Nighttime Must-Read: Dani Rodrik: The New Mercantilist Challenge

…Economic liberalism… is… dominant…. But its intellectual victory has blinded us to the great appeal–and frequent success–of mercantilist practices. In fact, mercantilism remains alive and well, and its continuing conflict with liberalism is likely to be a major force shaping the future of the global economy…. Mercantilists certainly did defend some very odd notions…. Adam Smith… masterfully demolished many of these ideas….

But… mercantilist theorists such as Thomas Mun were in fact strong proponents of capitalism; they just propounded a different model than liberalism…. The mercantilist model can be derided as state capitalism or cronyism. But when it works, as it has so often in Asia, the model’s ‘government-business collaboration”’or ‘pro-business state’ quickly garners heavy praise…. A second difference between the two models lies in whether consumer or producer interests are privileged…. The logic of the liberal approach is that the economic benefits of trade arise from imports…. Mercantilists, however, view trade as a means of supporting domestic production and employment, and prefer to spur exports rather than imports…. From the liberal perspective, these export subsidies impoverish Chinese consumers while benefiting consumers in the rest of the world…. From the mercantilist perspective, however, these are simply the costs of building a modern economy and setting the stage for long-term prosperity….

The liberal model has become severely tarnished, owing to the rise in inequality and the plight of the middle class in the West, together with the financial crisis that deregulation spawned. Medium-term growth prospects for the American and European economies range from moderate to bleak. Unemployment will remain a major headache and preoccupation for policymakers. So mercantilist pressures will likely intensify in the advanced countries. As a result, the new economic environment will produce more tension than accommodation between countries pursuing liberal and mercantilist paths. It may also reignite long-dormant debates about the type of capitalism that produces the greatest prosperity.