationary land bank, proposed one of his own, as did Governor John Winthrop, Jr., of Connecticut. Captain John Blackwell proposed a land bank in 1686, MERCANTILISM: A LESSON FOR OUR TIMES? 199 the notes of which would be legal tender in the colony, and such wealthy leaders of the colony as Joseph Dudley, William Stoughton, and Wait Winthrop were prom i nen tly associated with the plan. The most famous of the inflationary land-bank schemes was the Massachusetts Land Bank of 1740, which has generally been limned in neo-Marxist terms as the creation of the mass of poor farmer-debtors over the op position of wealthy merchant-creditors of Boston. In actuality, its founder, John Colman, was a prominent Boston merchant and real-estate speculator; and its other supporters had similar interests-as did the leading op ponents, who were also Boston businessmen. The differ ence is that the advocates had generally been receivers of land grants from the Massachusetts government, and desired inflation to raise the value of their speculatively held land claims. 14 Once again-a typically mercantilist project.

Keynes Wouldn't Learn From just a brief excursion into mercantilist theory and practice, we may conclude that Lord Keynes might have come to regret his enthusiastic welcome to the mer cantilists as his forbears. For they were his forbears in deed; and the precursors as well of the interventions, subsidies, regulations, grants of special privilege, and 14 See the illuminating study of Dr. George Athan Billias, The Massachusetts Land Bankers of 1740 (University of Maine Bulletin, April, 1959).

200 MURRAY N. ROTHBARD central planning of today. But in no way could they be considered as "progressives" or lovers of the common man; on the contrary, they were frank exponents of the Old Order of statism, hierarchy, landed oligarchy, and special privilege-that entire "Tory" regime against which laissez-faire liberalism and classical economics leveled their liberating "revolution" on behalf of the free dom and prosperity of all productive individuals in so ciety, from the wealthiest to the humblest. Perhaps the modern world will learn the lesson that the contempo rary drive for a new mercantilism may be just as pro foundly "reactionary," as profoundly opposed to the freedom and prosperity of the individual, as its pre nineteenth-century ancestor.