Are the Mercantilists Right? Rethinking Trade, Jobs, and the Role of the State
What if the ideas we were taught to dismiss as outdated, or even dangerous, deserve a second look?
What if Donald Trump is “not entirely wrong” when he rails against free trade, champions protectionism? What if decades of free‑market orthodoxy have obscured some uncomfortable truths about how economies actually grow—and how societies hold together?
A working paper, that came out about a year ago, by Harvard economist Dani Rodrik, “What the Mercantilists Got Right,” offers a timely and provocative lens through which to revisit these questions. Written against the backdrop of rising trade tensions, political polarization, and renewed industrial policy, Rodrik’s argument challenges the idea that mercantilism was simply a collection of errors swept away by Adam Smith and classical economics.
In this post, I summarize Rodrik’s core insights and reflect on why they matter for understanding today’s political economy.
Who were the mercantilists?
As the name suggest, mercantilists were mainly people involved, in some way or another, in international commerce. Intellectually speaking they did not constitute a single school of thought. Rather, they were a loose collection of merchants, policymakers, and early economic thinkers active mainly between the 16th and 18th centuries. What united them was not a unified theory, but a shared set of practical concerns about growth, power, and national prosperity.
At the heart of mercantilist thinking was the belief that “economic strength depended on production, trade surpluses, and national capacity”, rather than on consumption alone. Wealth was associated with the accumulation of gold and silver via positive trade balances (broadly with the ability to sustain domestic industry, employment, and military power). Trade, in this view, was closer to a zero‑sum contest among rival states than a universally beneficial exchange.
Mercantilists typically favored:
· Strong and active public intervention in the economy
· Strategic coordination between government and business
· Protection of domestic industries, especially manufacturing
· Policies tailored to national circumstances rather than universal rules
Notable figures associated with mercantilist or mercantilist‑inspired thinking include Thomas Mun, William Petty, Friedrich List, and Alexander Hamilton. Their ideas echo through later traditions of “developmentalism”, particularly in the East Asian industrialization process.
Mercantilists vs. classical economics: five key contrasts
Rodrik organizes the debate between mercantilists and classical economists (from Adam Smith to modern neoclassical theory) around several fundamental differences. These contrasts remain strikingly relevant today.
1. Production versus consumption
Adam Smith famously argued that “consumption is the sole end and purpose of all production.” In modern economics, this idea lives on in models that treat well‑being as a function of consumption and leisure, with production merely a means to that end.
Mercantilists flipped this logic. They cared deeply about “what an economy produces, how it produces it, and where jobs are located”. Trade surpluses were not just about hoarding gold; they reflected a desire for domestic production to exceed domestic consumption. From this perspective, managing the structure of production is not a distortion but it is a central policy objective.
This mindset helps explain why governments in countries such as South Korea, Taiwan, and China have actively shaped industrial outcomes rather than leaving them entirely to markets.
2. Neutral markets versus managed production
Classical theory assumes that markets allocate resources efficiently and that governments should remain neutral between sectors. A dollar’s worth of highly advanced semiconductors chips is, in theory, no more valuable than a dollar’s worth of potato chips.
Mercantilists disagreed. They believed that “some activities matter more than others”, especially manufacturing and technologically sophisticated production.
Furthermore, as Rodrik argues, the recent experience of deindustrialization in advanced economies suggests they may have been onto something. When industries disappear, the resulting job losses can have long‑lasting and deeply corrosive effects on communities.
3. Universal theory versus pragmatic policy
Another sharp divide lies in how economic knowledge itself is conceived. Classical economics aspires to universal, context‑free principles, that should apply everywhere.
Mercantilists, by contrast, were “pragmatists”. They focused on what worked in specific historical and institutional contexts. Their approach resonates with Deng Xiaoping’s famous aphorism: “it doesn’t matter whether a cat is black or white, as long as it catches mice.”
East Asia’s growth experience illustrates this vividly. There was no single model: Hong Kong relied on free trade, South Korea on directed credit, Taiwan on tax incentives, and China on experimental special economic zones. What united these cases was not ideological purity, but adaptive problem‑solving.
4. Arm’s‑length government versus collaboration with business
Smith worried that close ties between government and business would breed corruption and rent‑seeking. Modern economic orthodoxy echoes this concern, favouring limited regulation and minimal interaction between firms and policymakers.
Mercantilist and developmental states take the opposite view. They emphasize “structured collaboration” between governments and firms, using feedback, experimentation, and iterative adjustment. While this increases the risk of capture, it also improves information and policy effectiveness in complex, rapidly changing environments.
Rodrik points out that many successful industrial policies—from East Asia to green energy—have relied on this collaborative model rather than on distant regulation.
5. The limits of markets
Finally, mercantilists were sceptical that markets alone could deliver large‑scale collective goals. This scepticism is especially relevant for challenges like climate change.
Economists typically favour market‑based tools such as carbon taxes or emissions trading. In practice, however, the biggest advances in renewable energy have come from “industrial policy”: subsidies, public investment, and strategic coordination.
Mercantilism and the backlash against globalization
One of Rodrik’s most compelling arguments concerns jobs. Standard economic models treat job losses as temporary disruptions, assuming workers will relocate or retrain. But evidence from the China trade shock shows that many communities never recovered.
The disappearance of manufacturing jobs has been linked to social breakdown, declining health outcomes, and the rise of authoritarian populism. Work is not just a source of income; it provides dignity, identity, and social recognition. Mercantilists, with their focus on production and employment, would not have been surprised by these outcomes.
In this light, the political appeal of protectionism—even when poorly designed and unsuccessful—becomes easier to understand.
What should we take away?
Rodrik is not calling for a wholesale revival of mercantilism, nor for an endorsement of Trump‑style trade policy. Obsession with trade balances and indiscriminate tariffs remains economically misguided.
But dismissing mercantilism entirely is a mistake. Some of its core insights deserve rehabilitation:
· Production and jobs matter, not just consumption
· The structure of the economy has social and political consequences
· Government and business often need to work together
· One‑size‑fits‑all economic rules rarely work
In a world of geopolitical rivalry, fragile supply chains, political polarization, and climate urgency, a mercantilist thinking is likely to be viewed as less heretical and more appealing, if not necessary, than we once believed.
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