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A New World Order: Economic Liberalism or the New Mercantilism

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In the days immediately following the Iraqi invasion of Kuwait in August 1990, the Bush Administration declared that a vital interest of the United States was at stake. American economic wellfbeing was threatened by Iraqi control of the Kuwaiti oil fields. However, when a growing number of economists pointed out that the U.S. economy had the capacity to adjust in a reasonable amount of time to any rise in the price of oil — or to a disruption in its supply from the Persian Gulf — the Bush Administration began shifting its rationale for American intervention.

The argument was next made that what was actually at stake was the freedom of the Kuwaiti people. A number of political analysts, however, pointed out that while Saddam Hussein’s regime in Iraq was undoubtedly a brutal dictatorship, Kuwait had not exactly been an example of a free, democratic society. In fact, the royal family of Kuwait had closed the Parliament a few years earlier and had also imposed various restrictions on freedom of speech and the press.

The Bush Administration again changed the rationale for American military intervention. It was now claimed that what was at stake was the inviolability of international borders and the continued existence of nation-states. A number of Middle East experts pointed out, however, that these supposedly “inviolable” borders and nation-states were themselves the creations of Britain and France when they carved up the Turkish Empire at the end of World War I. The existing boundaries and the legitimacy of the Persian Gulf states are no less “artificial” than making Kuwait “Province 19″ of Iraq.

The Bush Administration finally argued that what was at stake was the establishment of a “new world order.” World peace and stability could never be secure as long as dictators had the license to conquer and plunder their neighbors by force of arms. With the end of the Cold War, it was now necessary to bring to fruition the noble dreams of Woodrow Wilson and Franklin D. Roosevelt which called for a consort of nations to police and guarantee world order for the mutual benefit of all.

Few people have asked, however, what the ultimate foundations for any durable world order are. And to ask this question is, at the same time, to ask. What are the causes of conflict and war — the causes of world disorder?

In the 18th century, the reigning economic philosophy among nations was mercantilism. The fundamental premise underlying mercantilism was expressed by Voltaire in 1764: “It is clear that a country cannot gain unless another loses and it cannot prevail without making others miserable.” The policy implications of this social philosophy were trade wars and territorial conquests. If your own nation was to be wealthy, it could only be so by making others poorer. Tariff walls were needed to protect the prosperity of domestic producers from the “attacks” of foreign competitors. Subsidies were required for export producers so that they could “seize” the wealth of others in foreign markets. Resources in foreign lands had to be militarily “captured” to keep them out of the hands of commercial rivals in opposing nation-states who would use them to defeat “our” nation-state.

Economic activity in every nation was entirely politicized. Private interests had to be subordinated to the ends of the state in this global war of all against all.

But in the 19th century, the liberal ideal replaced mercantilism. The liberal philosophers and economists explained that trade among nations, like trade among individuals, was mutually beneficial. All men would gain through participation in a global division of labor — a way of life in which they offered to each other the various products in the production of which they specialized. Market competition was not conflict, they argued, but rather peaceful cooperation: each producer helped to improve the quality of life for all through the production and sale of superior and less expensive products than the ones offered by his market rivals.

The liberal ideal required minimizing the role of the state in economic affairs. The German economist Wilhelm Röpke once concisely explained that the “genuinely liberal principle” required “the widest possible separation of the two spheres of government and economy…. This means the largest possible ‘depolitisation’ of the economic sphere with everything that goes with it…. By aid of this principle of separation, it was possible to reduce to a minimum the economic coexistence of sovereign states with their different legal orders, their frontiers, their systems of administration and separate citizenships…. The result was that it was now possible to remove the greatest part of the economic issues of conflict and problems to which the coexistence of sovereign States is liable to give rise.”

Competition and rivalry, the “capturing” of consumer business and the “conquest” of market share were now private matters of peaceful exchange and contract. They were no longer affairs of state — no longer political issues concerning obedience, command and control.

The privatization of economic life, with government limited to the protection of life and property and the adjudication of contractual disputes, was the foundation of this “new world order” in the predominantly liberal era between the end of the Napoleonic wars in 1815 and the beginning of the First World War in 1914. And what did it produce? A century of the greatest freedom, prosperity and peace that man has ever known.

In the 20th century, however, we have unfortunately returned to the mercantilist ideal. Trade and commercial rivalry are once again seen as the battleground of political combat. Iraq’s motive in invading Kuwait merely took the principle to its logical conclusion: a nation destroys its economic rival by seizing its resources (Kuwait’s oil fields) and attempts to enrich itself by plundering its accumulated wealth (Kuwait’s gold and physical assets).

But the United States and its Desert Storm allies in principle conduct their international economic affairs no differently than has Saddam Hussein. If some of America’s Asian trading partners “capture” a large share of the American consumer market, the government responds with a tariff-wall “defense.” If American agriculture cannot earn the profits it considers “fair,” the U.S. government takes the “offensive” by “attacking” other lands through export price-subsidies. If other nations will not comply with the wishes of the Washington social engineers in some international dispute, the American government influences and persuades them with government-to-government financial loans, grants and subsidized credits — all at American taxpayers’ expense, of course.

Nor has the United States government any qualms about military adventures to secure its economic goals when circumstances seem to warrant it. When it becomes politically profitable for the politicians in Washington to oppose the importation of narcotics into the United States, then American military forces invade one of the countries — Panama — that is accused of dealing in the forbidden trade. Or if the occupation of Kuwait by Iraq might negatively influence the availability and price of a valued import such as oil, then a military crusade is launched to guarantee “our” supply of oil. And in the process, we purchase some allies — Egypt — by “forgiving” tens of billions of dollars in government loans; and we also punish others who won’t go along with us — Jordan — by withholding government aid and loans.

In a world of politicized trade and commerce, conflicts among nations are inevitable, because the economic profits and losses of private individuals and industries are raised to the level of affairs of state. And, as a consequence, the problems and interests of private suppliers and demanders are turned into issues of national concern and supposed survival. This is the source of much of our global disorder as well as one of the fundamental barriers to a truly peaceful “new world order.”

In 1936, the Swiss economist and political scientist William Rappard delivered a lecture entitled, “The Common Menace of Economic and Military Armaments.” World order, he said, was threatened not only by military aggression but by economic warfare as well. The weapons for economic warfare were “economic armaments” — meaning all of the legislative and administrative devices governments use to politically influence imports and exports as well as the allocation of commodities and their prices within one’s own country and in other parts of the world. “The primary source of economic and military armaments,” Rappard said, “we perceive in the doctrine of political nationalism. Political nationalism is the creed which places the national State at the top of the scale of human values, not only above the individual, but above mankind itself.”

Rappard argued that a new world order of peace and prosperity would only be possible when nations undertook a policy of economic disarmament. But this would only come about when the creed of political nationalism and mercantilism was again superseded by the ideals of economic liberalism. And, alas, we still seem as far away from that transformation as when William Rappard delivered his lecture more than half a century ago.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).