Did Mercantilism Promote Economic Growth in the U.S.?

by Don Boudreaux on October 4, 2010

in Complexity & Emergence, Growth, History, Immigration, Myths and Fallacies, Population, Seen and Unseen, Trade

Some commentors here at the Cafe have insisted that – as “Brutus” put matters today when commenting on this post – “If the history of mercantilism showed that it weakened an economy, then I would agree with you [that protectionism harms an economy]. But the data indicates [sic] the otherwise, including the history of the US.”

This myth is quite common.  But the best evidence disputes it.

First, here’s a paper on this very topic by Dartmouth economist Douglas Irwin.  The abstract of Doug’s paper is this:

Were high import tariffs somehow related to the strong U.S. economic growth during the late nineteenth century? This paper examines this frequently mentioned but controversial question and investigates the channels by which tariffs could have promoted growth during this period. The paper shows that: (i) late nineteenth century growth hinged more on population expansion and capital accumulation than on productivity growth; (ii) tariffs may have discouraged capital accumulation by raising the price of imported capital goods; (iii) productivity growth was most rapid in non-traded sectors (such as utilities and services) whose performance was not directly related to the tariff.

Second, the U.S. had largely open borders for labor during the 19th century, and evidence suggests that open immigration helped to mitigate – or, rather, hide – much of the economic harm done by trade restrictions.  On this matter, see this paper by Cecil Bohanon and T. Norman Van Cott.

Third, economic intervention into the American economy during the 19th century was – while not non-existent – quite minimal by today’s standards.  The resulting freedom fueled dynamism and creativity and opportunities for investment that, in a country as large and as otherwise open as the United States, resulted in substantial economic growth.

Fourth, the huge size of the U.S. itself helped to mitigate – or, rather, hide – the harmful effects of protective tariffs.  With free trade from the Atlantic to the Pacific, and from Canada to Mexico, the opportunities for specialization combined with the competition that emerged from railroads, telegraphy, and telephony to spark and to maintain economic growth.

Fifth, and relatedly, if protectionism worked for the U.S., would each U.S. state have grown wealthy – or wealthier – had each state protected its domestic suppliers from not only non-American but from out-of-state competition?  Highly doubtful.  The U.S. was then – and remains today – a huge free-trade zone.  This fact testifies to the benefits of free trade and to the destructiveness of mercantilism.

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