Strawmen: Smith, Trump & the ‘mercantile system’
Tristan Lockwood | ECOP610 | Essay 1 | 3300 words
I INTRODUCTION
United States trade policy has been critical to the nation’s realisation of global hegemony. From the establishment of the Treasury in 1789 to today, trade policy has moved with the tide of domestic politics, often but not always functioning as an instrument of United States macroeconomic and foreign policy. Following the New Deal in 1933 and the enactment of the Reciprocal Tariff Act in 1934, a ‘liberal’ trade agenda developed as a new orthodoxy; gradually evolving into a widely-held belief that an American-led rule-based international liberal-trade-system is in the United States’s best interest.
Since taking office in 2017, President Donald J. Trump has challenged this orthodoxy. Critics of Trump’s protectionism at first sought to delegitimise his policies on a case-by-case basis, characterising them as ad hoc and impulsive responses to populist interests. However, the increasing coherence of Trump’s platform has undermined this critique. Confronted with a popular protagonist in a deepening counter-narrative to liberal-trade orthodoxy, critics have pursued fresh assaults. One rhetorical weapon used by both the academy and the media in this crusade is the characterisation of Trump and his policies as ‘mercantilist’. The insinuation flowing from the use of this term is that Trump’s policies derive from the ‘antiquated’ tapestry of 16-18th century political-economic thought known as mercantilism. In the same way that Adam Smith’s The Wealth of Nations dismantled the efficacy of mercantilism in favour of ‘liberalism’ in 1776, so too do these critics invite readers to reject Trump and his policies.
This essay will demonstrate that the characterisation of Trump as a mercantilist is not only unhelpful, but also – somewhat ironically given his role as antagonist in this modern saga – contributes to the misapprehension of mercantilism that began with Smith himself. In developing this thesis, this essay will: first, critically examine mercantilism; second, describe the ‘Trump is a mercantilist’ discourse; and third, explain why this discourse is unhelpful in by offering a nuanced analysis of Smith, Trump and the ‘mercantile system’.
II MERCANTILISM
Economic historians are divided as to whether mercantilism represents a coherent theory or school of thought (Anheier 2012). Moreover, it has been suggested that any identifiable coherence owes more to the critics of mercantilism than its proponents (and, as this essay will demonstrate, Smith in particular). This is because of the compelling analysis offered by many modern critiques that mercantilism represents little more than the political-economic manifestation of a disparate collection of 16-18th century European socio-political – as opposed to explicitly economic – institutions and ideas (Stern & Wennerlind 2013: pp. 3-4). To assess whether Trump is either methodologically or ontologically a ‘mercantilist’, it is therefore necessary to explore the mercantilist discourse and critically examine its ontology.
A Smith’s ‘mercantile system’
The word ‘mercantile’ is a reference to the merchant class that emerged in Europe from about the 16th century, following the end of the Dark Ages (Landreth 1976: pp. 20-24). The term was first used first by the Physiocrats who described the ‘systeme mercantile’; before being popularised by Smith in The Wealth of Nations. In Chapter I, Book IV, Smith critiques the ‘mercantile system’ and its proponents for a theoretical misstep in equating money with wealth; contrasting the deficiencies of this analysis with his own labour theory of value (developed in Books I and II). Smith thus explains:
Labor was the first price, the original purchase money that was paid for all things. It was not by gold or by silver, but by labor, that all the wealth of the world was originally purchased; and its value, to those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labor which it can enable them to purchase or command.
In this regard, Dunn identifies that Smith ‘particularly mocks the association (which he finds in Locke and Mun) of wealth with gold and silver’ (2018: p. 52). Smith further critiques what he describes as the ‘equally fruitless’ mercantile focus on maintaining a ‘positive balance of trade’ as a means of building such ‘wealth’. Smith portrays this penchant as little more than a theoretical postscript to the ‘bullionist’ restrictions on the outflow of gold and silver that prevailed through Europe at the time (1778: p. 450). Smith devotes the balance of Book IV to critically analysing the protectionist measures that he contended had emerged around the world as a consequence of mercantilist theory. As Dunn observes, however, Smith’s critique of protectionist policies is not absolute. On the contrary, Smith identifies numerous exceptions where he argued protectionist policies should be implemented including: to secure national defence, to effect quid pro quo restraints against states, and to afford short-term protection to industries from new capital – an idea later developed by Hamilton (2018: p. 54).
Stern & Wennerlind in their ‘reimaging’ of mercantilism suggest that Smith’s characterisation of the ‘mercantile system’ extended to embracing the idea of a ‘close conspiracy between merchants and politicians, [as well as] a confusion as to what constituted the true nature of wealth…’ (2013: p. 3). This critique embraces the idea that ‘mercantile’ theory as being deployed by merchants as against politicians in an act of ‘rent-seeking’ (Magnusson 2003: p. 47). Stern & Wennerlind’s hypothesis, which is supported by a plain reading of Book IV, directs attention to the socio-political aspect of Smith’s critique of the ‘mercantile system’. In addition to its theoretical contribution, The Wealth of Nations also sought to describe the transition that occurred from feudal to industrialised Europe. In this regard, Smith’s critique of the ‘mercantile system’ can be understood as an aspect of his broader critique of what may now be described as monopoly capitalism.
B Mercantilism: Smith’s strawman?
The portrait of mercantilism painted by Smith is, however, apt to mislead. While Smith represents mercantilists as united in their understanding of ‘money as wealth’, and as such subscribed to the protectionist policies that he says follow from that view, this is far from the case. Anheier identifies most mercantilists as sharing three relevant common beliefs: first, the aggregation of wealth as either inherently worthwhile or as worthwhile as a means of acquiring state-power; second, the importance of the supply-and-demand principle; and third, the economic sphere as an independent system regulated by its own observable laws. In this respect, the commonalities of the mercantilists are surprisingly limited and are not, at this level of abstraction, inapplicable to many of the classic economists including Smith.
Moreover, as Magnusson observes, the mercantilist ‘methodology and supply-and-demand analysis has formed the nucleus of modern [economic] theorizing ever since’ (2004: p. 49).
Further, although protectionism was a feature of some mercantilist writing, many mercantilists criticised the practice. For example, Anheier observes that ‘Dudley North,
Misselden, and Charles Davenant (1656–1714) all [argued] intensively against the adoption of discriminatory rules to nurture domestic industries’ (2012). At a more general level, Magnusson contends that ‘most [mercantilist] writers were unwilling to put their sole faith in the self-equilibrating forces of the marketplace in order to achieve wealth and growth. On the other hand, as many argued, too much interference in the laws of supply and demand could be just as harmful as none at all’ (2004: p. 50). It is thus clear that many of the mercantilists would not have subscribed to the protectionist policies that Smith implies follow from their conflation of money and wealth. Rather, many of those writers, supported liberal-trade tempered only by pragmatic state-intervention as a means of securing state-power.
While Smith’s caricature of mercantilism has prevailed as its dominant illustration, others have departed from this view. As Magnusson summarises, the German historical school ‘preferred to define mercantilism as state-making in a general sense’… with a focus on ‘economic wealth as a rational means to achieve political power’. In this regard, Magnusson too concludes that it is mainly with the question of ‘how a nation could become rich and thus also achieve greater national power and glory’ around which mercantilists found common ground (2012: pp. 47-60). While mercantilism has thus been popularised as an ideology for economic protection in order to achieve economic growth, this definition does not fully embrace the disparate and conflicting ideas that the term has come to encapsulate.
In modern times, ‘neo-mercantilism’ has emerged as a new term to describe protectionist policies deployed as means of achieving economic growth. Adjacent to this revival, writers including Brander, Spencer, and Krugman have, with reference to arguably ‘mercantilist’ ideas around the idea of trade as an instrument of realising state-power, variously contended against orthodox forms of liberal-trade theory in favour of more nuanced understandings of Ricardian ‘comparative advantage’ and the limits of the Heckscher–Ohlin theorem in the context of modern international trade (Magnusson 2012: pp. 56-60). In this respect, modern conceptions of mercantilism have come to not only embrace the misconceptions of classical mercantilism described above, but also an emerging discourse which seeks to re-engage with classical economic trade theories thought through the mercantilist lens of state power.
III TRUMP THE MERCANTALIST
It is within the above context that the ‘Trump is a mercantilist’ discourse must be understood and, for reasons which are now apparent, immediately treated with some skepticism. Although the arguments vary greatly as between the many contributions to this discourse, the following articles provide a convenient focal-point for the purposes of this essay.
A Appelbaum, The New York Times (2016)
In an editorial published shortly before Trump’s candidature for the presidential nomination, Appelbaum contended that ‘Mr. Trump’s mercantilism is among his oldest and steadiest public positions’ and, citing Smith, ‘challeng[es] the last 200 years of economic orthodoxy that trade among nations is good, and that more is better.’ Appelbaum supports this contention by noting that ‘[s]ince at least the 1980s, [Trump] has described trade as a zero-sum game in which countries lose by paying for imports…’. He characterises Trump’s position as ‘tariffs as the best solution’ to the current trade deficit ‘problem’.
B Stiglitz, Journal of Policy Modeling (2018)
In an academic article published in April this year, Stiglitz describes in detail Trump’s various trade policies and ‘promises’, including: to renegotiate trade agreements to assert American’s market power, including the North American Free Trade Agreement (NAFTA); to withdraw from Transpacific Partnership (TPP) negotiations; to impose tariffs against particular countries including China and Mexico with a view to reducing bilateral trade deficits; and to impose a tariff on imported steel. Stiglitz also highlights that ‘[t]he Trump administration has brought a large number of “unfair competition” (anti-dumping, countervailing duties, safeguard) cases’ with particular implications for specific industries. Stiglitz contends that Trump’s ‘policies are predicated on a number of elementary misunderstandings of international trade, some of which economists have been inveighing against for two centuries.’ In this respect, Stiglitz suggests that ‘[t]he first is [Trump’s] neo-mercantilism, the argument that the United States should be running a surplus, and that it is only because of others’ unfair trade practices that it is not.’
C Rampell, The Washington Post (2018)
In a recent opinion piece, Rampell contends that Trump’s proposed tariffs on imported steel and aluminum ‘… and the supposed rationale behind them, bear an uncanny resemblance to classical mercantilism’. Rampell explains the logic of mercantilism: ‘[m]ilitary power comes from wealth; wealth comes from accumulating gold and silver; and the way you accumulate gold and silver is through trade surpluses.’ Against this, Rampell cites Smith as having demonstrated that ‘[t]rade is not zero-sum; it’s positive-sum’ – a ‘lesson’ which Rampell suggests Trump has ‘missed’.
IV TRUMP THE MERCANTILIST
A What would Smith say?
It is evident from the above articles that one of the key reasons why Trump is understood as a mercantilist is his rhetoric around trade balances. On various occasions, Trump has condemned the United States’s trade deficit. For example, on 3 March 2018, Trump tweeted:
The United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been…
It appears Trump falls into the trap identified by Smith of equating money with wealth and thus perceiving a negative trade balance as tantamount to a loss of wealth. Appelbaum and Stiglitz are correct to observe that this misstep has been inveighed against for over two centuries. Moreover, Trump’s protectionist prescription is precisely that which Smith implies follows from a mercantile misunderstanding. Trump’s views can, in this sense, be seen to fall within Smith’s theoretical critique. However, labelling Trump a mercantilist and pleadings Smith’s case against him is a straw-man critique. As explored above, there is a compelling argument that Smith’s characterisation of mercantilism is its own straw-man critique and this type of reasoning also tends to result in an overstatement of Smith’s contribution to liberal-trade theory, which often gets confused with later developments including those of Riccardo. Further, such argumentation ignores the protectionist discourse adjacent to mercantilism, which proceeds in earnest to explore the limits of liberal-trade theory in modern times (Davies 2011: p. 18). Even Stiglitz’s more nuanced critique invites some confusion.
But what of Smith’s ‘mercantile system’ as a socio-political critique in the broader sense identified by Stern & Wennerlind? There are various instances where in connection with his ‘mercantilist’ rhetoric about trade balances, Trump laments what he sees as a ‘conspiracy’ between big business and politicians. Indeed, this was one of the key facets of his attacks on Hillary Clinton during the Presidential campaign. For example, in a speech delivered on 28 June 2016 in the Pennsylvania, Trump said:
Our politicians have aggressively pursued a policy of globalization, moving our jobs, our wealth and our factories to Mexico and overseas. Globalization has made the financial elite, who donate to politicians, very, very wealthy. I used to be one of them.
In a very curious inversion, Trump’s complaint about the status quo in 2018 is effectively the same as Smith’s was 230 years earlier: a conspiracy between the merchant and political classes! However, rather than prescribing liberalisation as the solution, Trump critiques it as the problem. This observation highlights an irony in invoking Smith’s critique of the ‘mercantile system’ as against Trump, and also directs attention to the question of what these two periods of history have in common that sees this conspiracy between the merchant and political class persist (in this regard, see, for example, Hymer’s theory of international capitalism as explained by Buckley 2004, as one potential means of explaining how modern corporations have been able to maintain political control through monopoly power).
On Smith’s view, there is thus an ontological similarity between Trump and the mercantilists’ misconception of wealth and a methodological similarity between the protectionist policies that follow. However, rather than promoting his ‘mercantile’ views as a means of rent-seeking, Trump promotes them as a solution to that very problem.
B Other perspectives for critique
Putting to one side Smith’s conception of mercantilism, one can also ask whether Trump is a mercantilist with regard to the question Magnusson argues lies at the heart of the German historical school’s conception of the term: how can a nation could become rich and thus also achieve greater national power and glory? It is in this respect that the ‘Trump as a mercantilist’ discourse perhaps finds its strongest basis; yet it is a conception of mercantilism with which the discourse has not engaged. Trump’s election promise was to ‘make America great again’. A central facet of this rhetorical device was the insinuation that the United States, which was once a great nation, was in decline as a consequence of the acts and omissions of the political elite in promulgating a globalisation agenda. Just as Davies observes of the German historical school, so too does Trump appear to conceive of the state as the unit for economic analysis (2011: p. 10). The correctness of Trump’s suggestion that the trade balances are an effective measure of such success does not undermine this analysis; rather, it arguably highlights Trump’s pursuit of a simplistic measures of ‘wealth’ as a measure of state-power.
A further principled point remains to be taken against the suggestion that Trump is methodologically or ontologically anything other than a populist. Although over time Trump has increasingly deployed a mercantilist vocabulary, his trade policies arguably remain explicable as pragmatic responses to political interests. Trump was elected on the promise of changing the status quo and, in this regard, he has successfully tapped into the sense of polarisation that Irwin argues has existed in the United States as a consequence of globalisation since at least the early 1990s (2017: pp. 625-668). In the context of a United States liberal-trade orthodoxy, in which American workers have suffered at least in part as a consequence of trade liberalisation, protectionism stands as the easiest means by which Trump can be seen to effect change and avoiding the need to engage with systemic challenges of structural adjustment. Davies argues compellingly against this very reasoning (2011: pp. 18-22); but in the case of Trump, this author contends that is very difficult to attribute any institutional method to Trump’s madness given both his limited policy experience and the absence of any protectionist characters amongst his economic advisors.
V CONCLUSION
It may very well be that Trump’s trade policies make little or no economic sense. However, the characterisation of those policies or Trump as mercantilist is not only unhelpful but, as demonstrated in this essay, contributes to the misapprehension of mercantilism that began with Smith himself. A critical examination of mercantilism has revealed that the term carries a particular normative charge; imbued by its historical connection to Smith and his particular use of it in the Wealth of Nations. The use of the term in the ‘Trump is mercantilist’ discourse is thus typically crude, importing only Smith’s conception of mercantilism and only part of his conception at that. In this connection, this essay has highlighted a curiosity of commonality between Smith and Trump in their respective conceptions of protectionism and liberalism as the cause, and inversely the solution, to a persistent ‘conspiracy’ between the mercantile and political classes. This point of inquiry has so far been ignored, along with both competing historical conceptions and modern re-imaginings of mercantilism in terms of their application to Trump. It appears that just as Smith made a strawman of the ‘mercantile system’, so too do Trump’s critics make a strawman of him by the invocation of this term.
VI BIBLIOGRAPHY
Anheier, H 2012, ‘Mercantilism’ in H Anheier & M Juergensmeyer (ed.), Encyclopedia of Global Studies, viewed 23 September 2018, Sage Reference Online Database
Appelbaum, B 2016, ‘On Trade, Donald Trump Breaks With 200 Years of Economic Orthodoxy’, The New York Times, 10 March, viewed 9 September 2018, www.nytimes.com
Buckley, P 2004, ‘Stephen Hymer: Three phases, one approach?’, International Business Review, vol. 15, pp. 140-147
Davies, S 2011, ‘Trade, Mercantilism & Nation-Building’, Economic Affairs, vol. 31, no. 3, pp. 18-22
Irwin, D 2017, Clashing over commerce, University of Chicago Press, Chicago
Magnusson, L 2003, ‘Mercantilism’ in J Samuels et al (ed.) A companion to the history of economic thought, Wiley-Blackwell, Malden
Rampell, C 2018, ‘Trump’s trade policy is stuck in the ’80s — the 1680s’, The Washington Post, 31 May, viewed 9 September 2018, www.washingtonpost.com
Smith, A 1776, An Inquiry into the Nature and Causes of the Wealth of Nations, ed. S Soares, MetaLibri Digital Library, www.ibiblio.org/ml/libri/s/SmithA_WealthNations_p.pdf
Stern, P and C Wednnerlind 2013, Mercantilism Reimagined: Political Economy in Early Modern Britain and Its Empire, Oxford Scholarship Online, viewed 13 September 2018
Stiglitz, J 2018, ‘Trump and Globalization’, Journal of Policy Modelling, vol 40, pp 515-528.
Trump D 2016, ‘On Trade’, Public speech, Monessen, Pennsylvania, 28 June, www.time.com
Trump D 2018, Twitter, 3 March, twitter.com/realDonaldTrump/status/969991653393039361