Book free on Amazon for 48 hours! (Kindle)

Hello everyone- I am making a Kindle version of 1000 Castaways: Fundamentals of Economics FREE on Amazon for reviewers for a short time – but anyone here can take advantage of this and get their free copy.
It is free for the next 48 hours  (all day Sunday & Monday, Pacific time USA). You guys can help out immensely by posting a review on Amazon – good or bad!! – if you feel it merits it. Thanks! (on the reviews, you will be considered a “verified purchaser” even though the price was “0” 🙂
Even if you don’t usually read ebooks, you can read/review this by using Amazons easy free kindle reader for desktops/laptops.
(This is how I am doing the ARC [Advance Reader Copy] for the forthcoming paperback rather than try to mail/print galley copies around the world etc.)

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When Bitcoin goes to Zero, Don’t Blame Regulation

After bitcoin goes to (essentially) zero (since it is global, even a few oddballs can prop up its value for years at some low level, like hobbyists do for all kinds of things), which it will, some will say that it was regulation that killed it, not, as I explain, because crypto is worthless because it is not part of a balance sheet and as such has no inherent value to extinguish debt.

To be clear: That bitcoin can’t withstand being treated as any other ordinary good yet does not deserve special tax-free treatment is part of the theory though. You don’t get to declare “I’m a currency! I deserve special treatment!” and not pay taxes. Governments maintain the value of their currency through taxation (taxes drive currency). Money is a public good we all support for our mutual benefit.

You can’t just invent some new token (even if something new and shiny like blockchain & crypto) and declare it a special good that can be traded tax free. Yet taxing a self-declared “currency” guarantees its failure as it will not make sense for individuals to move into it if they are going to be taxed in real money for transactions in it.

Until recently crypto has been bartered freely in its sphere like Pokémon cards because no one cared. It takes time for public institutions to catch up to developments, but there is no more reason, if they become significant, to allow crypto tokens to trade tax free than anything else someone invents; we simply do not have the right to declare something tax free because we want it to be or businesses would do it all the time.

Because crypto tokens do not have any intrinsic value (as opposed to the other taxed assets they compete with), AND because they, unlike real money, are neither tax credits nor bank-loan repayment credits, then any ordinary taxation that every other good can bear will drive cryptos to zero.

Speculators will cry because their Ponzi scheme is tamed, Millennials will want a participation trophy, and libertarians and anarchists will as always be sophomoric, not understanding the deeper need for social cooperation that is embodied in agreed taxation.

Real businesses provide real value that makes them able to pay taxes and still be profitable. Crypto tokens have no intrinsic value and cannot just declare themselves tax free to claim utility; unlike real assets, crypto will not bear even the slightest bit of legitimate taxation because there is no value there to tax. House of cards (or tokens I guess).


March 28, 2019  UPDATE: The Intro to Economics textbook is finished! Live on Amazon here –

1000 Castaways: Fundamentals of Economics

Bitcoin Delusions

Bitcoin collectors and crypto-token creators suffer from a number of unsupported beliefs destined to come back and haunt them. The key ones:


That Quantitative Easing was the same as “printing money”.  It wasn’t.


That printing money causes hyperinflations.  It doesn’t.


That a 21 million limit means anything.  It doesn’t.


That blockchain is the future of finance/law/business.  It isn’t.


That if blockchain were to become more widespread it would be based on cryptocurrencies as we know them.  It wouldn’t.


That blockchain eliminates the need for intermediaries and rules in markets and transactions/contracts.  It doesn’t.


That the cryptocurrency/blockchain bubble is like the bubble.  It’s not.


That network effects are enough to sustain the value of a currency.  They aren’t.


That a low barrier to entry and endless replicability does not reduce the value of cryptocurrencies to zero.  It does.


The true value of cryptocurrencies is zero, as many are soon enough going to painfully find out. Some more discussion on why here – Of Bitcoins and Balance Sheets: The Real Lesson From Bitcoin




Of Bitcoins and Balance Sheets: The Real Lesson From Bitcoin

The monetary systems of nations operate on two types of balance sheet expansion:

  1. National, where the government spends into the economy expanding a national balance sheet
  2. (The sum of) banks’ balance sheet expansions, where bank loans create deposits

The asset side of both of the above are traded around as “money”.

The national government creates the numeraire for the system (the “Dollar” in the US, the “Pound” in the UK etc.) and in addition to spending directly in to the economy in that numeraire, the government allows a public/private system (publicly regulated private banking system) to operate with the same numeraire. This creates a single system for the public but in fact arises from two separate but linked balance sheet expansions.

But why do the tokens from either of these balance sheet expansions have and maintain value?

The government maintains the value of its balance sheet tokens by demanding that some of its tokens, once a year, must be paid back to the government. This guarantees that everyone in that nation will accept and value the tokens from the national balance-sheet expansion.

The tokens that arise from the public/private bank balance-sheet expansion maintain their value analogously – by the obligation to repay bank loans.

Together, the obligation to pay taxes and the obligation to repay bank loans maintain the value of a currency. Note that both of these rest on the government/legal system of a nation.

An organized, effective government with a sound legal system that does not use foreign currencies can always maintain the value of its currency. (Hyperinflations are always the result of governments and their legal systems becoming corrupted or destroyed in some way, and never the result of runaway money creation).

What does this mean for Bitcoin and other cryptocurrencies?

Bitcoin is not the result of a balance sheet expansion. There is no inherent obligation for repayment of bitcoin to any government (taxes) or to extinguish private debt (banking system). There is no in-built demand for bitcoin (or any cryptocurrency).

Bitcoin is worth zero dollars (or Yen or Pounds etc).

National currencies will always do two things 1) extinguish tax obligations and 2) extinguish private debt obligations. Even if you have neither, there are always enough people with tax and bank debts that you can be sure that your money will be voraciously sought after by merchants of all types. Unless we are in Mad Max territory, they will give you a loaf of bread for it.

Bitcoin is not part of a balance sheet. It does not inherently extinguish debt of any kind – neither a tax obligation nor a bank debt. Nor do other cryptocurrencies. Once the fad for them subsides, the realization that you can’t pay taxes or repay a debt with them will become evident and their true value of 0 will become evident.

Because they don’t understand money or balance sheets, bitcoin collectors and cryptocurrency creators don’t understand why their tokens are inherently worthless. They won’t understand why, when the fad passes, no one will be willing to take their play tokens for real goods.

The only benefit from the bitcoin fad may be a better understanding of the balance-sheet nature of national economies, and the relationship of this to the real resources of a nation. This will prove to be the real lesson from bitcoin. The sooner it is learned the sooner nations can get on with the real work of using their national balance sheets and good legal environments to improve the real economy.


P.S.  A common refrain is that yes, Bitcoin and cryptocurrencies are worthless, but Blockchain is really a big deal.

Well, not so much…

The blockchain paradox: Why distributed ledger technologies may do little to transform the economy

Ten years in, nobody has come up with a use for blockchain

As I have said before – blockchain is going to turn out to be the Wankel engine of the finance world. Interesting concept but not that useful in real life, never quite filling a real need.

Check out my new book “1000 Castaways: Fundamentals of Economics,” Aetiology Press. 

A renegade band of Modern Monetary Theorists has overturned mainstream economics in part by emphasizing that there is not one, but two systems of modern money, the “vertical” and the “horizontal.” They conclusively demonstrate how unifying our understanding of these is crucial for grasping modern economics.

“the key to understanding Modern Monetary Theory is this vertical-horizontal relationship”

(Warren Mosler)

1000 Castaways develops Mosler’s statement into a concise, book-length treatment that is accessible to all readers, starting from first principles and, step-by-step, leading the reader up to the complexities of the real world.

Our one thousand castaways develop, before our eyes, a “perfect” economy, and demonstrate how the horizontal and vertical systems of money naturally emerge from even more fundamental organizational needs of a large society.

1000 Castaways then contrasts the Island’s “economics” with real-world “economics,” in an enlightening illustration of the last few steps in our common economic understanding that we must take in order to run our modern economies in a way that maximizes wellbeing.

Paperback $9.99 Kindle $2.99 Hardback $21.99 Also available as Barnes and Noble Nook, Kobo etc.

OMFG, MMT & Positive Money Get Along



{OMFG = Overt Monetary Financing of Government}




Economies run on tokens from two balance sheet expansions:

  1. (The sum of) Banks’ balance sheet expansions, where bank loans create deposits (also called “horizontal” money)
  2. National, where the government spends into the economy expanding the national balance sheet (aka “vertical” money)

Two observations:

1) It is desirable, especially evident after 2008, to more carefully regulate the horizontal sector, which would also reduce its overall size significantly.

2) In the current economic climate it is desirable to expand the vertical balance sheet, both to maintain/increase aggregate demand and to foster activities that the public desires that increase the public’s well-being (infrastructure, education, healthcare etc.).

Note that although more carefully regulating the horizontal side would decrease aggregate demand (especially given the overheated credit impulse/acceleration Steve Keen has so usefully highlighted) this would be balanced by increasing the vertical side.

What do MMT economists and Positive Money propose regarding these two systems?

Both agree that the vertical side should be larger and the horizontal side more regulated with the resulting smaller horizontal component made up for by expanding the vertical side.


On The Vertical Side

The crucial fact about the vertical side is that the fact that a nation is not like a household is evident regardless of the operational details. Positive Money is wrong in their belief the current system must be changed to achieve the type of government spending they want.

However, this does not mean that Positive Money is flat out wrong. Key MMT people would be perfectly happy to spend vertically in the way Positive Money wants, which is just PQE/OMF by another name. This is especially so given that OMF procedures would be transparent and thus politically advantageous.

MMT scholars just do not believe it is remotely as urgent as Positive Money because they realize the current system is already capable of spending into the economy in the same way that PM wants to (Wray 2001, Fullwiler 2011 ). Also, many have rejected PM more or less out of hand because of Positive Money views or perceived views on the horizontal system [which we turn to below].

At any rate, regarding the vertical system – The crucial thing is to get the vertical system to do what is good for the economy – functional finance – regardless of the operational details.

From a political point of view it is better to have a clearer more straightforward system [PQE/OMF]. This is a substantially less fundamental problem, however, than what Positive Money thinks it is doing; in saying that, however, the practical and strategic importance of making the changes to a straightforward system perhaps should not be underestimated.

Scott Fullwiler himself has noted the fundamental agreement on vertical money issues:

“interestingly, understanding how DFM [Debt Free Money] works also illustrates the MMT view of government spending and government bond issuance. Logically we should expect that DFM supporters could join MMT in rejecting otherwise widespread concerns about government solvency, China refusing to purchase US national debt, the financial sustainability of entitlement programs, and so forth.” (Fullwiler 2014)

(relatedly and importantly, both Positive Money and many MMT economists propose ZIRP; another post for that though)

On The Horizontal Side 

As noted, MMT rejects Positive Money mainly because of PM views on the horizontal side – in the past PM stated they wanted to eliminate the horizontal altogether and essentially create a loanable funds system. Contrast this to MMT, for which overall pre-2007 regulating the horizontal side was not a primary focus (not to ignore the Minsky-Wray connection and other pre 2007 work of course, but banking regulation was/is not the overarching focus of MMT). [Update: please see Scott Fullwiler’s comments on pre-2007 bank regulation/MMT)

However, both sides have moved closer together on horizontal money, to the point where in practice the horizontal systems they advocate would be similar.

MMT increased the emphasis on limiting the horizontal after 2007 (Mosler 2009, Mitchell 2009, Mitchell  2010, Wilson 2017).   Crucially, the Mosler/Mitchell/Wilson proposals would be far more significant and profound in their effects than they are given credit for. Easily enforced common sense rules (that did not exist in 2008) to force banks to hold the loans they make, operate on a single balance sheet, and not accept financial collateral already clears up most of the problems with banking and would leave a drastically shrunk but drastically more healthy horizontal money and funding system in place.

Simply put, this puts MMT closer to the goals of PM on horizontal money than is generally recognized.

Conversely – Positive Money has moved to allow what is in effect horizontal money creation (whether “nationalized” or not makes little difference if regulated in the proposed ways). This pushes PM substantially towards the same horizontal system that would result were the Mosler/Mitchell/Wilson proposals to be put into practice.

(The similarity in views on this are evident in these quotes by MMT scholars and Positive Money:

“Right now, we have far more finance than we need. Exactly how much of it we could eliminate as unnecessary is up for debate. I wouldn’t be surprised if our economy would actually run better if finance was downsized by 90%”
L. Randall Wray 2014

“The correct approach, as highlighted by the MMT view, is to reduce bank lending by banning its use for anything that isn’t constructive. Bill Mitchell regularly suggests that 97% of financial transactions should be illegal.”
Neil Wilson 2014

“The central bank would be willing to create additional money, on demand, in response to banks that are able to lend that money to non-FIRE sector businesses. This protects the level of lending to businesses.”
Positive Money 2015)



There are two monetary systems, vertical and horizontal. Both MMT and Positive Money want to see the vertical increased in size to maintain aggregate demand and increase the general welfare; both MMT and Positive Money would like to see a more straightforward (PQE/OMF operations) vertical money system that would allow mainstream economists and the public to understand that a nation is not like a household (Positive Money makes the mistake of not realising that the current vertical system can already do what PM wants; MMT could perhaps make even clearer than they already do that the current system can do this without structural change).

Both MMT and Positive Money would like to shrink the horizontal system through reducing it to funding only real production. The two schools of thought come from utterly opposite directions on horizontal money; however in practice both of their suggested horizontal systems would be for all practical purposes the same – limiting banking to a completely safe payments system and to an investment-side that is regulated to only expand enough to fund productive investment but not to allow asset bubbles via a non productive FIRE sector. Whether the horizontal side is “nationalized” or not is merely a distraction – banks under the Mosler/Mitchell/Wilson rules providing for capital development based on solid credit analysis would operate the same regardless of their formal status vis-Ă -vis government. Positive Money is wrong to think this can be done in a loanable funds system (future post), but plain vanilla 1960s banking works fine.


March 28, 2019  UPDATE: The Intro to Economics textbook is finished! Live on Amazon here –

1000 Castaways: Fundamentals of Economics







MMT & Positive Money Are Converging. That’s a Good Thing

Many common views on macroeconomics are of little use and even harmful because they do not recognize basic facts about the economy. That limits useful macroeconomics to the minority who recognize that loans create deposits, that there is no money multiplier, that the household analogy is false, money is not just a veil over barter etc., and the profound implications of these facts.

Because it is, unfortunately, a minority that understands meaningful macroeconomics, and because of the enormity of the welfare issues that are at stake, it is of the utmost importance that the lucid minority support each other and sort out their differences in order to find the strength in numbers needed to implement sane macroeconomic policies that have the potential to greatly increase the public well being.

Perhaps the two greatest current macroeconomic problems are

  1. a failure to optimally use resources (including people)
  2. the design and/or manipulation of the financial system to divert real resources from producers to a financial class

The logical approaches to these problems are functional finance in the first case and changes in and/or enforcement of regulation of the financial system in the second case.

Two groups that have gained visibility (academic, policy, and/or popular) on these issues are Modern Monetary Theory and Positive Money.

MMT scholars largely focused on the first problem, how functional finance can increase the public’s well being. Positive Money’s main worry has been the second and suggestions for changes that might make resource diversion more difficult.

However, the simple point I want to make is this: in recent years the two groups have moved towards each other’s positions and interests to a significant extent, probably much more than either group or the heterodox community recognizes.

Positive money originally wanted to eliminate bank credit-money creation altogether. Crucially, however, they have modified their plan to allow for a tightly regulated system of credit money creation for individuals and businesses. (see Would a Sovereign Money System Be Flexible Enough?  also Would There Be Enough Credit in a Sovereign Money System? )

MMT, as mentioned, traditionally focused on functional finance solutions to the first problem above. However, after the 2007 financial crisis especially, they addressed the second problem above (which caused the crash) and subsequently Warren Mosler, Bill Mitchell and Neil Wilson all proposed far reaching (and similar) changes to the banking sector (here: Mosler, Mitchell, Mitchell, Wilson )

Crucially, there is now very little difference between the banking system that MMT (or at least Warren Mosler, Bill Mitchell and Neil Wilson) propose and the banking system that Positive Money now propose.

Additionally, Positive Money has always been a proponent of the state spending for the public welfare; indeed, they had to be as this would be the only way money would be introduced into the economy under their proposals. As Positive Money has matured they have continued to develop their ideas on how the government would spend into the economy for the public good – in other words, functional finance perfectly in line with traditional MMT views.

So in short, Positive Money is fighting for functional finance and a banking system like the Mosler/Mitchell/Wilson proposals. MMT is proposing (or at least Warren Mosler, Bill Mitchell and Neil Wilson) a banking system like the one PM has evolved towards (tightly regulated credit-system) and MMT has of course long supported the state spending directly into the economy for the public purpose just as PM has.

Both groups have achieved significant political and popular support as well as media attention. This attention has often been in different places. Combining their message is a win-win and an important step in educating the business, political and internet community and thus eventually winning votes and changing real policies.


March 28, 2019  UPDATE: The Intro to Economics textbook is finished! Live on Amazon here –

1000 Castaways: Fundamentals of Economics

The Banking System We Need

As the crisis of 2007 demonstrated, the banking system in its current form does not optimally serve the public interest. To make the system work in the best interest of the nation as a whole, I would make the following changes:


  • Banks that are allowed to grant loans that create deposits would operate under the Mosler/Mitchell/Wilson proposals including:
  • Be allowed direct access to government funds  (details below)
  • All bank levies, liquidity ratios, and reserve requirements would be eliminated.
  • Banks must operate on a single balance sheet, and with no subsidiaries of any kind.
  • Banks should not be allowed to engage in profit making ventures beyond basic lending; banks should profit through high quality credit analysis.
  • Banks would be allowed to lend only directly to borrowers, and only for capital development purposes (i.e. business credit lines and household loans)
  • Loans must be kept on their books until cleared.
  • Banks cannot accept collateral.
  • Banks cannot buy (or sell) credit default insurance.
  • There would be a narrow banking option.

Treasury & Federal Reserve

All Federal Reserve functions would be absorbed by the Treasury. No public purpose is served by the Federal Reserve that cannot not be more democratically, efficiently, and transparently carried out by the Treasury.

Converting U.S. Government securities into federal reserves via open market operations serves no public purpose. The Treasury would fund the monetary system and public expenditure by spending zero interest perpetual bonds directly into the economy (electronically in the same manner currently used for transferring demand deposits and federal reserve accounts).

The same effect as above could be achieved by having the Federal Reserve keep the discount rate and fed funds rate target at zero and allow zero rate overdrafts by the Treasury on its deposit account. However, maintaining and allowing a Federal Reserve/Primary Dealer(s) middleman to do this serves no public purpose.

Having the Treasury spend zero interest perpetual bonds directly into the economy allows for funding full resource utilization (including mobilization/training for all idle labor). The public purpose is hindered by obfuscation from complex and needless Open Market/Primary Dealer operations. The national government maintains productivity and stable price levels through fiscal spending and taxation respectively and this should be done both directly and openly.

The fundamental structure/goals of the current FOMC will be maintained within the Treasury, with a primary mandate to maintain full productivity and a stable price level. As now, appointments to the body will outlast/overlap political and administrative terms of office, allowing the price stability mandate to remain apolitical in the manner of the current FOMC.

The role of banks and credit

The role of banks is to provide for a payments system and to fund loans based on credit analysis.

The payments system will be an open clearing system created by the state available to all on an open license. The public purpose is best served by a single public payment system.

A primary area of concern with a non-endogenous monetary system based on treasuries is that if banks are only allowed to loan funds they actually possess (in the way building societies/credit unions traditionally functioned) lending will not be sufficiently responsive to the needs of the economy. Credit is thought to be overly restricted and bank balance sheet expansion/contraction not able to nimbly adapt to prevailing economic conditions.

Crucially, the above concern over restricted credit demonstrates a failure to follow through with the full implications of a direct treasury funded system. Zero interest perpetual bonds, unlike current bank credit, will not be extinguished by loans being repaid. This is not trivial. Under this system the incentives and availability of funds for building society/S& L/credit union type institutions is vastly greater than the current system due to the way in which repayment does not extinguish money in the way it does in the current system.

The current system relies on distracting Federal Reserve/ Primary Dealer operations that maintains the destructive public belief in the “household analogy.” This is also perpetuated by the demand deposit money system. Neither of these processes serve the public and are easily bypassed.

“Endogenous” bank balance sheet expansion
In addition to building society/credit union type institutions, special banks will be allowed to grant loans that create treasury deposits, with the loaned treasuries extinguished on repayment.

These public/private partnerships are licensed to create and extinguish (as loans are repaid) zero interest perpetual Treasury bonds. They serve as intermediaries between the Treasury and businesses/individuals who are willing to take on what is in effect a special tax burden for a special privilege (treasury funding).

This process is the same as the current private endogenous demand deposit creation process which is able to nimbly expand and contract to meet changing economic conditions. However, crucially, it beneficially keeps the process on one national balance sheet. The creation of private demand-deposit money serves no public purpose that cannot be duplicated with direct-issued treasury money.

These transactions are carried out in the same way as bank credit money is created now, with the asset restrictions outlined in the “banks” section above (the Mosler/Mitchell/Wilson rules).

These special funding/taxation agreements are one more policy choice for spending into the economy, along with fiscal, tax reduction, and citizen dividend options. Crucially, the amount of spending via this channel can, unlike the current system, be easily made highly countercyclical via changes to capital requirements, loan quality assessment, and interest rates and is a policy decision like any other.

Summary: Stability, Equity, Innovation 

A monetary system is made by creating and expanding a balance sheet and the public operating within the asset side of it.
Taxes (or the bank equivalent, loans) represent a debt. This debt obligation is traded around as currency. This is why taxes (or bank debt repayment) give value to a currency.

  • It can be national, with government spending creating deposits and taxes destroying deposits. That is, the public swaps the government’s deposits (treasuries) around as money.
  • It can be endogenous, with bank loans creating deposits and repayment destroying deposits. The public swaps banks’ demand deposits around as money.
  • In the latter case when businesses/individuals choose to take out a loan beyond what the building society/credit union/mutual funds banks might provide, they in effect choose to take on greater spending and in return take on an additional tax burden (thus helping to maintain the value of the currency; taxes give value to a currency). For the good of the public and for innovation, individuals voluntarily asume a possible gain and asume a liability.
  • Both systems can exist at same time with same denomination, as in modern economies.
  • Both their combined total size and the balance between them is important…

Optimal total size and optimal balance 

  • Optimal level of total money creation = enough to keep the economy at full productivity, through both fiscal policy and through individuals having money created for them (loans) for spending on productive purposes.
  • Optimum balance is enough national spending to create public goods that otherwise wouldn’t be done – i.e., infrastructure, education, full use of idle resources including idle labor, military, and health care.
  • Additional spending into the economy for innovative, productive economic activity is by the special banks (endogenous) sector. This private borrowing/repaying allows private venture-type investment by individuals who agree to what is in effect voluntary taxation. This is also equitable because, unlike normal taxation, individuals ask for the additional opportunity (and accept voluntary “taxation” in return).  If credit analysis is administered in the right way, this means goods created by individuals who are willing to take on rewards but also take on an additional tax.
  • Both systems net to zero. This is crucial to emphasize in both systems, albeit for different reasons. In the government balance sheet expansion monetary system, it is important to realize that as a whole the system is debt free (assets and liabilities net to zero) as this highlights the fact that the government can expand the balance sheet as much as they want in order to bring all idle resources into productive use. Being clear on the equity, debt free nature of the national balance sheet crucially highlights the fact that the nation is not a household and is key to getting the public to realize that the government balance-sheet monetary system does not remotely function like a household.
  • On the endogenous side, although the private endogenous system nets to zero the total size of its balance sheet relative to the monetary system matters. If the endogenous balance sheet expands greatly due to unproductive debt creation for the FIRE sector (as now), although it nets to zero it nevertheless unfairly allows real claims on real resources.
  • The system balanced so that there is easy availability of the “endogenous” system to those who want to borrow/repay, but it is far more stable than the current system.
  • One national balance sheet reflects the reality of our intertwined monetary-financial system and allows easier optimization of public spending and productive investment.

[I am traveling at the moment & this is a rough draft that needs editing – comments greatly appreciated]


March 28, 2019  UPDATE: The Intro to Economics textbook is finished! Live on Amazon here –

1000 Castaways: Fundamentals of Economics

Mercantilism – Rejected by both Left & Right: Part II of Mercantilism and the Rise of the West

Mercantilism – Rejected by both the Left and the Right

Mercantilism has received very little attention in the twentieth century,[1] and much of the attention it has received has often used mercantilism as a straw-man against which to present other theories in a good light, with numerous misrepresentations often intentionally introduced. This has led to widespread acceptance of simplistic and erroneous views of mercantilism which in turn still further decreases attention to the subject. Paul Rich states that ‘There are few better examples of trying to lend misleading coherence to complex matters than the way in which mercantilism has been dismissed as a spent philosophy’ (Rich 2006, 183).[2]

Mercantilism seems to have been ignored and even disparaged by both the right and the left, accounting for the scant attention paid to the historical impact of these policies in the twentieth century. The left, while embracing the state’s role in development, rejects the capitalist and ‘internalist’ (and often, viewed as triumphalist) view of Europe as a region developing economically largely due to internal institutional development stimulated by its own internal dynamics of intra-state competition and commerce.[3] Conversely, the right, while embracing the emphasis of mercantilism on a ‘fragmented and thus competitive’ internalist model of European expansion, cannot embrace mercantilism because of its emphasis on the role of the state in development. Thus mercantilism has found little support or attention in the twentieth century from any side.[4]

Consequently, there are a number of widespread misunderstandings concerning mercantilist policies. One is that mercantilism is simply a naïve focus on the balance of trade (or worse still, as an even more simplistic focus on the stock of precious metals, properly called ‘bullionism’). The mercantilist approach to trade and development was in practice much more nuanced, based on views of ‘good’ trade and ‘bad’ trade. Good trade is trade that increases the amount of increasing returns activities (in that time especially, essentially manufacturing) within a country’s borders; bad trade is trade that increases a reliance on raw materials exports (see Reinert 1998). Crucially, much confusion also arises because of the difference in the significance of arguments concerning trade originating in the context of the country by far more industrialized (Great Britain, and later, also the US) and the significance of those arguments for everyone else: In the real world, the implications of ‘free’ trade turned out to be very different for the world leaders in industrial production than for less industrialized nations. It has seldom been grasped how fundamentally this influenced the interpretation of economic theory in different countries, especially in the English speaking countries vis-à-vis the rest of the world (Reinert 1998).

Mercantilism and the Zero Sum game fallacy

Another misunderstanding concerning mercantilist policies is that they are frequently portrayed as attempting to capture trade and industry due to a naïve belief that these are a ‘zero sum game’ when in reality trade and industrial growth are very much a non-zero sum game, with cooperative free trade increasing the total amount of goods for all. Mercantilists are portrayed, in effect, as believing (in their ignorance of the non-zero sum nature of development) that if considering two countries starting on equal terms, taking one country’s ten percent meant the winner would have sixty percent and the loser be left with forty percent of the pre-existing trade or industry levels, and ignorant of the possibility that with increased trade there may be 500 percent more goods and industry in the future for all to share.

However, in a non-zero sum world strongly marked by agglomerative forces (whatever these may be), mercantilist strategies make more, not less sense than non-competitive policies: that is, taking a rival’s ten percent now might leave the ‘winner’ with the lion’s share of the 500 percent more trade/industry in the future, and the loser with almost none, a more likely outcome in the real world of agglomeration than each ending up with greater equal amounts of growth. Crucially, in a non-zero sum world of increasing returns and agglomeration, mercantilist strategies were especially astute and beneficial, although only, of course, for the ‘winners’.

Based on these observations this work might be described as a ‘geography of mercantilism’ that seeks to understand how mercantilist policies, so intricately associated with both the military and commercial expansion of Europe that subsequently shaped global patterns of development, became spatially ‘centered’, as writers such as Blaut and A.G. Frank often characterize the process, on Europe.

Next Post – An Empirical Approach to the Geography of Mercantilism: Part III of Mercantilism and the Rise of the West



[1] Mokyr, for example, in discussing Heckscher’s (1931) extensive treatment of mercantilism, observes ‘the book seems to have been strangely neglected by economic historians in recent decades. Mercantilism as a major topic in the institutional development of Europe has not yet been taken up by the New Institutional Economics.’ (Mokyr 2003, 1). In a footnote Mokyr notes: ‘Of the forty five references to Heckscher’s work on Mercantilism in the two leading Economic History journals, thirty five were made before 1971, and only four since 1980. Of the thirteen citations in the entire economics and history sections of JSTOR to Heckscher’s work on Mercantilism, only five papers qualify as economic history proper. A recent well-reviewed book (Epstein, 2000), clearly concerned with similar issues, does not even refer to it. (Mokyr 2003, 1). McCusker writes ‘Indeed, by mid-century, some were prepared to deny that mercantilism as an economic doctrine had ever existed’ (McCusker 2000, para. 1) and that after World War II ‘mercantilism was irrelevant. After the demise of the world of nation states, it seemed to some best forgotten and, with it, the doctrine that had served to underpin its foundation. By the middle of the twentieth century more than one writer on the early modern period of Western European history was prepared to deny mercantilism’s very existence. 
 The most extreme of these writers, D. C. Coleman (1980, p. 791), classed mercantilism with other “non-existent entities.”’. (McCusker 2000, para. 10).

More generally, if all of the JSTOR articles from history, political science, and economics from the entire twentieth century and to the present with any of the words ‘mercantilism’, ‘colbertism’, or ‘cameralism’ in the title are considered, there are only 46 articles, of which only 12 have been published after 1980 (the date of Coleman’s ‘Mercantilism Revisited’), and these are mostly either narrowly focused responses to Ekelund and Tollison’s (1982) public choice interpretation of mercantilism or discussions of modern trade theory as ‘neo mercantilism’.

[2] McCusker, for example, in discussing one of the few modern widely read discussions of mercantilism notes: ‘Unfortunately in their exploration of the subject Ekelund and Tollison offer little more than “poor history,” “circular arguments,” and a disinterest “in what the mercantilist writer actually wrote,” according to Magnusson (p. 50), an evaluation with which I can only agree, sadly’ (McCusker, note 8).

[3] Even in its ‘neo’ form mercantilism is criticized for its association with capitalism from the left. Lovering 1999 sees ‘new-regionalism’ as a form of neo-mercantilism and criticizes it accordingly as ‘instrumentalist’ ‘Hayekian rhetoric’. Simply (mis)applying the word to a description of policy automatically paints the policy in a bad light; e.g. ‘[Texas Governor] Perry’s economic vision is the kind of race-to-the-bottom mercantilism we’ve come to expect from developing nations in the globalized economy
’ (Meyerson 2011. The term is misapplied because capturing particular sectors of increasing returns industry and thus raising the wealth of a region or state was traditionally the goal of mercantilist policies, not reducing living standards to indiscriminately attract sectors that enrich a minority capitalist class).

[4] McCusker makes a similar argument in discussing the reception of Heckscher’s (1931) book on mercantilism:  ‘The book and its subject had less play in the second half of the twentieth century when the worries of the world shifted from a fear of totalitarianism of the right to a fear of totalitarianism of the left. Indeed, by mid-century, some were prepared to deny that mercantilism as an economic doctrine had ever existed’ (McCusker 2000, para. 1)


As World War II came and passed, many thought they saw the future in an even newer and now victorious doctrine, socialism. For them Heckscher was even less relevant – or, better put, mercantilism was irrelevant. After the demise of the world of nation states, it seemed to some best forgotten and, with it, the doctrine that had served to underpin its foundation. By the middle of the twentieth century more than one writer on the early modern period of Western European history was prepared to deny mercantilism’s very existence. 
 The most extreme of these writers, D. C. Coleman (1980, p. 791), classed mercantilism with other “non-existent entities.” It was an invention, conjured up “to prevent the study of history from falling into the abyss of antiquarianism” (7). With hated capitalism under attack from the bastions of academe, mercantilism suffered the even worse fate of being ignored. (McCusker 2000, para. 10).

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