[Note for bibliographic reference: Melberg, Hans O. (1998), Explaining the appeal of protectionism: From mercantilism to today's popular opinion, www.oocities.org/hmelberg/papers/980811.htm]

by Hans O. Melberg

by Hans O. Melberg

Paper submitted in Economic History

University Of Oslo

July 1998

Introduction *

Protectionism: The facts *

Four mechanisms: Explaining protectionism *

Criticism and extensions *

Conclusion *

by Hans O. Melberg

"... very few of its tenets [mercantilism] can be explained by particular external conditions existing at the time, but that, on the other hand, most of its conclusions follow more or less naturally from quite plausible suppostitions." Coleman (1969, 29)

"Everybody knows that Jeppe drinks, but nobody asks why", says Jeppe in a play by Ludvig Holberg. Almost the same can be said about the mercantilists; Most economist agree that they were wrong, but few ask why they held the beliefs they did. More generally one could try to explain the appeal of protectionist sentiments though history, from the old mercantilists to today's popular opinions about free trade.

The explanation I shall defend in this paper, is that beliefs about free trade are influenced by four psychological mechanisms which make the protectionist argument intuitively appealing. I have labeled these four mechanisms the zero-sum-belief, money fetishism, indirectness, and focal point. By implication this means that I do not think the causes of mercantilism are mainly to be found in particular historical circumstances, but rather that it is a doctrine that comes naturally to most people even today.

How can I prove this argument and what is the point of doing so? By their choice or words, arguments and actions the participants in a debate give us direct and indirect clues to the mechanisms that generate their beliefs. Hence, to argue my case I shall use textual evidence from the intellectual history of protectionism as well as evidence inferred from the policies pursued. Moreover, by noting the similarities between the mercantilists and many of the common views today and I hope to justify my emphasis on the universal causes of these beliefs, as opposed to explanations that focus on particular historical circumstances. Altogether I hope not only to provide an explanation of a phenomenon, but also to give hints as to how we may correct false beliefs that lead to bad policies.

The paper is divided into five sections. After this introduction I discuss the set of beliefs that define old mercantilism and a brief discussion of the history of protectionism. The third section develops the main argument by presenting the historical and textual evidence proving that the appeal of protectionism in influenced by four psychological mechanisms. Before concluding I consider possible counterarguments and extensions to my argument.

Many articles and books on mercantilism start by complaining about the difficulty of finding a precise definition (e.g Mathias 1969 and Coleman 1969). One explanation of this difficulty, is simply that mercantilism was not a coherent intellectual system developed by academics. Instead, as Jacob Viner writes: "Mercantilism was essentially a folk doctrine, evolved in the light of the prevailing historical circumstances and values by simple inference from apparent facts. It was a doctrine of practical men not given to subtle economic analysis ..." (Viner 1991, 263)

Hence, to find the core set of beliefs and values that characterize mercantilism, we need - first - to examine the writings of leading mercantilists such as Thomas Mun and Jean-Baptiste Colbert. However, since most mercantilists were not academics who wrote books, we also need to infer their beliefs from the policies they pursued or less intellectual writings. Using these two sources we may hope to find the set of positions that define mercantilist thought.

Of course, different academics may disagree on the common factors that emerge from combining the two sources. First, various writes differ in their emphasis put on the writings vs. the policies when defining mercantilism, viewing mercantilism either as a set of intellectual doctrines of a set of policies. Second, the inference from policies to beliefs is not an exact science. In any case, below I have tried to present my own definition of the core set of beliefs that characterize mercantilism.

The most obvious factor common to most mercantilist, was the belief that import was bad, while export was good. For instance Carey Reynell, an English mercantilist, wrote in 1685 that "Exportation is gain, but all commodities imported is loss" (quoted in Irwin 1996, 33).

There is, however, disagreement between economic historians as to the aim of discouraging import and encouraging export. Some believe the mercantilist were concerned about wealth, others claim it was power, some claim it was employment, others - in turn - argue that the mercantilist disliked imports because they worried about the balance of trade; there are those that argue the mercantilist policies were designed to encourage growth, and for some the unification of the state was a goal of mercantilists. These disagreements are, in my opinion, of limited significance for the present discussion. The motives are often not exclusive (power and wealth are clearly related). Moreover, there is no need to argue that all mercantilists were inspired by the same motive. Finally, the mentioned Jacob Viner has made a persuasive case that the mercantilists were concerned about both plenty (wealth) and power (see Ch. 4 in Viner 1991). More importantly, for the purpose of this essay the main point is that mercantilists though that import was bad and export was good, not the (explicit) justification of this belief.

A second characteristic, is that mercantilists seemed to have a particular conception of wealth, namely that wealth was associated with the amount of precious metals or money within the country. This is how the Oxford English Dictionary used to define mercantilism, namely as "the system of economic doctrine and legislative policy based on the principle that money alone is wealth" (quoted in Coleman 1969, 1).

A third common trait to most mercantilists is that they made a distinction between different types of goods. Not all imports were equally bad and not all exports were equally good. The export of raw materials was considered bad (particularly when they were re-imported), while the export of manufactured goods was viewed very positively. Conversely, the import of raw material was viewed much more favourably than the import of luxories or manufactured goods.

A fourth, and in this survey, final view common to mercantilists, was that the government could and should intervene to encourage exports and discourage imports. The position is important since it is at least logically possible to accept the three first beliefs, and yet to argue that intervention only produces a worse situation. However, most mercantilists did not take this position; it was obvious that the government should intervene.

Before closing this section on ideas, I should describe some of the characteristics of modern protectionist views. It is important to note here that I am not concerned with the academically sophisticated economists who prove that there sometimes is a case against free trade. My focus is on the similarity between the opinions of the common people of today and the mercantilists of yesterday. Hence, it is instructive to learn that 68% of the respondents in a large American survey believed that one of the reasons the US economy was doing so poorly was that "companies are sending jobs overseas" (only 6% of the economists believed this). Similarly, 28% argued that free trade agreements were bad for the country (compared to 3% of the economists) (Blendon 1997). This exemplifies, I think that many modern protectionists still believe that export is good and import is bad.

As promised, I shall defend my selection of typical mercantilist beliefs not only by quotations, but by reference to the policies pursued. However, my aim in this sub-section goes beyond that as I also want to give a very brief overview of international protectionism.

Internationally, we may distinguish between four periods in international trade:

a) Before 1850: Mercantilism, Colonial system

b) 1850-1870 Free trade

c) 1880-1945 Protectionism (except Britain, Holland and Denmark)

d) After 1945 Free Trade (increasingly)

In the first period, before 1850, trade was dominated by trading companies who were granted monopoly rights by the government, such as the Dutch East India Trade Company (formed in 1602) or the English East India Trading Company. The governments tried to influence trade directly and indirectly. For instance, by 1610 in France there were 48 "manufactures royales" that is firms set up with the aim of both increasing the export of goods, as well as preventing import by becoming self-sufficient in manufactured goods. More indirectly, the governments used laws and tariffs to promote exports and discourage exports. Examples of laws include, the 1651 (and 1660) Navigation Acts in England which implied that all goods brought into England had to be transported on British ships. It also required all goods shipped from English colonies to Europe to first enter England before the goods were re-exported to Europe. These measures were directed against the Dutch. Another example of protectionist policies in this period, were the Calico Acts in 1701 and 1721 which outlawed the import of calico from India in order to protect the domestic textile manufactures (Bladh 1995, 31). Another good example of the policies pursued, is the Colbert tariffs of 1664.

It is, of course, wrong to say that free trade was suddenly introduced in 1850. It was a gradual development all over Europe, including the formation of the German Zollverein in 1834 and the large-scale reduction of duties in the British budget of 1842. Nevertheless, the repeal of the Corn Laws in 1850 may serve as the symbolic turning point away from protectionism and towards free trade (The repeal was decided on in 1846, implemented in 1849). Another symbolic landmark is the Cobden-Chevalier Treaty (1860) in which France and England promised mutual reduction of duties on imports. Similar treaties were concluded between many other European Countries (see Kenwood and Lougheed 1992, 64).

After a period of relatively free trade, many countries turned increasingly protectionist. Russia greatly increased protectionism in 1868, Italy in 1878, the McKinley Act in the US (1890) increased tariffs by about 50% and France introduced the Méline Tariff in 1892 which increased tariffs on agricultural goods by 25%. World War I, for obvious reasons, reduced trade in Europe.

With the conclusion of the Havana-round in the GATT talks, free trade was once again on the advance. The period since they has largely been one of increasing free trade, as each round in GATT was concluded. More recently the formation of the World Trade organization to replace GATT as the main organization for regulating trade, also strengthened the position of free trade in the world.

Faced with these facts some might say that it exemplifies the ebb and flow of protectionism. There are, however, at least two possible interpretations; either the historical pattern was one of ups and downs, or it was a matter of variations on a trend of decreasing protectionism.

Lastly, return to the question from the start of this sub-section: Do the facts support my definition of mercantilism. Maybe, for example, the degree of protectionism is best explained by variations in the need to finance the state apparatus, and not by a principled aversion to imports (Kenwood and Lougheed emphasise this point). While this explanation certainly has some truth to it, it cannot explain the precise nature of the trade interventions. Why did the tariffs favour exports over imports? Why did the state intervene to create manufactures themselves (as the manufactures royales in France)? Why did the mercantilist think that import of manufactures was worse than import of raw material? In short, to explain the precise nature of intervention we are left with the inference that they really believed that export was good and import was bad, not only that they used tariffs as a source of revenue.

Take the first defining characteristic of mercantilism i.e. that export is good while import is bad. How did people come to this conclusion. The most obvious and frequently used explanation is that people believed that wealth was a zero-sum game. For instance, in 1644 Thomas Mun wrote that: "If [we exchange] amongst ourselves, the commonwealth cannot be enriched thereby; for the gain of one subject is the loss of another." (Irwin 1996, 29, my emphasis)

The statement that the mercantilists believed export was good and import bad because they assumed trade was a zero-sum game, is not really satisfying as an explanation. First, to explain a belief using another belief does not give much understanding unless we can prove that the second belief is more general than the first. Second, we might go one step further to ask about the causes of the zero-sum belief. Finally, the zero-sum belief alone is not enough to generate the import/export attitudes of the mercantilists. These three issues are discussed in the next paragraphs.

There is relatively abundant evidence that the zero-sum belief is common to much human reasoning, not only the mercantilists. For instance Aristotle condemned money based international trade on moral grounds, arguing that "it is not in accord with nature, but involves men's taking things from one another." (Irwin 1996, 12) Similarly, St. Jerome wrote that "All riches proceeds from sin. No one can gain without another man loosing." (Viner 1991, 40). Thus, even before the mercantilist the zero-sum belief was widespread.

If people before the mercantilists made the mistake of thinking that wealth was a zero-sum game, surely we are wiser today? On the contrary! In his crusade against the strategic traders, Paul Krugman has revealed ample evidence that the zero-sum assumption still generates mistaken views on trade policy. As an editor in the well known journal Foreign Affairs said to Krugman: "The conventional wisdom is that the military wisdom competition has been replaced by economic competition amount the market economies" (Krugman 1996). But the analogy between economic competition and military competition does not hold. If you improve your productivity this represents a gain even for me. But in military affairs one man's victory is another man's loss.

If the zero-sum belief is so widespread, we might ask about the causes of this belief. I have no firm answer to this. Jacob Viner suggests that the belief arises out of a false analogy with power. The nature of power, at least to a large extent, is such that if I have much power, another person has little power.

The third issue, however, is more problematic: If you really believe that that trade is a zero-sum game, the logical conclusion is that you should favour import and discourage export, and not the other way around as the mercantilist argued. Promoting imports and discouraging exports would be the best way of keeping as much as possible within the country. Hence, the zero-sum assumption alone cannot explain the mercantilist doctrine. To do so we need to combine the first belief with their conception of wealth. Moreover we should try to explain how the mercantilists came to hold their conception of wealth. This is the topic of the next section.

In the book Against the Grain: An Intellectual History of Free Trade, Douglas Irwin quotes a mercantilist who in 1719 wrote that buying imports was the same as "carrying our cash abroad" (Irwin 1996, 53). The attitude is typical of mercantilists and it reveals that their conception of wealth was tied to money or precious metals since it was assumed that it was a negative thing to send cash abroad. Combined with this attitude the zero-sum assumption becomes more understandable. There really is a limited supply of gold in the world and my gain is your loss. Hence, it seems that the key to mercantilist thought is not so much the belief that trade is a zero-sum game, but that wealth consists of precious metals (in which case trade really is a zero-sum game!). But this, of course, begs the question of why they believed that money and precious metals was the correct measure of wealth.

One possible explanation can be labeled money and commodity fetishism. According to Jon Elster commodity fetishism is "the belief that commodities have value in the same sense that they have weight or colour" (Elster 1985, 96). To believe that money is valuable in itself, can then be termed money fetishism. The fundamental cause of this is a confusion of relational and absolute properties. For instance, the statement "X is black" does not depend on comparison with other objects (it is an absolute property), while the statement "X is taller" is only meaningful when you compare it to something else (a relational property); in itself nothing "is taller". Using this distinction between absolute and relational properties, and the term fetishism to describe the mistake of confusing the two, we may explain the mercantilist confusion of money and wealth.

The key is to recognize that the label "valuable" is a relational property. For instance, in itself today's paper money is not valuable. It is only because it can buy goods that money is valuable. The very fact that the value of money varies (inflation and deflation) and that the gold price fluctuates indicate that "valuable" is a relational concept. That, however, does not prevent people from thinking about gold as having a value in itself. Conceptually it is an easy mistake to make, especially if prices are relative stable over time. People become so accustomed to the fact that gold can be used to buy commodities, that they start to think that gold in itself is the same as "valuable." In sum, the mercantilist made the mistake of confusing relational and absolute properties and as a consequence they though wealth was the same as gold or money.

Once again the explanation above is not completely satisfying. First of all, while we may use the concept of fetishism to explain why they believed that gold and money had value in itself, I have not explained why the mercantilist focused almost only on gold as if commodities in themselves were not valuable. In short, explaining why they thought money was wealth does not explain why they also thought that other things mattered little. Nor have I explained why they made a distinction between raw materials and manufactured goods.

Raw materials are cheaper than manufactured goods. Since selling at a high price meant more gold, it seems logical that exporting raw materials is to loose the price differential between raw materials and the finished product. Of course, modern economists would say that we need to deduct the costs of manufacturing the product before we can make a calculation as to how profitable it is. Yet, many people, both old mercantilists and modern strategic traders, fail to do this. To explain this failure, I turn to the third mechanism explaining protectionist attitudes, namely the human tendency to count only the direct and immediate consequences.

The English mercantilist Gerard de Malynes argued against England using gold to buy spice from the East India Company (anonym, 10). This argument reveals yet another cognitive mechanism common to many, but not all, mercantilists. The fallacy is to consider only the first and direct effect of a transactions on the gold balance. More sophisticated mercantilist like Thomas Mun, argued that the specie was re-exported to Europe at a higher price, thus the initial gold outlay was balanced by a higher gold inflow in the next step of the chain.

The same mechanism is evident in another belief of mercantilists (both old and new) when they argue that protectionism and high exports are good for employment (anonym, 10). A memorable illustration is Ross Pero's famous "great sucking sound" - a phrase he used to describe the job losses in US if NAFTA was accepted. Once again the underlying fallacy is only to consider the direct effects. Assume, for instance, that farmers in Norway suddenly were no longer protected from competing imports on foodstuff. The competition would probably force some of the farmers into bankruptcy and job losses in the agricultural sector. However, it would also imply a lowering of prices on agricultural products, which in turn mean a small growth in the real income for the people employed in the non-agricultural sector. This real income, in turn, implies higher demand for goods and services in some sectors. The new sectors would have to hire new people to increase their productions and this concludes the logical circle: In the new equilibrium there is no necessary reason why there should be lower employment than in the first equilibrium; The elimination of protections does not necessarily lead to job losses.

In 1720 Isaac Gervaise wrote in a short tract that "trade is never in a better condition, than when it is natural and free; the forcing it either by laws, or taxes, being always dangerous: because though the intended benefit or advantage be perceived, it is difficult to perceive its countergroup; which ever is at least in full proportion to the benefit ..." (Irwing 1996, 60). This illustrates the fourth mechanism that I want to use to explain the mercantilist doctrine. The idea is simply that the benefits of protectionism is more visible because it is concentrated, than the costs which are widely distributed.

As mentioned the gains from protectionism is clearly visible (as it the cost of free trade). Jobs in some professions are made safe by protectionism. The costs of this measure is less visible i.e. that a lot of people have to pay a slightly higher price for a product. This asymmerty in visibility may give rise to the belief that free trade is bad, while protectionsim is good. The underlying psychological mechanisms could be labelled "focal points" (a term introduced by Thommas Schelling).

As an example of the empirical value of this theory, consider the phenomenon of "preference reversal" (see Hausmann 1992, ch. 12, for an excellent discussion of this and the literature surrounding the controversy, Another reference is Kahneman et. al. 1982). Assume that you have to choose between two lotteries, one with a high probability of winning a small sum (a P-bet), the other with a low probability of winning a large sum (a $-bet). When faced with this choice it has been experimentally proved that people typically prefer the P-bet above the $-bet. However, when people are asked to sell the bets, they typically demand a higher price for the $-bet than the P-bet. Thus the name preference reversal. One possible explanation for this is simply that the framing of the question directs our attention to different answers. When asked which bet you want, people may be led to think mostly about the probability of winning, but when asked about a price they automatically put more emphasis on the sums involved. In short, framing effects and focal points have proven empirical effects.

There are a number of possible counter-arguments to the thesis and the methodology of this paper. First of all I have not dealt property with possible alternative explanations of the mercantilists beliefs. For instance, one could argue that the cause of confusion between money/gold and wealth was caused by historical peculiarities unique to that time (see anonymous, p. 10). Moreover, I can be accused of seeking confirming evidence. For every quotation that I found illustrating my argument, there were also quotations which did not fit that well (I have tried to draw attention to this in the footnotes). Lastly, the evidence is still to weak to draw a firm conclusion. Finally, a good extension would be to conduct experiments to examine the existence and nature of the cognitive processes I have argued influenced (and influences) beliefs about free trade.

Protectionism is often intuitively appealing, and I have tried to suggest four reasons why this is so. I have also tried to examine the intellectual history of protectionism, especially mercantilism, to prove my argument. Lastly, I hope to have illustrated some of the similarities between mercantilism and today's popular opinion.

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(anonym, "The Scholastics and the Mercantilists", ch. 2 in a photo copied textbook in economic history. Available from hansom@online.no)