Parked outside Pete's Coffee, lost in thought, soaking up the late afternoon sunshine while waiting to pick up my son from school, I was jolted out of my reverie when he yanked open the car door, plopped down in the front passenger seat and blurted out the following.
(paraphrased because I can’t remember his exacts words)
So, Mom. Today in history, my teacher said mercantilism has nothing to do with balance of trade. It has to do with colonialism. Balance of trade is just balance of trade. And what we have now isn’t mercantilism, it’s capitalism.
(what I would have liked to say, only conversations with my teenager tend to occur in short sentences, not paragraphs)
Whew! That’s a bunch of claims all at once. Let’s look at them one at a time.
Your teacher is partly right – mercantilism can be about colonies. More generally, mercantilism is about government controlling the economy in attempt to benefit its own country and businesses. You can think of it as a kind of "economic nationalism." One way to do it is through colonialism, as when Great Britain tried to use the colonies in North America to provide raw materials and customers for its home merchants. The king didn't want gold leaving Great Britain when her citizens purchased goods from other countries. He wanted to keep it as as taxes in order to pay for soldiers and other royal prerogatives. In other words, the government (the king and Parliament) wanted a positive balance in gold!
Today, people still talk about needing to keep a “positive balance of trade,” meaning; our country should sell more than it buys to avoid loosing dollars and jobs to other nations. The government enacts laws which restrict trade in the attempt to protect domestic businesses and workers from foreign competition. That, too, is economic nationalism, or mercantilism.
There's a lot of problems with the current concern over “balance of trade.” (In a free market there never can be an imbalance of trade because you can’t buy unless you also sell. That’s why it’s call trade.) But that's off track right now. If you think about what mercantilism means --the government using its political power to restrict trade in favor of its home country—then you can see how colonialism and current protectionist policies are both types of mercantilism.
(what I actually did say)
We don’t have capitalism today. Capitalism means a market free from government intervention. We have a mixed economy- some free trade and a lot of government intervention in the form of tariffs, regulation, minimum wage laws, trade quotas, most of which is done in the name of creating a positive balance of trade. That's mercantilism!
But we are mostly capitalist because you can’t have total free trade anyway or you would have to let North Korea trade nuclear weapons with Iran. You think its ok for government to interfere there, so you really aren't for completely free trade either!
Whoa. Now that’s an interesting point, but something's not right about that argument. Let me get back to you after I give it some thought.
(That last point was moot because, by that time, we had arrived home and he was already out of the car and half way up the drive way to the house.)