Since the economic downturn of the late 1970s, a growing number of articles have included comments on the global resurgence of a new mercantilism (governmental subsidies and regulations designed to secure an accumulation of wealth for a particular state or region). While many Americans especially policy makers in the Reagan Administrationwould argue that the U.S. should remain committed to free market principles and free trade at the national and international level, there has been relatively little recognition of the extent to which mercantilism has already become the operative political economy at the state and local levels! In this article, the author examines several consequences relating to the growing popularity of a mercantilist philosophy in Florida
A recent business section of the Miami Herald was devoted to stories about how important is has become for the South Florida area to emulate the Orlando areas industrial development efforts by setting up a similar, centralized Industrial Development Commission (IDC). The Business/Monday editor, Larry Birger, apparently saw no contradiction in describing the IDC as a private, nonprofit organization with a budget of $550,000, of which $232,000 comes from the city and two counties. One can easily characterize statements such as this as evidence of how much our thinking already reflects the mercantilist perspective where the line between private and public becomes increasingly blurred or non-existent. It appears somewhat cavalier to call an organization, over 40 percent of whose budget comes from government sources, a private one.
While continuing to consider themselves in favor of free enterprise or a free market economy, some business leaders also appear to perceive the world from a mercantilist perspective. For example, that same issue of the Miami Herald discusses Hooking Jobs for Florida, using such terms and phrases as war, conquest, and out for blood. It asserts that the pursuit of new industrial developmentin an effort to increase the tax basehas become an ever-escalating struggle between states, counties and sometimes even cities within the same county. Nowhere do either the reporters, or the business leaders interviewed, seem to indicate an awareness that the system they are describing bears a more striking structural resemblance to mercantilism rather than to a true market system.
There is a special irony in observing the Reagan Administration, ostensibly in support of the free market, pressing for a new federalism which shifts the locus of power in America from the national back to the state and local levels. When this perspective was articulated several years ago, it was pointed out that unless the power of government was itself curtailed, this effort would simply result in mercantilism at the lower levels of government. Thus, while, at the national level, we debate re-industrialization schemes and whether we ought to follow Japan Inc., we appear to be in the throes of implementation at the state and local levels.
This phenomenon is not new to the American experience. Our nation, in fact, was born out of a similar struggle within the British mercantilist system. Not all American leaders were in agreement with criticisms of mercantilism voiced by Adam Smith in The Wealth of Nations. Indeed, while breaking free of England, some wanted to create a competing American mercantilist state. Under the Articles of Confederation we ended up with a system of thirteen mercantilisms a situation similar to what appears to be happening today. Under this system, States sought to erect trade barriers, violate contracts, and inflate the currency. It was that state of affairs which led some Americans to create the Constitution.
Mercantilism and the free market are very different types of political economies, as Adam Smith well understood. Competition is not the same thing as conflict! The market worldview believes in competition and individual choice. Except for establishing a rule of law, government is to be kept out of economic affairs, not only because it is inefficient and institutionalizing, but because it leads to corruption and a loss of liberty.
The mercantilist, however, takes a much more positive view of the possibilities for government and his ability to use it for planning. Wealth is not open-ended. Conflict is inherent in that view because government, at whatever level, claims to have sovereignty. Stopping short of socialism and a complete abolition of private property, the mercantilist hopes to build a public policy that will check the influence of special interests. The problem is that mercantilism is unstable, and tends to revert to control by such special interests, causing the mercantilist to demand more power in order to restore his notion of the general welfare.
Mercantilism and Growth Management
Most of us are aware of the extent to which growth management has of late become the great buzz word for certain politicians, academics, and business leaders in Florida. A moments reflection suggests that this whole approach may be nothing more than a broad scale revival of mercantilist thinking. Such a program cannot be carried out unless the structure of state government has become mercantilistic. To be fair, it ought, at least, to be called growth administration, since the term management implies a presence of market forces.
Data are beginning to accumulate with respect to some of the growth management programs implemented in other states during the late 1970s, a time period when environmentalists could afford to ignore the overall economic situation. The data clearly demonstrate, as we shall see, the problems and contradictions inherent in such mercantilist programs. The State of Oregon is a case in point. Interestingly enough, several leaders in the growth. management field in Florida were among the consultants who helped to write the Oregon legislation.
A recent study of Oregons experience with growth management indicates that the law has been very difficult to interpret, has led to enormous property losses without compensationestimated at over $50 million in one rural county aloneand has resulted in new business virtually shunning location in that state. Business leaders in Florida will soon have to decide how they feel about such growth management programs, for its advocates have made clear their position that Florida needs the kind of laws now present in Oregon. It is tempting to explore the relationship between growth management and the mercantilist paradigm more closely, but that will have to wait for a future article.
The Quest for High Technology
The high technology area has proved an irresistible lure for those with a mercantilist worldview. The idea, naturally, is to use increased government involvement in schooling as well as other areas to lure new hi tech industry to Florida. But, as that States businesses are learning, increasing spending for schools may counter-productively increase taxes since it undercuts the overall business climate in the state.
The Joint Economic Committee of the U.S. Congress has recently completed several studies on high technology that should be of interest to Floridians? The conclusions were based upon questionnaires sent to hundreds of firms in the hi tech field. Returns indicated that the primary considerations for geographic-location decisions were labor skills/availability, labor costs, and a number of other factors such as cost of living, transportation, and access to market. Some-what further down in terms of importance were regulatory practices and energy costs, with cultural amenities and climate placing even lower and access to raw materials relegated to last place.
The Florida Research Park Act
What are the implications for Florida? It is interesting to note that reports on planned facilities for the near future indicate the Midwest will begin a comeback from its industrial losses of the last few years. Some might call this another example of the law of the retarding lead, but it more likely reflects the fact that the area has the large pool of labor skills/availability which was overwhelmingly ranked as the most important factor in the decision to locate a new facility.
What is becoming evident is that in pursuing regulations for growth management and taxes for schooling, Florida may place at risk the highly rated overall investment climate it has worked to create. We might recognize, for example, that not all hi tech industry requires research parks.
The author recently contacted Robert Premus, the economist who conducted the studies for the Joint Economic Committee to inquire about a sensible approach to hi tech development. His response is worth quoting at some length:
A sensible approach for states to follow would be to look inward in an attempt to remove institutional, technical and financial barriers to business investments within the state rather than to adopt a marketing strategy aimed at attracting high tech companies from other states and regions.
Also, finding ways to stimulate business innovation and start-ups from university and laboratory research activities can be a rewarding approach, providing a favorable investment climate exists. In my view, the Florida Research Park Act may be too grandiose a scheme if its intent is to provide space and tax incentives for a research park near every university and branch campus. Certainly research parks and innovation centers have a role to play, but resources are limited and quality scientific and applied research varies by program and among the universities. Assessing the strengths and weaknesses of scientific research capabilities in the state universities, private corporations and laboratories, is an important step in evaluating the potential of a university or a region to support a research park.
Finally, exploring ways to link formal training and on-the-job training of technicians and paraprofessionals can be an important mechanism for providing the needed trained labor for the high tech industries . . . [But I would like to stress that the role of the government in spurring high tech development must be secondary to the private sectors role. Industrial innovation will require an incentive conducive to entrepreneurship and risk-taking. The state has an important role in creating the necessary investment climate by considering the impact of its tax expenditure and regulatory policies on innovation and business development.
The reason that Texas, especially Austin, has been so successful in attracting hi tech research is that back in the 1960s, then-Governor John Connally used his power to create a super board which cut down on the proliferating number of programs in Texas many universities and began to concentrate these at the University of Texas. Even North Carolina is now beginning to show the effect of interest group politics as the Charlotte area begins to push for some of the resources allocated to the Research Triangle?
As Premus suggests, there are major problems with Floridas existing shotgun approach to research parks. It sets up a typical mercantilist situation of region against region, county against county, all trying to get a share of the pie. It is apt to increase schooling expenditures without ever achieving the kind of excellence in any one location necessary to attract the best in hi tech innovation and research.
Finally, we need to heed the suggestion that government can help the private sector best, not by direct involvement of a mercantilist subsidy/regulatory nature, but by cutting back so as to provide the best possible climate in which the market and entrepreneurship can operate. Unfortunately, in the last few years, there are indications that Florida is beginning to go in the wrong direction.
For further articles and studies, please see OnPower.org.
William Marina was a Research Fellow at the Independent Institute in Oakland, Calif., and Professor Emeritus in History at Florida Atlantic University.