Political Entrepreneurs

The Economic Engine of Political Change

Reflections on the Political Economy and Development of Ideas in Free Trade

October 22nd, 2016 by James Caton

Mercantilists formulated a system of political economy that put the strength of the state as the primary end. Economists supporting this doctrine, whether or not they realized, were defenders of the existing order. The mercantile system inverted the preference ordering appropriate for science, submitting the search for truth to some alternate end. Investigation was in the service of enriching and empowering the state and agents connected to it.  Much as still occurs today, the status quo was the analytical point of departure. Objects of interest were not necessarily the primary elements of the economic and political order. Rather, they were the elements of interest to the reigning regime comprised of politically connected merchants.

Jean Baptiste Colbert

Mercantalist Jean Baptiste Colbert

Consider two manifestations of mercantilist doctrine: bullionism and protectionism. Both of these doctrines reflected a belief that a nation should have a positive balance of trade. In other words, the value of imports should exceed exports. Mercantilists believed that, whenever possible, monetary wealth should be kept within the nation. These beliefs reflected a political alliance between the emerging merchant class and the agents of the nation-state. Those comprising the merchant class were responsible for the enrichment of the state in the sense that they were a significant tax base. Not surprising, the two classes of actors developed ongoing relationships. Influential merchants wished to limit competition between themselves and foreign industry. They lobbied government in order to erect barriers to competition. One primary means was to implement tariffs on goods that competed with the domestic industry of interest. The government benefited by developing a tax base. The merchants benefited by increasing their hold on the market and receiving a higher price and greater demand for their own goods as a result. In this game, there was a third class that lost from this relationship: those who were forced to pay higher prices for goods whether due to taxes or quotas. To counteract these costs, those who were impeded by these regulations moved their activity to the black market. Though impeded by higher costs, international trade could not be stopped by government.

In retrospect, most economists see mercantilism as a relic. Out of fashion as it may be, mercantilism did serve the development of economic thought. Even if mercantilism was wrong in many ways, it provided a place for conversation. It is no coincidence that Adam Smith’s Wealth of Nations was not only a tract on positive economics but also a cry against the mercantilist elements that dominated policy at the time. Although economic ideas generated by mercantilism were perverted by ends encouraged within the political climate, redemption of economics as a discipline was not far from reach. The right ideas were already in the air. Smith and those who followed him stood on the shoulder of giants. Though the ideas of these giants in some ways deviated from the economic reality that underlies all social activity, the lineage of ideas, of which they comprise in part later came to converge on truth. Improvement came from the Smithian line, which includes French physiocrats and philosophers of the Scottish enlightenment as predecessors. It came from  scholars who were not swayed by mercantilist doctrine.

Mercantilist elements are still embedded in modern conversation, for example, as protection for domestic workers or under a guise of maintenance of culture. In recent decades, however, these have had a limited impact on policy. Despite the rhetoric, policymakers and the public have come to realize the benefits of exchange across national boundaries. A majority of Americans support the expansion of free trade. I was surprised to learn that support for free trade comes most heavily from those on the left (here and here).  Still, there are imperfections in understanding of free trade. Americans seem to be less optimistic concerning the effect of trade on jobs and, reasonably so, job security. Still, these numbers represent a substantial improvement compared to the time of Smith. The ideas generated from the mainline of economics – the Smithian line – have exerted tremendous influence and improved our world in the process.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.121, ch.5)

When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.

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