While classical political economy has been considered outdated by many social scientists, I argue here that it can provide insights about the world today and the challenges we face. One of these insights has to do with the early disagreement that existed between Adam Smith and the mercantilists of his era with regards to the wealth of nations, a topic sometimes captured under the label “development”. Based on this disagreement, this blog post develops a typology of Smithian and Mercantilist nations as different models of capitalist development that may be considered alternatives for developing countries today.
On the one hand, there is Adam Smith who, unlike what many believe, did not argue that the wealthy capitalist class should be left to their own devices without any restricting legislations or responsibilities to society (“the invisible hand”). On the contrary, the core of the Smithian political economy was the relationship between the individual and the state (Ekelund and Hébert, 2005). According to this idea, some authors (Arrighi 2007; Landreth and Colander 2002a; Roncaglia 2005a) argued that Smith judged the wealth of a nation based on the wealth and well-being of its inhabitants, which he argued would be achieved through both the relative freedom of enterprise and the imposition of restrictions on it in areas where it did not generate welfare. One area in which free enterprise was thought to not generate welfare was related to the intellectual competences of workers related to the effects of a deepening division of labor. Smith wrote:
His dexterity at his own particular trade seems, in this manner, to be acquired at the expense of his intellectual, social, and martial virtues. But in every improved and civilized society, this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it. (Smith, 2007: 506)
Consequently, Smith’s work does not lack active policy recommendations. For example, Smith advised the state to intervene to protect the security of individuals, to ensure the provision of infrastructure, to regulate money and credit, and to provide education of the population and training of workers (see Arrighi 2007: 43).
On the other hand, there are the mercantilists which, as Schumpeter (1954) asserts, have misleadingly been identified as a school of thought. However, the mercantilists were mainly officials at the service of the European Monarchy Houses or Kammer, as the German State administration was named. These officials were not interested in individual welfare, but economic power that could support the political and military power of the State (Roncaglia 2005b). So while they recommended an active role for the state, it was not directed towards the regulation of the market in favor of the citizens, but towards the regulation of activities that affect the balance of power of the state with respect to other rival states. Among these policies are hoarding of precious metals, which were identified as a source of state power, and a lot of recommendations aimed to establish quotas and other kinds of restrictions to international commerce, to enhance piracy, and to establish state owned factories (Manufacture royale in France).
The difference between these perspectives lies primarily in their approach to society. While Smith focused his attention on the internal administration of a nation, mercantilists focused in the external (geopolitical) competition between nations. The different approaches to society led to a difference in moral interests: the Smithian approach led proponents to consider the welfare of the population, while the mercantilist approach led proponents to focus almost exclusively on the power of the state and production of goods, with ‘little concern for increasing the consumption of the masses’ (Landreth and Colander, 2002b: 55-56).
The difference I wish to highlight here concerns the different ways in which the state can regulate the economy. While both promote state regulation of the economy in some form, the difference lies in the beneficiaries of that regulation. While for Smith the beneficiaries are the individuals – at the expense of restricting the freedom of the capitalist class in some areas – the mercantilists’ beneficiary is the state, which has no particular aversion to affiliating with the capitalist class. Therefore, with regard to the capitalist class, while Smith’s recommendation to the prince was to not let it influence him to promote its own interests, but to force them to compete freely in the market, the mercantilists advise the prince to protect the businesses of national capitalists whose prosperity was favorable to the enrichment and empowerment of the state in relation to its rivals.
Applying the typology to the world today
Are there elements of this typology of Smithian and Mercantilist nations today? One could argue that the Smithian nations today are represented by countries with strong social welfare states transparently managed alongside regulated capitalist markets. Meanwhile, one could argue that mercantilist nations are represented by world powers such as China and Russia, which have implemented economic policies that have enriched and politically empowered their States and their capitalist classes, while not necessarily protecting and promoting the liberties and rights of their populations.
Thereby, even if Russia is not among the countries with the highest levels of welfare (see here), it is an agent of global geopolitical power because of the huge military industry inside its frontiers (a heritage of the soviet empire privatized by former officials) and of its control of key energy resources, such as natural gas. On the other hand, China constitutes an economic as well as a military power at global level and has certainly managed to lift a large part of its population from poverty. However, the improvement in the standard of living of the Chinese population does not seem to be the main goal of the government of the Communist Party of China, but rather a means to develop a strong market and build a competitive industry to further enhance the country’s economic power. An indicator of this is the refusal of the Chinese government to grant its citizens the same freedoms and rights that most people in countries with similar income levels have.
This typology does not aim to classify all countries into two categories. On the contrary, one can recognize that there are many cases that cannot fit neatly in either or both. Some countries, like the United States, have something of each of these two types (although in recent years the government of Donald Trump could lead the US to a more Mercantilist direction, according to this typology). Also, one could argue that the vast majority of developing countries are the ones that do not fit in this typology, given that many of them do not have sufficient social welfare programs which complement a dynamic and competitive market economy, nor do they possess the economic or military power, globally or regionally, that would allow their domestic political leadership to reach their geopolitical goals.
The upside of this is that the population of developing countries have the opportunity to raise the question about the type of development they desire: Would we want to follow the Mercantilist or Smithian route, or both? Which conditions exist in our countries, if any, that make either of these ideal types possible? Or are there other models we need to consider?
 This is an extended and improved version of an article previously written by the author for the magazine Foreign Affairs Latin America (see here). This text could not be possible without the invaluable feedback made by Ingrid Kvangraven, all my gratitude to her. Nevertheless, all the mistakes or controversial points are solely my responsibility.
Arrighi, G. (2007). “The Historical Sociology of Adam Smith”. In G. Arrighi, Adam Smith in Beijing. Lineages of the Twenty-First Century (pp. 40-68). London: Verso.
Ekelund, R., & Hébert, R. (2005). “El Mercantilismo y el Nacimiento del Capitalismo”. In R. Ekelund, & R. Hébert, Historia de la Teoría Económica y de su Método (pp. 43-76). México: McGraw-Hill Interamericana.
Landreth, H., & Colander, D. (2002a). “Adam Smith”. In H. Landreth, & D. Colander, History of Economic Thought (4 ed., pp. 80-112). Boston: Houghton Mifflin Company.
Landreth, H., & Colander, D. (2002b). “Mercantilism, Physiocracy, and Other Precursors of Classical Economic Thought”. In H. Landreth, & D. Colander, History of Economic Thought (4 ed., pp. 45-72). Boston: Houghton Mifflin Company.
Roncaglia, A. (2005a). “Adam Smith”. In A. Roncaglia, The Wealth of Ideas. A History of Economic Thought (pp. 115-154). Cambridge: Cambridge University Press.
Roncaglia, A. (2005b). “The prehistory of political economy”. In A. Roncaglia, The Wealth of Ideas. A History of Economic Thought (pp. 18-52). Cambridge: Cambridge University Press.
Schumpeter, J. (2006). History of Economic Analysis. London: Routledge.
Smith, A. (2007). An Inquiry into the Nature and Causes of Wealth of Nations. Hampshire: Harriman House Ltd.
Orlando N. Santos Alvarado is a sociologist at the National University of San Marcos (UNMSM), Lima, Peru.