Jane Jacobs Challenges the Mindlessness of Mercantilism

by Don Boudreaux on February 11, 2006

in Trade

Impressed by how badly economists – especially ‘development’ economists and macroeconomists – predicted and explained post-WWII events up through the early 1980s, Jane Jacobs wrote the following on pages 29 through 31 of her 1984 book Cities and the Wealth of Nations:

However, in the face of so many nasty surprises, arising in so many different circumstances and under so many differing regimes, we must be suspicious that some basic assumption or other is in error, most likely an assumption so much taken for granted that it escapes identification and skepticism.

Macro-economic theory does contain such an assumption. It is the idea that national economies are useful and salient entities for understanding how economic life works and what its structure may be: that national economies and not some other entity provide the fundamental data for macro-economic analysis. This assumption is about four centuries old, coming down to us from the early mercantilist economists who happened to be preoccupied with the rivalries of European powers for trade and treasure during the period when Portuguese, Spanish, French, English, and Dutch were exploring and conquering the New World and the lands and seas that lay along the trade routes around Africa to the Indies and beyond. The early mercantilists assumed that the national rivalries unfolding before them were the very keys to understanding what wealth itself is and how it arises, how it is maintained, how lost.  According to the theory they propounded, wealth consists of gold, and gold is amassed as a nation manages to sell more goods than it buys….

Jacobs then goes on to praise Adam Smith for redefining wealth as the availability of consumable goods and services. But even Smith, says Jacobs, “accepted without comment the mercantilist tautology that nations are the salient entities for understanding the structure of economic life.”

Jacobs continues a few paragraphs later:

Nations are political and military entities, and so are blocs of nations. But it doesn’t necessarily follow from this that they are also the basic, salient entities of economic life or that they are particularly useful for probing the mysteries of economic structure, the reasons for rise and decline of wealth.

Why don’t “progressives,” such as Sen. Charles Schumer, who oppose free trade whenever some conventional and largely meaningless statistic (such as the balance of payments) comes out one way rather than another, feel chagrined by their reliance upon a doctrine developed by many of the same people who also sincerely believed that religious heretics and witches should be burned at the stake and that slavery was part of god’s divine will?

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{ 7 comments }

Rishi February 11, 2006 at 12:50 pm

So Dr.,
What exactly defines how a nation is performing? Or is the idea of macroeconomics a faied science?

ken nielsen February 11, 2006 at 4:30 pm

Rishi: I think the point is that a nation does not perform. People and companies and other organisations perform and it is not very useful to aggregate those into an artificial entity – a nation – to measure its "performance".
Different parts of it will perform very differently – Jacobs was mainly interested in differences between cities and non-urban economies.
Jacobs really is worth reading.

joe February 11, 2006 at 8:08 pm

This reminds me of Thatcher's famous remark that "there's no such thing as society"; that is, it's just a collection of people, not some all-powerful entity. Its funny how the left-leaning (who purportedly care so much about the "people") fail to recognize that the person (not the "nation" or "society") is the fundamental economic entity.

Swimmy February 12, 2006 at 12:26 am

It's true that the mercantilists were fools in more than areas than just economics, but there's no need to turn this into a guilt-by-association argument when a perfectly good gaping inconsistency argument can be made. Consider that it is largely the left which argues against nationalism for its own sake, that criticizes the United States most vehemently (often for good reason), points to arbitrary political borders historically starting unnecessary wars, and associates Nazi nationalism with conservatism. It is, then, resoundingly illogical to declare that we should close off our borders to trade, enact as many tariff laws as possible, and discourage globalization on every frontier. If trade is not immoral and nationalism is nonsense, then anti-globalization is an untenable position because it is nothing more than nationalism applied to commerce. (This was the first thing I thought of when I read your article on political inconsistency not too long ago.)

Were an argument to be made that nationalism regarding combat is bad but nationalism regarding markets is good, there is still the undeniable fact that championing the good of the poor while clamoring for Indians, Chinese, Mexicans, etc. to be put out of jobs for the sake of relatively rich Americans is downright hypocrisy.

Russell Nelson February 12, 2006 at 2:50 am

I doubt Schumer ever feels chagrin about anything.

WMCW February 12, 2006 at 12:05 pm

Don,
I want to read Jane Jacobs. Thank you for letting know about her.
Concerning some mercantilist things that still remain strong:
1. Quesnay´s Tableau oeconomique becoming Leontief´s Input-Output Matrix;
2. My money box (partially included grandmother´s jewellery in secret false bottom);
3. Variation in national exports as an independent variable in politicians and voters utility functions;
4. There is a huge-violent-obedient man near my home that helps a rich person to keep his local monopolic business;
5. Crowded public buildings.

I guess everybody forgives Adam Smith for considering nations as relevant entities. He help us to rid of that zero-sum-game way of life. Well, we could not do it completely yet.

Joe Roberts February 13, 2006 at 12:32 pm

Here's a fact to celebrate: Jane Jacobs lives! Saw her on C-Span last year in a panel from Portland, Oregon–as much of an iconoclast as ever. I read here book on cities 35 years ago while in college and parts of it have stuck with me as much as anything I read during that period. She is so Hayekian in her stated belief that order will emerge out of chaos; and that diversity of structures and place are to be celebrated not destroyed.She professes to be a leftist, but she hates government bureaucracies of most kinds, and especially anything like a planning department. Vive la Jane!!

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