Theft by Mercantilism: Old and New

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

Keynesianism 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.

Keynesianism 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.

Textbooks 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 1776.

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.

Politicians 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.

Mercantilism 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.

Mercantilism 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.

Keynesian 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.

Bureaucrats 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 and 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.

Until 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 TVs.

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.

December 28, 2010

Gary 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.

Copyright © 2010 Gary North