THE MAIN IDEOLOGIES IN GLOBAL POLITICAL ECONOMY BETWEEN MERCANTILISM AND LIBERALISM

THE MAIN IDEOLOGIES IN GLOBAL POLITICAL ECONOMY

BETWEEN MERCANTILISM AND LIBERALISM

Introduction

In the world of economics, especially in the field of political economy, the question

will be posed to the government, towards what specific economic policy choices will the

government make? Another question is, why do some governments in the world allow their

currency to float, while others maintain a fixed exchange rate? In answering such questions,

it is important to go back to the three political economy schools of thought, viz: -

Mercantilism, Liberalism, and Marxism. In fact, according to Wolin (2004) each of these

three schools of thought provides its own explanation to the above question. This difference

has become a matter of debate when each of them is compared and then taken into account.

Especially, when it comes to the comparison between Liberalism and Mercantilism, there

are opposing viewpoints. This paper does not discuss this from the perspective of Marxism.

From one point of view, Mercantilism is a paradigm of political economy that was later

followed by Liberalism in the late 18th century, i.e. the Capitalist Economic system or free

market economic system, in England with the motto "laissez faire" which means "Let it be".

The free market economic system provides freedom to organize and determine their

own economic activities to the people they want to do according to their respective abilities.

The freedom in question is all the main activities of the economy including production

consumption and distribution. The characteristics of the Capitalist Economic System are, all

means and sources of production are purely owned by the community or individual

companies so that everyone is free to allocate resources according to their talents expertise

and desires. However, on the other hand, Mercantilist thinking is still being implemented

today, as McCusker (2011) assesses. This means that both Mercantilists and Liberalists

believe that economic activity increases the strength and security of the state. However,

these two ideologies have different approaches in operating economic activities. This paper

will examine and compare Liberalism and Mercantilism in their historical and practical

perspectives to prove that both Mercantilism and liberalism have certain strengths and

weaknesses. Although the tension between their mindsets remains with economists to this

day; both ideologies have provided economists with insights into the market system

throughout the history of political economy.

Let's discuss the following mercantilist historical perspectives with their rationale,

strengths and weaknesses in Johnson's (2011) History of domestic and foreign commerce of

the United States, highlighting the system of liberalism and the innovative idea of the market

system, as well as its strengths and limitations. In the process of illustrating the strengths and

weaknesses of mercantilism and liberalism, this paper attempts to show how the tension

between mercantile and liberal thought still exists today.

Mercantilism and its rationale

From a historical point of view, according to Robert (2008) mercantilism is the oldest

and can be considered an important theory in international economics, as it contributes to the

idea of a "coercion" system as the basis in all nation-states. The development of classical

mercantilism is associated with the rise of the modern nation-state in Europe in the 15th-

18th centuries. This was the period of time when the idea of state intervention in the market

for the purpose of strengthening the security of the state and nation dominated political

economic thought. In addition, as a clear learning experience from the history of European

wars as well as the competition between European powers for hegemony in society,

economists of the 15th-18th centuries were able to recognize the importance of state

intervention in the marketplace. At that time, seizing territory was the first priority of the

state on the grounds that to protect its national security and independence, the state had to

create and maintain wealth and power. According to mercantilists, nation-states could only

achieve wealth and power with their efficient military and economic capabilities to protect

themselves from foreign invaders.

Wealth and power are considered two inseparable parts in the process of building a

prosperous and secure state and nation. In a sense, wealth and power revolve in a vicious

circle so that the ultimate goal is to generate wealth, which in turn increases power. Thus, if

a state fails to protect itself from foreign invaders, it will be overthrown and end up in

weakness and poverty. This means that the State must be wealthy, produce a wealthy nation

and be filled with wealthy people, so that those who appear poor, weak and seem vulnerable,

may become as different and strange. An important key to achieving wealth and power, from

a mercantilist perspective, is to promote exports and limit imports to generate trade surplus

value which then becomes the wealth and power of the state. The wealth and power of

nation-states were evaluated based on the accumulation of gold and silver. Therefore, a

favorable trading system is less imports and more exports. Good trade results were measured

by the difference of exports to imports and the amount of gold received from trade. This

view was clearly reflected in the mercantilist writings of the 16th, 17th and 18th centuries.

Instantly, Blaug Mark lists some important features of mercantilist trade policy that helped

nation-states accumulate gold and gold. Mark emphasized the regulation of foreign trade to

generate as much inflow of gold and silver as possible.

To that end, the government must first promote its industry by importing cheap raw

materials while imposing protective obligations on imported manufactured goods. Exports

should be encouraged, especially finished goods, and most important is the suppression of

population growth, so that it does not burden the State and the people prosper. The above

policies brought many advantages to monopolies in the manufacturing business such as the

East India Company during the 17th and 18th centuries. In fact, this trading model can be

seen while retracing the British colonization of India that the East India Company had

supported wealthy merchants and nobles that they sold manufactured goods to the colony

and received gold, silver, furs, timber, raw materials, and cheap labor. A successful trader

and director of the East India Company, Thomas Mun said that it was the positive balance of

trade that was essential for the British to pursue wealth.

Another noteworthy feature of mercantilism is that all economic activity is determined

by the state. By emphasizing on wealth as an indispensable component of power,

mercantilists argued that economic activities were too important to be conducted through a

comprehensive process of determining how and where to invest where community resources

are located. Furthermore, there is an analysis from a mercantilist perspective that only with

government support, are "budding industries" able to thrive in the long run. Thus,

mercantilists add that an "uncoordinated" process will result in an "inappropriate" economic

structure; therefore the state must play an important role in economic policy-making.

In general, mercantilism should be viewed as a commitment to state-building and that

the mercantilist literature is large and diverse. However, according to Thomas Oatley,

mercantilists essentially adhere to the following three main propositions. First, classical

mercantilism holds that wealth and national power have a close relationship, which means

that in the international system, national power is primarily derived from wealth. Second,

wealth can only be gained from trade, and the only way to have a balance of trade is to

encourage exports and discourage imports whenever possible. Therefore, it can be said that

wealth and power are the ultimate ends of a nation's policy. Finally, some classical

mercantilists believed that some economic activities were more valuable than others. For

example, classical mercantilists considered that manufacturing activities were more

important to promote than agricultural and other non-manufacturing activities.

Strengths and Weaknesses of Mercantilism

At the forefront of mercantilism is the dominance of states as the means of economic

development and the main actors in international relations. Although in modern economic

development, many argue that the trade framework has become obsolete, this kind of

"patriotic" political economy can still be found everywhere in the world today. There are

societies that are working hard to create strong state enterprises to organize and manage their

national economies. For example, many economists in developing countries regard national

development and nation-building as a process to match the industrialization of other Western

countries. Thus, they on the one hand consider promoting domestic industries, but on the

other hand, they take precautions against "their budding industries" among other mature

industrialized countries. In the 1980s and 1990s, the economic success of Japan and other

newly industrialized countries (Hong Kong, Singapore, South Korea, and Taiwan) became a

hot topic for economists. They compared the success of the new economies with the United

States and other industrialized countries.

Economist Lester Thurow argues that it was Japan's desire to become a world

economic power, which motivated them to get ahead of others. In fact, this goal of gaining

more security in an "unpredictable" world is also one of the reasons for countries to practice

mercantilism to this day. Furthermore, mercantilism provides a framework such as that

which emphasized the importance of security and political interests. By doing so,

mercantilism provided security (military power) for the state which was seen as an important

prerequisite for its economic and economic stability in a competitive state system. To

illustrate the power of mercantilism in this case, it is necessary to take the case of the Dutch

East India Company to see how mercantilism succeeded in their economic activities. In the

early 17th century, the Dutch had just gained their independence from Spain and began to

establish the Dutch East India Company. Since the Portuguese started the Far East sea route

to carry out their economic activities, the British and later the Dutch followed suit. The

Dutch used their ship technology to engage in trade and colonization in different parts of the

planet. Unlike many other large companies of the time, the Dutch East India Company was

equipped with an army and navy itself.

The company also had monopoly rights (rights granted among the Dutch) to establish

economic activities in Asia. In 1602, the Dutch East India Company (Vereenigde Oost -

Indische Companie, VOC) was an association of merchants who worked together with the

aim of doing economics on a larger scale, sharing risks, and reducing competition. At the

same time, there were East India Companies - from Portugal to Sweden - many merchants

had left - but they did not achieve as much success as the VOC. According to John. (2008)

the VOC's predicate in the spice trade contributed to its power which in turn helped to create

and maintain market relationships. By 1670, the VOC was the richest company in the world,

paying a 40% annual dividend on its investments, while financing 50,000 employees, 30,000

fighting men and 200 ships, many of which were armed. It is clear that the VOC's economic

activities were based on a political framework, undertaken to be the most effective economic

enterprise in a competitive world of groups and nations. Fully furnished in terms of military

power, the VOC not only imposed economic policies and regulations on the local

population, but also had the ability to prevent competition from other competing European

traders and colonizers at the same time. Of course, this framework demanded a large amount

of money to purchase weapons and supporting soldiers. Therefore, in the mercantilist

system, this economic model relied on monopoly to generate high income. From the point of

view that the mercantilist economic framework was costly, many liberal economists argued

that the mercantilist economic framework was conflictual because several countries

competed for the desired industries and engaged in trade conflicts as a consequence of this

competition, which was one of the drawbacks of mercantilism.

The weakness of mercantilism is that it views state power in terms of a "zero-sum

game", meaning that if a state gains, other competing states must lose. In this perspective,

trade, investment, and economic relations are put into a conception of conflict. This

assumption argues that it does not have true international economic relations because there

is a zero-sum game possible benefits for all if cooperation occurs. A mindset that believes

that dependence on other nations will lead to weak and vulnerable nations if import

provisions are cut off. Such beliefs create a hostile environment and conflict as all nation-

states pursue wealth and power. Here the case of the Dutch East India Company in the 17th

century again serves as an example. While the Dutch were successful with their trade,

France and England were their business competitors in the 17th century. Jean-Baptiste

Colbert, the French finance minister planned a strategic industrial policy to replace the

Netherlands' current dominant position in international trade. Jean's plan first invested more

in the shipbuilding industry to develop the French trading fleet. Then he sought to strengthen

the French manufacturing industry and protect it from foreign competitors by imposing

import tariffs. At the same time, he also penalized producers of standardized products. The

increase in import tariffs in France led to the fact that other countries also imposed heavier

tariffs. This process was a constitutional element that led to the Dutch War between 1672

and 1678. The first Anglo-Dutch War between 1652 and 1657 was also a battle at sea

between navies caused by disputes over trade.

The main factor that caused tension between the two countries was the First

Navigation Act passed in 1651. In the Act there was a declaration that all shippings of

imported goods were prohibited unless the goods were carried by English ships. It is clear

that the premise of mercantilism was essentially before national interest in that the policy

favored the domestic market and outcompeted foreign industries. Explaining the reason why

English merchants were so opposed to the Dutch, Jonathan Israel in his book entitled

"Conflict and Wealth" mentions that this was because English merchants were at a

disadvantage compared to Dutch merchants as the Dutch gained greater value, namely

market share. In response to this situation, English merchants created several treaties aimed

at protecting their foreign trade, shipping and other industries.

Given the nature of international economic relations as a zero-sum game, the basic

assumption of mercantilism is that the core of economic relations is conflictual. Therefore,

the struggle between states for economic resources is inherent and inevitable. However, all

arms races and military exercises are costly. This possibility leads to budget deficits and

economic inefficiencies. In addition, industrial development without regard to the market

situation or comparative advantage can weaken a society economically. As Adam Smith said

that nowadays the tendency to identify industry with strength can even suffer the country's

economy.

Here, the example of Latin America after the Second World War is an example of

economic failure where Latin American governments intervened too much in national

industries and lacked to consider the comparative advantages of their import substitution

policies.

Like many third-world countries, many Latin American governments are drawing

lessons from the recent experiences of richer countries particularly from the Soviet Union.

During the 1930s, Stalinist industrialization in the Soviet Union achieved capital

accumulation and doubled economic growth, while more liberal Western capitalist

economies faltered in the Great Depression. Unfortunately, Latin American countries, one

after another, suffered economic stagnation. Many commentators argued that Latin

American economies had "too much state intervention in developing national industries,

which caused them to be inefficient and uncompetitive and required too much government

spending, which ultimately led to inflation". The World Bank and the International

Monetary Fund (IMF) also argue that import substitution is the main factor causing

economic stagnation in Latin American countries. Another weakness of mercantilism is that

it lacks a satisfactory theory of domestic society, the state, and foreign policy. For

mercantilists, the real actors in international economic relations are nation-states and

therefore national interests determine foreign policy. National interests may depend on the

economic interests of certain classes including elites or other sub-groups in society.

However, as liberals argue we live in a pluralistic society where including individuals and

coalition groups who try to gain advantage for themselves through state mechanisms. Thus,

mercantilists fail to interpret that domestic political groups usually use national policies to

seek their own interests. These policies lead to trade monopolies and thus increase economic

rents while monopoly traders control certain industries that only benefit the traders.

Furthermore, business owners have an inherent tendency to collude to raise prices leading to

an uncompetitive market and even failure. Hence, it is said that mercantilists theoretically

refer to state building as their ultimate goal, however this is a "cloak for the interests of a

select group of producers who are in a position to influence national policy".

Although all the major industrial powers in the 17th and 18th centuries were

successful with state trade protectionism, they would eventually die out due to the high cost

of financing wars to protect their trade, and they also lacked the power of perfect

competition. Therefore, since the early 19th century, the economies of East Asian countries

began to favor the framework of liberalism and have experienced sustained growth.

Actually, the concept of economic liberalism is Adam Smith's great intellectual innovation,

and this paper will discuss the following parts.

Liberalism and its Reasons

Mercantilism and liberalism stand on opposite sides. While mercantilism emphasizes

the role of national policies in operating economies, liberals on the contrary distinguish

economics from politics and consider that each domain operates on its own due to certain

rules and logic. In fact, the idea of liberalism emerged in Great Britain, the United States,

and Western Europe during the 18th century to challenge the dominance of mercantilism in

government circles. Adam Smith and other authors including David Ricardo, John Maymard

Keynes, Milton Friedman, and Friedrich Hayer were scientists who opposed government

intervention in economic activity. Against mercantilist policies, Adam Smith in Eisenbrauns

(2007) viewed government management and intervention in the economy as dangerous and

untrustworthy, arguing as follows: "The State, should endeavor to direct its officials, its

human resources in any way, they should use the power of the State to facilitate the people,

not only to make itself (the State and its officials) ask for the most unnecessary attention. A

State authority should be trustworthy, not just left to one person, but also to a group of

people who have authority that is suspected of endangering the people, also the State should

be like a mother who has patience so that her children are sufficiently trained in facing

various types of competition".

This view was later reflected in the assumptions of liberalism that were developed to

challenge mercantilist propositions. The basic assumptions of liberalism again according to

Eisenbrauns. (2007) in There is no need to expound the foundations and principles of

modern liberalism, which emphasizes the values of freedom is that the nature of international

economic relations underlies harmonization, which is in stark contrast to mercantilism,

where the core of economic relations are competing and conflicting. The law was to lose and

win. With the opposite idea to his predecessors, Smith argued that a world of prosperity

could only be achieved under the framework of liberalism in which international economic

relations were a "game of some positive thinking"; that is, everyone would benefit once

business was operated.

Liberalism theory challenges the mercantilist framework with the following

propositions. First, liberal economic theory is committed to free markets or free trade. It was

Adam Smith's great assertion in his writing on "The Wealth of Nations" that the wealth of a

nation would be better served by a policy of free trade. Smith added that economic growth is

a function of the degree of division of labor, which then depends on the scale of the market.

Smith strongly opposed barriers such as import substitution and import tariffs set by

mercantilists that prevented the exchange of goods and the enlargement of markets. Thus, to

achieve wealth, countries should not produce manufactured goods but they should focus on

primary commodities. By doing so, countries can make better use of them by producing

goods that they can produce at relatively low costs and by making use of primary

commodities trade them for commodities that require high production costs at home. As

Smith wrote: "What is prudence in the conduct of each family, may be folly in a great

empire. If a foreign country can supply us with commodities cheaper than we can produce

them, it is better to buy them from them with a portion of the produce of our industry, used

in a way that we have some advantage". Therefore, according to liberalism, the government

should take little intervention in economic activities to achieve maximum efficiency; that is,

the government should take a 'laissez-faire, laissez passer' approach to the economy with an

'invisible hand' to determine which industries should be pushed forward, and the government

should provide adequate national defense and also basically enforce laws.

It is important to mention Adam Smith's most famous book that discusses the invisible

hand. In fact, the invisible hand is a metaphor that Smith introduced in the book "An Inquiry

into the Nature and Causes of the Wealth of Nations", published in 1776. In his book, Smith

stated that, in a free market economy, each individual pursues his or her self-interest, and the

actions of these individuals tend to amplify the benefits to the rest of society through the

invisible hand. He argued that, as each individual desires the greatest benefit they will

maximize the benefit of the whole society, this is like the whole community of all individual

benefits. Second, liberals assume that the market improves unexpectedly to meet the needs

of society, once it is operational, it will work well with internal logic to facilitate exchanges

and improve the social economy. As Adam Smith said that mankind inherently knows how

to drive trucks, barter and exchange so the market can naturally improve even without any

external intervention or at least a form of government is required only for the period of

primitive market system. Third, liberals argue that in a harmonious relationship of interests

there is market competition of producers and consumers, which then results in economic

growth and efficiency maximization.

In a sense, liberalism assumes that markets operate in a society where individuals are

fully informed and thus able to make the most advantageous choices. This suggests that

liberalism reflects a commitment to equality and individual freedom. As such, the value of

goods and services is determined individually due to market dynamics and this creates a

flexible economy where any changes in prices will lead to changes in production patterns,

consumption, and economic institutions. In addition, it is important to note that in a truly

competitive market, unequal bargaining positions can sometimes occur by mutual consent of

the parties and both parties benefit. This is a natural outcome of economic competition

where exchanges are voluntary, there is no coercion.

It is true that both mercantilism and liberalism agree on the issue that economic

activity enhances state power and security. However, the two ideologies have different

approaches to the market economy. While mercantilism considers the state as an important

instrument for conducting and developing the national economy, liberalism supports the

operation of the free market. The basic premise of liberalism is that it takes into account

individual consumers, households, or firms as elements of society. When individuals gain

maximum interest in the market, they will in turn contribute to social wealth to accelerate

economic growth, and thus promote the strength and security of the state. Because liberalism

strongly advocates the role of individuals in the economic market, it criticizes monopolies in

trade. As Adam Smith's negative view of the East India Company's monopoly ruled and

oppressed some people. Smith not only denounced the company as a blood-stained

monopoly, but also accused the company of massacres in Bengal. The situation worsened in

1770 when a famine decimated a third of Bengal's population, which further depressed the

Company due to reduced local productivity, and eventually forced it to seek reinforcement

from the British government to avoid bankruptcy.

Actually, Adam Smith was not against unreasonable state-made trade monopolies. He

realized that when a monopoly occurs, the monopolist will artificially raise prices. Smith

ignored the tricks of monopolists who kept their markets constantly disrupted by never

supplying enough as customers demanded in order to sell products at prices much higher

than their natural prices. "Monopoly prices are on every occasion the highest that can be

had. The natural price, or the price of free competition, on the contrary, is the lowest that can

be taken, not on every occasion, indeed, but for some time together." Generally, classical

liberals including Adam Smith and David Ricardo believed that a free international market

would not only bring mutual benefits to all countries concerned, but also stimulate industry,

encourage innovation, and create "general profits" by increasing production. As Ricardo

claimed: "Under a system of perfectly free trade, each country naturally provides capital and

labor for such work as is most profitable to each. The pursuit of individual advantage is

admirably connected with the universal good of the whole. By stimulating industry, by

rewarding ingenuity, and by using the most efficacious natural forces bestowed by nature, it

distributes labor most effectively and most economically: while, by increasing the general

mass of production, it diffuses the general benefits, and binds together, one by one, the

common bonds of interest and intercourse, the universal society of nations throughout the

civilized world". According to Ricardo, the free market gives efficiency to the nation-state,

and efficiency is the quality that is valued by the nation-state liberals almost as much as

freedom. The success of each individual is a contributing factor to universal prosperity and

no conflict between people or nations occurs in very simple societies.

Although liberalism was known as political economy before the end of the 19th

century and seemed to gain a position of dominance in the field of economics, it was also

criticized in many important aspects of both its strengths and weaknesses.

Strengths and Weaknesses

While liberalism continues to dominate the discipline of economics, economists have

favorably commented on the power of liberalism that it provides analytical tools and policy

frameworks that help countries gain some scarce resources by exchanging hands with other

countries. Moreover, the price mechanism (natural prices result from free competition) that

liberalism ensures to gain mutual benefits and thus generates social efficiency. However,

there are also criticisms against economic liberalism. The main criticism is that its basic

propositions about the existence of economic actors and competition in economic markets

do not reflect reality. That is, while liberals assert that economic liberalism performs

equality and individual freedom, and that exchanges are voluntary. However, in reality these

exchanges are rarely free and equal but under coercion influenced by other political factors

such as monopoly or monopsony. As a result, liberals tend to ignore the impact of non-

economic factors on exchange as well as the impact of exchange on politics.

Another limitation of liberalism is that it separates the economy from other aspects of

society and accepts the existing sociopolitical framework as given including the distribution

of power and property rights. [In other words, liberals do not look at the global situation but

remain focused on the economy and try to maximize profits. Thus, some argue that liberal

economic analysis tends to be static in the dynamics of international political economy in the

contemporary era. The fact is that important changes in economics, technology and politics

are powerful and go beyond the spherical economic analysis of the liberalism framework.

Conclusion

It is clear that both mercantilism and liberalism have weaknesses in strength. The

market system rationale of both ideologies is to enhance the power and security of the state,

but their approaches to the market system differ and the tension between the two ideologies

still exists today. For liberalism, it promotes the operation of the free market, and considers

individual success as a contributing factor to the universal well-being of society. In contrast,

mercantilism always considers the priority of state territorial security as the first priority of

the state. Mercantilists argue that in order to achieve domestic prosperity, justice, or peace,

economic activities and must be subordinated to state development goals and state interests.

In the contemporary world, while liberalism continues to gain a position of dominance in the

discipline of economics, mainly supported by NGOs, IGOs and the WTO, the ideology of

mercantilism is still under consideration as it provides important insights for governments to

make decisions on policy and intellectuals of the Realist School in international relations.