THE VIRGIN QUEEN'S REVENGE:

HISTORY, MERCANTILISM, AND GLOBALIZATION

Paul Rich

The University of the Americas-Puebla, Mexico

and The Hoover Instituiton, Stanford University

Paul Rich is Titular Professor of International Relations and History, University of the Americas-Puebla, Mexico, and Fellow, The Hoover Institution on War, Revolution and Peace, Stanford University. Among his many books are several on the influence of imperialism on culture, including the much-reprinted Elixir of Empire.

A historical perspective is sorely need in order to understand what is happening in Mexico and indeed the world today, and to appreciate the implications for North American relations of current American politics. There has been a lack of such perspective in viewing much of what has happened in the last few years - especially, for example, in regard to free trade issues and NAFTA.

Mexico and Latin America are feeling the brunt of the triumph of the Chicago School of Economics and the victory of free marketers, gloating in the aftermath of the Soviet Union's collapse. In North America, statism has replaced communism as a muck-racking epithet which can be flung at an opponent. Even a Democratic President, Bill Clinton, has to talk about less government control. But a case can be made that all of these events represent a resurgence of a much older phenomenon, mercantilism.

The tradition of state intervention in economic affairs gets little attention in accounts of the current trade dilemmas. There is no question but that Latin America countries and particularly Mexico are bearing considerable pain in anticipation of ever increasing access to American markets without the assurance that domestic politics in the United States will allow the honoring of the true spirit of NAFTA. The danger is that having given up so much and sacrificed so much in the name of free trade and downsizing and getting government out of people's lives, the countries that have embraced the new free market ideology will be denied its benefits.

By no means is the right wing of American politics resolute in commitment to free trade. To understand this, one must recall that the progeny (and predecessors) of state interventionism in economic affairs are mercantilism and neomercantilism, which are much misunderstood terms. ("The historian who is concerned with the doings of governments, however, needs to use the concept with a care amounting to suspicion, lest he is entrapped into explaining them as mercantilist simply by reference to ideas already called mercantilist.") Mercantilists (unlike merchants) have usually been associated with statist views, and shared in the approbum created by perennial waves of distrust of government. They never have been merchants in the adventurous, Marco Polo entrepreneurial sense. Mercantilism to the true free marketer is like an unwelcome suitor's embrace, because it presupposes the value of paternal guidance and patriarchal direction from public administrators. Its instruments in the past were monopolies and chartered companies, official sponsorship and control. Today they are statutes and tax codes and bad faith in trade agreements.

Mercantilism is one of those words which everyone believes that they understand but which few do, and one which needs far more attention and explanation from contemporary scholars than it has received: "As a category which embraces the economic thought of several nations during an epoch of social transformation, mercantilism is a term which threatens to lose all specificity in its drive for comprehensiveness."

Mercantilism started as an elitist philosophy, in the service of royalty. It was a helpmate of absolution, borrowed from Descartes the atomic theory of matter, and held that the state had a duty to impose its discipline on the atomic chaos of society. One foundation stone is Antoyne de Montchrétien's Tachté de l'oéconomie politique dédié en 1615 au roy et la reyne mère du roy, which is directly concerned with administration's effect on national economy, and sees that administration as an extension of the administration of the royal household.

Kings and Populists

But mercantilism long ago lost its elite connotations and can just as easily be embraced by populists. Theodore Roosevelt attacked Woodrow Wilson's New Freedom platform, and replied to charges that he was too interventionist:

The key to Mr. Wilson's position is found in the statement...that "The history of liberty is a history of the limitation of governmental power, not the increase of it." This is a bit of outworn academic doctrine which was kept in the schoolroom and the professional study for a generation after it had been abandoned by all who had experience of actual life. It is simply the laizzez-faire doctine of the English political economists three-quarters of a century ago...To apply it now in the United States, at the beginning of the twentieth century, with its highly organized industries, with its railways, telegraphs and telephones, means literally and absolutely to refuse to make a single effort to better any one of our social or industrial conditions. Moreover, Mr. Wilson is absolutely in error in his statement, from the historical standpoint so long as governmental power existed exclusively for the king and not at all for the people, then the history of liberty was a history of the limitation of government. But now the governmental power rests in the people, and the kings who enjoy privilege are the kings of the financial and industrial world; and what they clamor for is the limitation of governmental power, and what the people sorely need is the extension of governmental power.

Such a genealogy should itself raise suspicions about the doctrine, no matter how many transmutations it has gone through. Admittedly it benefited at the hands of David Hume and Adam Smith, who contributed to it's democratization, seeing it as beneficial to the hoipolli as well as to patricians. The nation-state would benefit everyone by its interventionist commercial policies, but this was a proposition which like phologistism was never to be proved. What did happen was that the politician acquired a lasting philosophical raison d'etre. - or an excuse to mettle, depending on one's viewpoint.

To understand mercantilism, a reading of the classic Chapter 23 of Maynard Keynes' General Theory is essential. Although Keynesian economics were foreshadowed by the mercantilists, Keynes provided mercantilism with a theoretical underpining which it had lacked. "Mercantilism" Keynes writes, " is a continually developing doctrine of the role of the national state in economic and social affairs, and the term neo-mercantilism is merely a means of distinguishing between the absolutist or oligarchical form and that of a more democratic society."

Simply calling mercantilism neomercantilism ignores the remarkable continuity of the doctrine over the years, one aspect of that continuity being nationalism. Mercantilism and neomercantilism are intensely nationalistic: "Of itself, neomercantilism unfortunately offers many temptations to the evil that accompanies the good there is in nationalism. America should not forget the belligerent statements of Theodore Roosevelt, the invasion of Vera Cruz ordered by the internationalist Wilson, Franklin Roosevelt's love for naval construction (fortunate, as it happened), and Secretary Ickes' allocation of public works funds to the building of warships until stopped by Congress (unfortunately, as it turned out)." Americans of all political persuasions, including those in the right wing of the Republican Party, have been quick to demand government intervention when it served economic aspirations: consular appointments, an isthmian canal, undersea cables, farflung military forces. The Monroe Doctrine put an economic wall as well as a political wall around the Western hemisphere. In his celebrated Influence of Sea Power on History (1890) Admiral Alfred T. Mahan (1840-1914) argued for a strong navy to protect commercial expansion. Hawaii was acquired in what amounted to a businessmen's coup. Theodore Roosevelt's policies were called "Dollar Diplomacy".

Ironies of Interventionism

And if those reminders were not enough, and no matter how out of favor mercantilism might appear to be today, bear in mind that it was accepted by the American Founding Fathers. The mercantilist spirit was present at the Constitutional Convention. Alexander Hamilton then in in his subsequent career was was eloquently opposed to Thomas Jefferson's agrarianism partly because he thought it would keep America poor and that success was to export. He therefore favored protective tariffs, subsidies, and prizes, and he had no trepidation about that. His economics were nationalist economics.

The irony today is that at the same time that the American right wants government as much reduced as possible, it also is tempted to use government intervention for what it perceives as nationalist goals. Indeed, an Elizabethian mercantilist would agree with Newt Gingrich that priority must be given to advancing one's nation rather than the world at large and that the government is the proper vehicle to accomplish such ends. However, instead of bullion, which their sixteenth and seventeenth-century predecessors worshipped, modern mercantilists perform puja to export figures.

From this, there follow important implications for those trying to understand this post NAFTA era. Early mercantilists believed in a static cake over which contending parties fought for the largest piece, and this belief in a finite wealth can be seen in much of the discussion about trade today. Whether the issue is an emphasis on bullion accumulation, or on favorable export figures, such policies encourage competition among states which degenerates easily into conflict.

Heckscher pointed out that, although apparently each other's opposites, mercantilism and laizzez-faire produced similar behavioral results: amorality, ruthlessness, and a lack of humanitarianism. This was painfully evident during the NAFTA negotiations, when blatant jockeying for position and justification by avarice were the themes, rather than a overwhelming desire to help Mexican campesinos. We would be naive to think that the apparent triumph of free market economics is any protection against nationalism. A healthy suspicion about NAFTA is in order. Anatole France told the story of a boy who was taken by a relative to see the Chamber of Deputies in Paris. He could not follow the debate and asked what it was about when they emerged on the street. His relative said, "They were discussing the cost of the First World War." "And what did they decide?" the boy asked. "They decided that the cost was 23 trillion francs. "And what about the men and women who were killed?" "Oh, they were included."

Counter-concepts

From the time of the European cultivation of colonies prior to the American Revolution, to the era of negotiations resulting in the North American Free Trade Agreement, mercantilism has had a profound and not always saluatory effect. If this is now somewhat unremarked, it is partly because of the all too glib description of mercantilism as a spent historical force rather than a living ideology. Fairly typical are Douglas Greenwald's dismissive remarks: "Mercantilism was an economic policy pursued by almost all of the trading nations in the late sixteenth, seventeenth, and early eighteenth centuries, which aimed at increasing a nation's wealth and power by encouraging the export of goods in return for gold."

Those who have noticed that mercantilism is not as as antiquarian a subject as some believe have resorted to the term neo-mercantilism, as if that explained its annoying resilence. Others have employed such terms as cameralism, imperial mercantilism, peseudo-mercantilism, and such counter-concepts such as anti-mercantilism, fiscalism, and semi-fiscalism. In actual fact, rehabilitation of the term is scarcely necessary as "Mercantilism is a continually developing doctrine of the role of the national state in economic and social affairs, and the term neo-mercantilism is merely a means of distinguishing between the absolutist or oligarchical form and that of a more democratic society."

William Pitt surveyed his age and commented, "commerce had been made to flourish by war". While the consequences of government intervention in the economic order, ostensibly in the interests of promoting a successful trade balance, have not always been so dire as a war, the results generally have been anything but an advertisement for the policy. Yet, despite the inflationary pressures and low levels of consumptions which almost inevitably follow such interventionism, it is a perennial popular panacea which politicians find irresistible.

We are not as far from the Elizabethian Age as we would like to think. There are few better examples of academics trying to lend misleading coherence to complex matters than the treatment mercantilism has received from twentieth-century economists. Their definitions of mercantilism invariably emphasize its past glories rather than any contemporary relevance, as if it was almost entirely a topic for historians. It is associated with Britain's Virgin Queen (Elizabeth I) and the great trading companies, and with beaver pelts and the indigo trade. Its influence on the lives of men like Francis Drake and Walter Raleigh is discussed and not its influence in the lives of Robert Dole or Newt Gingrich. There is little suggestion in the current literature that it lights fires in the hearts of modern bureaucrats. But it does.

At times in the current election campaign in the United States the Elizabethian mercantilist Thomas Mun could have been one of the speech writers, and his treatise England's Treasure by Forraign Trade, or the Ballance of our Forraign Trade in the Rule of our Treasure (1628) with its views of the sterility of domestic economic activity in comparison with might the rewards of exporting could have been by the bedside of Messrs. Clinton and Dole, as it assuredly was for President Salinas and President Clinton when they were negoiating NAFTA. An appreciation of just how deeply rooted mercantilism is in American economic history and in the psyche of politicans proves an essential step to understanding the tensions of current international and domestic political scene.

A Continuing Virility

Mercantilism is not an extinct ancient cult like drudism, its priesthood still flourishes, and the temples of mammon have not gone the way of standing stones. If a comparison is to be made and the religious analogy pressed, in ways mercantilism resembles Catholicism, wounded by reformations but with tremendous resilence. To be unaware of mercantilism's contemporary influence is to neglect a major driving force in American politics, and to miss the fact that while the fortunes of political parties wax and wane, there are ideological forces that continually impact government and have enormous staying power.

Mercantilism has, like tuberculosis, enjoyed remarkable recoveries from what seemed to be the last convulsions of its final demise. To twentieth-century social planners it seemed irrelevant to a triumphant socialism. Well, socialism has waned and the right everywhere is in its ascendany, but that has had little effect on the continuing virility of mercantilism. The term itself has been given a formal but premature burial on numerous occasions:

mercantilism. Commercial policy pursued by England, Holland and other European nations in the 16th and 17th centuries, as nations expanded the commercial sectors of their economies and a shift of emphasis towards trade and away from domestic agriculture occurred. The policy was aimed at securing an inflow of precious metals and raw materials in return for an outflow of finished goods. It went hand-in-hand with aggressive nationalism and the search for overseas colonies...The final demise of the system came in the 19th century with the triumph of FREE TRADE.

However, one dictionary-maker at least has had the common sense to remark that, "Although mercantilist doctrine is at a sharp discount among economists, mercantilist sentiment endures both among unions and businessmen whose immediate interests are threated by foreign competition, and among public officials responsive to the plaints of their constituents."

That nationlism is so strong at the same time that globalism is growing has been much noted. Mercantilism is a principal contributor to the ethos of state-building. The decline of mercantilism is a barometer reading that points to the decline of statism, and indicts that proponents of an exclusive loyalty to the nation state and its organizations are in danger of yielding to an internationally minded class. That nationalism has not been defeated by globalism should be a warning to those who talk so confidently about the North American market.

An appreciation of just how deeply rooted mercantilism is in American economic history, and in the psyche of American politicians, proves an essential step to understanding the tensions of these days. Although the nation-state is under considerable attack and hence mercantilism could be assumed to be on the defensive, a less nationalistic stance is not what is on the agenda of the resurgent right in the United States.

Increasing American concern over trade imbalances has been accompanied by strong mercantilism sentiments, ironically at times masquerading as free trade enthusiasm. Statism has been around too long to depart without a battle: "The moderate statist ideology of neomercantilism, however, has forebears as old as the medieval parliaments that grew into our institutions of representative government. If age lends interest and dignity, therefore neomercantilism must be approached in a spirit of respectful inquiry."

Melos and Mun

The temptation to which those who espouse modern mercantilism succumb is to use government as the "hair of the dog", believing that corrective administration of some sort is a means to economic prosperity. This "one more for the road" is as enticing to conservatives as it is to their liberal foes. Proof of this is the stance taken by Newt Gingrich. "In the days of Ronald Reagan and George Bush, the trade debate was split between two camps: laissez-faire vs. Interventionists. Republicans, by and large, didn't want to interfere with the normal course of 'free markets'. They argued that well-run companies would make their own trade alliances and that the U.S. Government had a role to play mainly as multinaitonal referee." But the temptation to resort to mercantilism is always there, as Ross Perot has shown by his vote-getting ability.

As far as American politics are concerned, the celebrated mercantilist position of Mun and other seventeenth-century writers has returned: the inbalance of trade now is high on every party's and every candidate's worry list. The objections to mercantilism - the narrowness of its focus, the way it narrrows policy concerns, its failure to contribute to the construction of an adequate general ecnomic theory - have been forgotten.

The fight between mercantilism and genuine free trade is an ancient one. In fact, the seeds of free trade have been discerned in the dimmest past, long before the Elizabethians. F.A. Hayek made the case for trade as "an indispensable institution" by citing archaeological evidence of its existence in the Palaeolithic age of more than 30,000 years ago, and of obsidian shipments from the island of Melos to Greece in the seventeenth millennium B.C. Hayek observed that trade was older than the state, and that "The more one learns about economic history, the more misleading then seems the belief that the achievement of a highly organised state constituted the culmination of the early development of civisation. The role played by governments is greatly exaggerated in historical accounts because we necessarily know so much more about what organised government did than about what the spontaneous coordination of individual efforts accomplished."

He argued convincingly that "Governments have more often hindered than initiated the development of long-distance trade. Those that gave greater independence and security to individuals engaged in trading benefited from the increased information and larger population that resulted, yet, when governments became aware how dependent their people had become on the importation of certain essential foodstuffs and materials, they themselves often endeavored to secure these supplies in one way or another." He concluded that government intervention often damaged economic improvement and brought desirable cultural evolution to an end. "What led the greatly advanced civilisation of China to fall behind Europe was its governments' clamping down so tightly as to leave no room for new developments, while, as remarked...Europe probably owes its extraordinary expansion in the Middle Ages to its political anarchy."

Seductions of Mercantilism

Mercantilism remains part of the ethos of state-building and thus an ever attractive policy option. A rationale will be found for its continuance regardless of whether the right or the left is politically in ascendancy. Its demise seemingly threatens la patrie. When mercantilism is out of favor, the exclusive loyalty to the nation state thought so desirable gives way to an internationally minded class. That is not what is on the mind of the resurgent right in the United States, and should the right win there is a collision course set with such new instrumentalities as GATT and NAFTA.

Quite apart from the right's distaste for any hint of insipient world federalism, there is no notion of give-and-take in the successful right-wing politican's approach to economics. Mercantilism, albeit presented in a Madison Avenue wrapping, is immensely appealing as a part of a winning domestic platform. The liberal shades of Eleanor Roosevelt, Adlai Stevenson, and Ralph Bunche are about as influential today in the United States as that of Cortes.

The right is of course concerned about economics, as is everyone. With the collapse of the Soviet Union, economic models have far outstripped war games as a think tank pursuit. The next war is seen as an economic one and the voters' revenge would be swift for that rash politican who would subordinate growth and employment to grand diplomatic strategy. "Economic growth is the most important social policy objective a country can have other than keeping its people physically safe", writes Newt Gingrich. He adds, "America's future depends on economic growth. Economic growth depends on our ability to compete in the world market."

Japan is not today's Venice, Germany is not an enlarged Hanseatic League, and Microsoft is not the East India Company. Mercantilism faces a vastly more complex world than that of pirate adventurers. Therein is a danger to world community, for every nation-state has an itchy finger on the trigger of covert protectionism, and every nation's politicians have a thinly disguised belief in the efficacy of interference. How much good faith is there to free trade agreements?

With the apparent renewal of American conservatism, personified in the Republican Party, the understanding of the true nature of mercantilism becomes tremendously important. Much more realism about the pain that is going to accompany a genuine shift to free trade is needed. This is demonstrated by the fact that often jejeune arguments for winning the trade wars via government intervention are being made at the same time by the same people who advocate staunch individualism and demand independence from the tentacles of government organization.

A chorus of presidential candidates in the recent primary sweepstakes, frequently making up in passion for what they lacked in sophistication, illustrates this. Much of the rhetoric is against interventionism. Lamar Alexander, erstwhile Republican candidate for the White House and former governor of Tennessee was emotive: "That the main engine by which the American dream can be realized is not government at any level but opportunity, initiative, and personal responsibility. The surest path to the promise of American life leads through ourselves, our families, and our communities. It does not pass through distant bureaucracies, experts, or policymakers....a revival of our spirit, character, and sense of responsibility will go hand in hand with diminished reliance on government." But when it comes to winning votes, one suspects that anything goes.

NAFTA has its secret interventionists on both sides. Those in favor and against the treaty each had a private agenda. There was no one during the adoption debate who was completely candid. While NAFTA put the seal of approval on the re-ascendancy of the notion that health and prosperity come from a favorable balance of trade, each participant of course went into the treaty with the idea that it would be the winner, rather like jockeys in a horse race that are all convinced that they will cross the finish line first. The control mechanisms of NAFTA should be regarded with considerable pessimism.

The Obsession with Competitiveness

Paul Krugman and others have charged that an obsession with trade competitiveness has diverted policy makers from what should be the real focus, domestic productivity. Of course, in the case of the United States where only about ten percent of the U.S. outpot goes in epxorts, that argument has some merit. Administrators in such a situation would appear to get their priorities wrong when they concentrate on trade wars as opposed to domestic issues. In more heavily export-oriented countries, the concern about other countries as rivals would still seem valid. Lester C. Thurow, Professor of Management at the Alfred Sloan School of Massachusetts Institute of Technology, has pleaded for changing the focus of the discussion: "In the traditional theory of comparative advantage, Boskin and Krugman are correct. [Michael J. Boskin, Chairman of President Bush's Council of Ecnomic Advisers and Senior Fellow, Hoover Institution.] Natural resource endowments and factor proportions (capital-labor ratios) determine what countries should reproduce. Governments can and should do little when it comes to international competitiveness. With a world capital market, however, all now essentially borrow in London, New York or Tokyo regardless of where they live. There is no such thing as a capital-rich or capital poor country. Modern technology has also pushed natural resources out of the competitive equation. Japan, with no coal or iron ore depsoits, can have the best steel industry in the world." He remarks, "A passion for building a world-class economy that is second to none in generating a high living standard for every citizen is exactly what the United States and every other country should seek to achieve. Achieving that goal in any one country is no way stops any other country from doing likewise."

Beggar-thy-neighbor policies are not the road to economic wellbeing. For example, devaluation may earn a temporary competitive advantage, but as we are seeing in Mexico there is a high longterm price to be paid in encouraging capital formation. On the other hand, real free trade, that is free trade in which countries do not seek in mercantilist-fashion to grab an unfair temporary advantage, may well be the catalyst of development for a world whose future political stability depends on economic growth. Alas, Adam Smith's accusation, that mercantilists were unable to differentiate between wealth and treasure, seeing gold bars as the end when the real end was consumable and usable goods, still holds true. The days of the Virgin Queen are not completely past.

The chances are that there is going to be a continued "yes but" effort to interfere under the table, colored by misperceptions about what really contributes to trade competitiveness. For politicians to genuinely repudiate mercantilism, sincerely abdicating the power to intervene in the market and thus letting the chips fall where they may, would be to witness the greatest collective harikari in organizational history. Constant vigilience then is a necessity for countries such as Mexico, for mercantilism like the proverbial cat has many lives.