Theft by Mercantilism: Old and New

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by Gary North: No
Criticism of Bernanke Is Allowed



“Thou shalt
not steal, except by majority vote.” ~ The Gospel According
to Keynes, Chapter 1, verse 1.

is an economic philosophy based on the idea that the free market
requires intervention from the civil government in order to maintain
justice and efficiency. The free market is both inefficient and
unfair to the common man, Keynesianism teaches.

So does mercantilism.

is almost universally believed today. Therefore, mercantilism is
almost universally believed. This connection is not intuitive, but
it is nonetheless true. What the economics textbooks do not say,
because they are written mostly by Keynesians, is that Keynesianism
is mercantilism with equations.

The textbooks
are officially anti-mercantilistic. There is a reason for this.
Mercantilism is officially wrong, because it is undeniably old.
Textbooks promote that which is new: “The latest is the greatest.”
Mercantilism was believed from 1650 to 1750. It is therefore outmoded.

Yet it is
in fact the dominant economic philosophy today. But it operates
under cover. The cover is called “managed trade.” It is sometimes
called “fair trade.” The high priests of mercantilism baptize the
new convert in the name of free trade, but then they catechize him
in terms of modified mercantilism. Modern mercantilism is “free
trade with modifications for justice’s sake.” “Justice” is defined
operationally as “protecting a politically favored voting bloc.”

Keep your
eye on the modifications. Here is where the sleight-of-hand operates.
Here is where slick-talking fellows from the best economics departments
separate the rubes from their money.


There is a
gigantic bait-and-switch operation going on in economics textbooks
and history textbooks. The textbooks sell beginning students on
mercantilism, but in the name of anti-mercantilism.

All collegiate
textbooks promote mercantilism in monetary affairs. They all promote
the cause of central banking. They all refuse to apply the logic
of the chapter on cartels to central banking. Cartels are recognized
as mercantilism for trade. But central banks are not presented as
cartels, despite the fact that they are, both in theory and practice.

Whenever that
which should be obvious both logically and historically is never
mentioned by a promoter, keep you hand upon your wallet and your
back against the wall.

The few textbooks
written by Chicago School economists all rest on Milton Friedman’s
statement of faith back in 1965: “We are all Keynesians now.” As
he later explained, he meant only methodologically. But that is
the whole point, as any good Austrian School economist will tell
you . . . if you can find one.

are fat, boring books written in a way to get through a committee.
The committee is hired by the publishing firm to act on behalf of
other committees: the departmental committees that assign textbooks
to freshmen. A book that does not promote the reigning methodology
does not get through the publisher’s committee.

“We are all
Keynesians now” means “the publishers’ screening committees are
all Keynesian now.”


Original mercantilism
was a widely believed and invariably incorrect theory of trade that
insisted that a nation grows rich by exporting more than it imports.
David Hume, the Scottish philosopher, refuted this logic over 250
years ago. His fellow Scot, Adam Smith, refuted it in detail in

A nation gets
rich only if its residents get rich. Residents get rich by increasing
their productivity. They stay rich by being allowed by the government
to do whatever they want with their wealth, whether counted in gold,
bank accounts, or goods. Liberty is the #1 basis of increasing people’s
ability to become more efficient and therefore more productive.
That was Smith’s argument in 1776. This is denied by Keynesianism.

Modern academic
mercantilism in the West has reversed the emphasis on exports. It
holds that a nation grows rich by importing more than it exports.
The difference between the value of exports and the value of imports
is made up by debt. The system might be called “spend and grow rich,”
which means “borrow and grow rich.” This is Western Keynesianism.

It is balanced
by Asian mercantilism, which is the older mercantilism: export and
grow rich. There is this difference. In 1750, the mercantilists
argued that gold should flow into the domestic economy to pay for
the exports. Asian mercantilism teaches that IOUs from governments
are to flow in, not gold.

The older
mercantilism made a lot more sense.

Western academic
Keynesian mercantilism and Asian mercantilism are Siamese twins.
Each supports the other. The Asians’ central banks lend newly created
fiat money to buy Western currencies, which is then lent to Western
governments. This holds down the value of Asian currencies. Westerners
can therefore buy more Asian goods. Western governments run up huge
debts to Asian central banks, so that domestic interest rates can
be kept low, lots of economic growth will result, and politicians
will be re-elected.

The mercantilism
of the American voter is the older mercantilism. Workers want protection
from foreign imports. They want an export-based economy, with sales
taxes imposed on imports. They get little support from academic
Keynesian mercantilists, who want more imports funded by debt issued
by Asian governments and central banks.

and bureaucrats on both sides of the border do not accept free market
economics, for the implication of free market economics is that
the government should have less power over the economy, including
the money supply. It is not in their self-interest to see the government’s
control over people’s lives reduced. Their gain as citizens would
be minimal: the per capita increase in liberty and wealth. Their
per capita losses as sellers of influence and as extenders of personal
power would far outweigh their per capita gains as citizens.

But what of
Western voters? Don’t they understand that tariffs are sales taxes,
and increased taxes are bad for them? No, they do not. They see
tariffs as a way to tell all those foreigners to get lost. They
think of their wealth as citizens of a protected country –
protected by sales taxes – as increasing when they have less
after-tax money to spend on what they want to buy.

Are they crazy?
No; they are traditional mercantilists. They are immune to economic
logic. They cannot think through the logic of their position. They
think that less is more: less after-tax income for them as private
citizens means more wealth for them as members of the nation.

But what of
Asian voters? Don’t they see that policies subsidizing exports reduce
their ownership of goods? Don’t they see that they are made poorer?
No, they don’t. They think of themselves as workers. They see exports
to the West as benefits. They do not consider sales to each other
as equally the basis of jobs domestically. They focus on what is
seen – income from exports – and ignore what is not seen:
lost demand domestically.

Keynes went
mercantilist in the early 1930s, and he carried the younger economists
with him. By then, he promoted the idea of state economic planning,
for he was a Treasury official. He trusted the judgment of other
Treasury officials, just so long as they followed his advice.

We find that
most economists are Keynesians, because most economists think that
the government – when advised by them – is wiser than
the mass of producers, who then act as consumers. The masses act
in their own self-interest, and most economists think that Ph.D.-holding
economists have far better judgment as advisors to bureaucrats than
citizens do. The economists are trained to think macroeconomically,
whereas the masses think microeconomically.


They all think
microeconomically. They ask: “What’s in it for me?” Economists look
at all that tax-funded money they can tap into as advisors, and
they conclude: “I must support big government.” The voters look
at their vulnerability to foreign producers, and they think: “I
must support big government.”

This is why
mercantilism persists. Economists believe that people act in their
own self-interest, and most people believe that they can use state
coercion to feather their nests more than other people can use state
coercion to pick them clean.

is the economic philosophy that says, “I can use political power
to get into your wallet deeper than you can use political power
to get into mine.” It appeals to men’s egos. Men think of themselves
as very clever politically. They do not think of themselves as equally
clever in the competitive free market. They see, day after day,
that other men can compete against them as producers. They see the
results of political competition only vaguely. They cannot trace
the effects of political interference with the economy. Even when
they see that politics is stripping them of the liberty and their
wealth, they reassure themselves: “Our side can do better at the
next election.”

All sides
find that they are losing their liberty, but all sides have confidence
that the next election will bring them the victory they need to
make the government act in the interest of their political party.

Those few
groups that benefit from ever-greater government spending staff
the political parties. They cannot lose, because they always promise
the same thing: “More booty next time. More free lunches next time.
More fame, honor, and glory next time. Trust us.” The voters do
just that.

is an easy sell. It sells to people who believe that badges and
guns are the basis of wealth, if the good guys can somehow get their
hands on badges and guns.

The trouble
is, bad guys always seem to have the larger guns. But the faithful
do not conclude that it would be better to issue fewer badges and
fewer guns. They call for more laws, more taxes, and more badges
and guns. Next time, next time, next time: the good guys will win.

The rich and
influential people who sell to the government smile and nod in agreement.
“We will help you toss out the bad guys next time.” The voters on
all sides believe.

The economic
philosophy of this religion of “Next Time for Sure” is mercantilism.
This religion is widely believed. It appeals to the larceny in men’s
hearts, of which there is a never-ending supply at zero official
price. It has a statement of economic faith: “Thou shalt not steal,
except by majority vote.”


The headline
on Google News announced that China has promised to provide support
for Portugal and other hard-pressed PIIGS. The
story was run by numerous sites.

The stories
were all brief. They were based on a statement by a lone female
bureaucrat. It turns out that she is employed by the foreign ministry.
But this ministry has no authority over the People’s Bank of China,
which is sitting on $2.6 trillion in foreign currency reserves,
meaning IOUs from other governments.

The woman
did not say how the central bank would get the money to buy PIIGS
bonds. Obviously, it would print the money, buy the currency and
buy the bonds.

Why would
the central bank do this? She did not say. She did not have to say:
to support the euro. The euro is being threatened by the ever-rising
bills facing the European Central Bank and the European Union itself.
The International Monetary Fund is also involved: loans to PIIGS.

Why would
China’s central bank support the euro indirectly in this way? To
keep the euro-yuan ratio high. Why would the bank want this? To
subsidize exports from China to Europe. If the euro stays high,
then Europeans will buy more goods from China.

The policy
of subsidizing European exports is good news and bad news for bureaucrats
in Washington. It is good news for Timothy Geithner, who is constantly
haranguing the Chinese government for holding up the dollar-yuan
ratio as a way to subsidize American imports from China. If the
Bank of China uses newly counterfeited yuan to buy euros, so that
it can buy PIIGS government bonds, it cannot use that counterfeit
money to buy U.S. bonds, thereby holding up the dollar, so that
Americans can buy more goods from China. The dollar will tend to
fall in relation to the yuan. Geithner will be seen as a tough negotiator
rather than a feckless whiner whom the Chinese can safely ignore,
just as they have for two years. On the other hand, the announcement
is bad news for Timothy Geithner, who is facing a $1.6 trillion
deficit in fiscal 2011, and who needs China’s purchase of Treasury
debt to hold down interest rates.


The Chinese
decision-makers face a dilemma: they must buy the IOUs of Western
governments that will inevitably default. The PIIGS will go bust.
This includes the U.S. government, whose debts dwarf those of the
PIIGS. When the default comes, the People’s Bank of China will be
sitting on top of a mountain of bad debt – the worst kind of
bad debt: the kind that is openly in default, not merely incapable
of repaying, as is the case of Treasury debt today.

The American
decision-makers also face a dilemma: the dependence of the U.S.
government on Chinese decision-makers. The U.S. Treasury needs China’s
central bank to buy Treasury debt. If that bank ever refuses, the
U.S. central bank will have to buy the debt in order to keep interest
rates from rising on Treasury debt. But the continuing purchase
of Treasury debt by the Chinese central bank means that the United
States will continue to import more from China than it exports to
China. This is bad news for mercantilists. It’s the dreaded negative
balance of trade.

This is great
for American consumers, of course. The goods that the Chinese citizens
cannot buy, because we buy them, benefit American consumers. When
you walk into Best Buy or Wal-Mart, and you see a wall of wide-screen
TVs, you know this: they were not made in the USA. They were made
in China, labeled by a Korean or Japanese company, and exported
to the USA.

China’s central
bank can create fiat money, and it does. It can buy foreign currencies
with this newly created money, and it does. It can buy IOUs from
foreign governments, and it does.

Why does it
do this? Because its staffers are Keynesians. They were trained
in the best foreign universities. The professors of economics in
China’s best universities are also Keynesians.

economics rests on two premises: (1) economic growth comes from
deficit spending by the central government; (2) central banks can
create sufficient money to buy government IOUs at low, economically
stimulative interest rates. To this is added traditional mercantilism:
national wealth is attained by exporting more goods than are imported.

and politicians on both sides of a border cannot achieve this goal.
Both nations, meaning producers on both sides of an invisible line,
cannot export more goods and services than it imports from the other
side. One side or the other will export more goods. To do this,
it must buy more investment assets on the other side.

If China’s
exporters are to export more than the Chinese people import, then
someone must lend foreigners the money to buy those “excess” goods.
The payments always balance, unless one side is giving away goods.
If China exports $500 billion more in goods than it imports, someone
in China must lend $500 billion to the foreigners who import all
those goods. China’s central bank is the lender. It creates the
computerized money to make those loans.

If China’s
decision-makers were all committed to Austrian School economics,
they would tell the central bankers to cease buying or selling assets.
The best central bank policy is to close up shop, meaning shut down.
The second-best policy is to do nothing. But central bankers ask:
“What’s in it for us?” They conclude that it would be unwise, career-wise,
to shut down or do nothing. They sell the decision-makers on the
need for more loans to the West, thereby funding more exports to
the West. They preach mercantilism.

Austrian economics
is a hard sell.

This is not
to say that it is an impossible sell. It is selling to Chinese citizens
who read Austrian School sources on the Web. The main ones are
But the market for this outlook is limited in governmental circles.

The market
for liberty is decentralized and therefore politically diffused.
The market for power is centralized and therefore politically concentrated.
The individual payoff from political power is greater than the individual
losses from any increase in political power, but only for those
who survive the screening process. Those who survive are the decision-makers.
They decide to pursue more power. The coin of the realm of the politically
screened is power. The coin of the realm for their victims is liberty.
But their victims do not see this clearly. They trust the screened
and the system of political screening. It takes a leap of faith
to abandon this trust.

In an economic
collapse, the politically screened must blame something else than
the existing system of government. The victims may at last blame
the screening system. But this has not happened in the West for
a century. The more that governments fail to deliver the goods,
the more that voters call for more government intervention. That
is the Austrian School’s dilemma, best expressed six decades ago
in Ludwig von Mises’s essay, “The Middle of the Road Policy Leads
to Socialism.”


For as long
as China’s decision-makers hold to Keynesianism, they will be trapped
by mercantilism. They will buy the IOUs of implicitly bankrupt PIIGS,
which includes the biggest pig of all, the United States government.
Eventually, the implicitly bankrupt issuers of IOUs will default,
one way or another.

then, we can buy all those wonderful goods from China, produced
from resources, both human and mineral, inside the invisible border
of China. The Chinese people, still poor by Western standards, will
continue to subsidize Western consumers. Their central bank will
buy our government’s IOUs, thereby leaving us free to buy wide-screen

Every time
I turn on my TV, I ought to thank the central bankers of the People’s
Bank of China.

Let us hope
that Geithner the hawker of IOUs will succeed, whereas Geithner
the nagging critic of managed yuan fails to make any headway. As
long as the U.S. government is going bankrupt, which it clearly
is, I might as well be able to buy those Chinese imports cheap.

I am hoping
that 3D TVs without polarized glasses will get here before Uncle
Sam goes bust. That is what’s in it for me.

Since we are
stuck on the Titanic, we might as well enjoy all the entertainment.

28, 2010

North [send him mail]
is the author of Mises
on Money
. Visit
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible

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