The Genius Has Invented Mercantilism

In this corner we have the man with the invisible hand, sponsored by the wealth of nations, a frilly sleeve fanatic and the inventor of Capitalism, Adam Smith. In the other corner, big bearded with a hand in your pocket, alleged breaker of chains with no property to his name, he puts the ‘man’ in manifesto, Karl Marx. These two heavyweights are here to spar for the future of mankind.

For a long time this was the story in my head. We have a protagonist and an antagonist (pick your own!) and it was Marx vs Smith. We (the US) picked Smith, Russia picked Marx and look who’s still got an economy. Well, also China picked Marx and so did Vietnam? Sort of? See, like everything it gets complicated the more you think about it. A simple framework like Smith vs. Marx as an understanding of economic theory is A. fine, B. better than the average, I’d bet, and C. Not likely to affect you in any way. q That being said, if we go just a little bit deeper I promise it’s interesting especially in light of recent political aspirations. Marx and Smith were not contemporaries at all. Smith died in 1790 and Marx wasn’t even born until 28 years later in 1818. This broke my brain a little bit when I found it out. How could Adam Smith have the solution to the many problems of communism before it was even invented? If he invented capitalism, who was he yelling at and what were they doing if not communism? As it turns out, Adam Smith’s big idea was actually the ending of this third thing, mercantilism and capitalism didn’t really take off until the industrial revolution gave it the lever it needed to affirm its place in society. The industrial revolution did start in Adam Smith’s lifetime and he did contribute greatly to it as a thinker, but much more with the idea of the separation of labor and the ending of mercantilism than what we know as capitalism, a word that didn’t even exist in its current definition until the 1860s, a time generally thought to be the end of the industrial revolution (the first one anyway - again everything is complicated…)

So what even is mercantilism? Before I looked it up, I, in my smarmy way of pretending I know everything thought it meant something about merchants selling goods because merchant <-> mercantilism right? Well, I was super wrong about that. The fundamental principle behind mercantilism is that wealth, especially amoung and between nations, is a zero sum game. If Spain gains wealth, then France (or whoever) loses wealth. There is a finite amount of wealth in the world and it was in a nation’s interest to keep and accumulate it as much as possible. This makes a lot of sense when you consider that at the time wealth wasn’t some ephemeral number floating around in the economy but a giant pile of gold and silver.

So what were the actual policies of mercantilism? Well, if you want to keep your pile of gold you’d better not ship it off to another country for goods you can make yourself. Domestic production was the rule and for goods that could not be produced were to be traded with goods that could be produced, leaving the pile of gold and silver untouched. This meant that raw materials were hugely important and if every inch of soil was needed to produces wealth for a country, then getting more inches of soil, especially inches that have more or varied raw materials became very important, a driving force in colonialism at the time.

As a country who wanted to maximize import and minimize exports, what policy tools did you have at hand to execute that plan? Well I’m so glad you asked. The answer is… Tariffs! Yes, costly tariffs on imported goods prevented money from leaving the country. This is starting to sound familiar.

I know that to some this is making a little too much sense. Of course a nation should fiercly guard its own interests. Why would a nation allow their wealth to slip away to another? A nation’s wealth, as it turns out, can be gripped so tightly that is slips between the fingers. Mercantilism meant that the pile of gold never left the purse but that only meant that the price must be paid in goods for trade and when that wasn’t enough, the price was paid in blood. War, as they say, were declared. The War of the Austrian Succession (1740-48)¹ failed to resolve tension between European powers, leading to The French and Indian War (1754-63)² and The Seven Years’ War (1756-63)³.

These wars put the British government deep in debt (I promise this is going somewhere, bare with me) and Britain’s Chancellor of the Exchequer at the time⁴, a man named Charles Townshed, had a great idea to make their new colony pay for them. He proposed a series of taxes on the American colonies, known as the Townshed Acts. Unfortunately (or whatever) he never saw the ramifications of these acts, because before they were even all approved by parliment, he caught a fever and died. Despite the unpopularity of the Townsend Acts (as you can imagine) in the American colony, Charle’s successor, a man named Lord North passed the Tea Act of 1773, leading to the Boston Tea party, widely regarded as the first spark of the American Revolution.

As a matter of serendipity, the Townsend Acts were perhaps the lessor of Charles Townshed’s contribution to the current state of the western world. In 1763, on the recomendation of David Hume, he hired the Head of Moral Philosophy of the Univercity of Glasgow as a tutor for his step-son who was living in Toulouse, France. The tutor was Adam Smith, and while in Toulouse he was so bored that he began to write a book. He moved to Geneva and met Voltaire and then on to Paris where he befriended beloved party animal and future star of the American Revolution, Benjamin Franklin.

Smith published his book The Wealth of Nations just three months prior to the signing of the Declaration of Independance when the American Revolution began in earnest. The war was won in 1782 in Yorktown and a new nation was born. A nation born out of the failings of mercantilism and looking for something better. They found it in Smith’s book and have built upon it ever since to become the strongest economy the world has yet known. Hopefully, some part of it will remember how we got here. Otherwise we will learn all over again.