Noah Smith pushes back on a claim by DeLong and Don Boudreaux from a couple years ago that mercantilism could be a sound economic policy. In a casual conversation, I would be on DeLong and Boudreaux's side. Free trade is so crucial that you don't want to muddy the waters on a question like that.
But we're all people interested in the nitty-gritty here, and we're talking about scientific explanations of reality not dogmatism, so I think you can all handle my limited defense of mercantilism.
- First, one crucially has to ask exactly what the object of economic policy is. Cutting yourself off from specialization and exchange bears a very real cost, but if for any reason you think it's legitimate to maximize your relative position there may be some justification for a mercantilist position. This is
- Second, as Noah points out, new trade theory (which is fundamentally Smithian, I'll remind everyone right now) provides a limited defense of limited protectionism. But Paul Krugman has always attached important cautions to these findings. Predicting the advantages of this sort of industrial policy gaming can be very hard. But it seems intellectually dishonest to say that it's always a bad policy. When you look at the really disastrous economic policies its really limited to socialism and actual planning. You have lots of anecdotal evidence for well-played mercantilism that speeds up the industrialization process and entrepreneurial activity. Anecdotal evidence is limited and what new trade theory tells us is that success is always going to be highly circumstantial. This makes it harder to demonstrate the case for mercantilism with standard empirical methods; randomly or quasi-randomly assigning a trade barrier isn't going to get you the right answer to your question because new trade theory's version of mercantilism also predicts that randomly assigned trade barriers are going to be bad policy. What we're interested in is strategic trade policy, and I have no clue how to think about randomly assigning strategic trade policy.
- Third, is that I think we need to clarify when in history we are talking about this. One important reason why mercantilism could be considered a "right" answer in the context of seventeenth and sixteenth century England but a "wrong" answer in twentieth century America is that mercantilism played an important role in maintaining the money supply (or NGDP for those of you that swing that way). Obviously that concern doesn't apply after the late seventeenth century. Again, we find these arguments have to be circumstantial.
I am not a "mercantilist" and if you gave me one of those surveys of what economists think I would check the free trade box. But we're grown-ups here and we can handle Alfred Marshall's wise words: "Nature's action is complex, and nothing is gained in the long run by pretending that it is simple, and trying to describe it in a series of elementary propositions".