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Economic Error #4: Mercantilism's State-Run Economy is Harmonious; the Free Market Isn't.

Gary North
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Ellen Brown favors Federal government control over the economy. She opposes free trade and free pricing. She is a mercantilist.

This becomes obvious in her discussion of Alexander Hamilton. She favors his recommendation of high tariffs to protect domestic industries. Hamilton was a mercantilist. She also recommends the economic system adopted by Hamilton's disciple, the politician Henry Clay. Clay was a mercantilist.

This makes her schizophrenic, for Hamilton and Clay were supporters of privately owned central banking. Hamilton foisted the First Bank of the United States (1791-1811) on the government. Clay forced a showdown with President Andrew Jackson in 1832. Clay wanted to re-charter the Second Bank of the United States (1816-1836). Jackson wanted to kill it. Jackson won the battle, and was overwhelmingly re-elected in 1832. Clay formed the anti-Jackson Whig Party in the late 1830s. Abraham Lincoln went to Congress as a Whig in 1846. He always professed to be a follower of Clay. Lincoln was a mercantilist.

They were all proponents of tariffs. A tariff is a sales tax on imported goods.

Here is Brown's assessment of Hamilton, Adam Smith, the free market, Henry Clay, and government control over the economy. She begins with Hamilton.

He was the chief author of The Federalist Papers, which helped to get the votes necessary to ratify the Constitution and formed the basis for much of it. The Preamble to the Constitution made promoting the general welfare a guiding principle of the new Republic. Hamilton's plan for achieving this ideal was to nurture the country's fledgling industries with protective measures such as tariffs (taxes placed on imports or exports) and easy credit provided through a national bank. Production and the money to finance it would all be kept "in house," independent of foreign financiers.

Senator Henry Clay later called this the "American system" to distinguish it from the "British system" of "free trade." Clay was a student of Matthew Carey, a well-known printer and publisher who had been tutored by Benjamin Franklin. What Clay called the "British system" was rooted in the dog-eat-dog world of Thomas Hobbes, John Locke and Scottish economist Adam Smith. Smith maintained in his 1776 book The Wealth of Nations that if every man pursued his own greed, all would automatically come out right, as if by some "invisible hand." Proponents of the American system rejected this laissez-faire approach in favor of guiding and protecting the young country with a system of rules and regulations. They felt that if the economy were left to the free market, big monopolies would gobble up small entrepreneurs; foreign bankers and industrialists could exploit the country's labor and materials; and competition would force prices down, ensuring subjugation to British imperial interests.

The British model assumed that one man's gain could occur only through another's loss. The goal was to reach the top of the heap by climbing on competitors and driving them down. In the American vision of the "Common Wealth," all men would rise together by leavening the whole heap at once. A Republic of sovereign States would work together for their mutual benefit, improving their collective lot by promoting production, science, industry and trade, raising the standard of living and the technological practice of all by cooperative effort. It was an idealistic reflection of the American dream, which assumed the best in people and in human potential. You did not need to exploit foreign lands and people in pursuit of "free trade." Like Dorothy in The Wizard of Oz, you could find your heart's desire in your own backyard. [Web of Debt, pp. 50-51]

Government and business should be "one big happy family." This was Clay's American System.

She speaks of Hamilton's promotion of the general welfare. Where did she get this idea> From that peculiar ex-Marxist, who once called himself Lyn Marcus, but who now calls himself Lyndon LaRouche. In footnote #6, she references a long article that he wrote in 2002, "Economics: At the End of a Delusion." Here is what he wrote.

The state must therefore be subject to control by the principle of its obligation to serve the promotion of the general welfare, to serve the common good. The moral right of the government to exist, is conditional upon its efficient promotion of the general welfare of all of the present generations and their posterity. No type of rule of law may be tolerated, which violates that principle.

That notion of law premised upon the notion of the common good, is the distinction of civilized government in modern society. That is the distinction which defines the modern sovereign nation-state republic; that distinction was the essence of the continuous quarrel between the patriots of the United States and the British monarchy over the interval 1776-1901, and the quarrel between President Franklin Roosevelt and the British monarchy's Prime Minister Winston Churchill, during World War II. That is the essential difference between the American System of political-economy, as exemplified by the work of Hamilton, the Careys, List, and Lincoln, on the one side, and the neo-Venetian, British rentier-financier system of Adam Smith, Jeremy Bentham, and the Mont Pelerin Society, et al., on the other.

He criticized the Mont Pelerin Society, founded by F. A. Hayek in 1947 to defend free market ideas.

But that is not all that he wrote. In Chapter 2, he identified the good guys for us.

On the opposite side, since about three centuries ago, the chief threat to that British System and its Anglo-American successor, historically, has been, and remains my American System, that of Benjamin Franklin, Alexander Hamilton, Abraham Lincoln, and Franklin Roosevelt.

He got it right. Franklin Roosevelt was indeed the economic heir of Hamilton, Clay, and Lincoln.

He went on to praise the idea of the general welfare -- the Constitutional basis of the modern welfare-interventionist Federal government.

It should be emphasized, at this point, that the entirety of the rise of modern civilization out of the swamps of ancient empires and feudal tyrannies, was premised on two, interdependent principles. First, the principle of the general welfare; second, the obligation to promote that general welfare through providing protection to the contributing role of the related cases of the individual scientist or creative Classical artist, and the individual entrepreneur. This is, in effect, the same thing as saying, that the superiority of the American System of political-economy, lies in a recognition of the nation-state to provide both the basic economic infrastructure, and the protection of the expression of the sovereign cognitive powers of the individual, upon which a satisfactory form of society depends. The business leader who combines a passion for promotion of the general welfare, with a cognitively inspired drive to make things better through the work of the enterprise, is the type we ought to desire and foster in our nation's economic policy. U.S. Treasury Secretary Alexander Hamilton would agree.

This is the basis of what is called the government-business alliance. In early modern European history, this was called mercantilism. In 19th-cenrtury America before 1865, this was called the American System. In the mid-1930s, it was called the New Deal. It was called fascism in Italy. This system of economics is the legal and moral foundation of The Web of Debt.

She has openly adopted one of the fundamental assumptions of mercantilism: "The British model assumed that one man's gain could occur only through another's loss." This is a fallacy. As Adam Smith taught, men trade because each person expects to be better off. We learn that trade benefits us as individuals, so we continue to trade.

Economists call the system Brown describes a zero-sum game. Winners win at the expense of losers. This is not the free market. It is a card game, or a roulette wheel, or the roll of the dice.

Ludwig von Mises in Human Action (1949) described this error as the Montaigne fallacy. Here is Mises's disciple, Murray Rothbard, on Montaigne and his theory. This is from his book Economic Thought Before Adam Smith.

Michel de Montaigne made a notable and highly influential contribution to mercantilism -- the strictly economic aspect of state absolutism -- as well. Although he claimed that he knew nothing, on one thing he certainly asserted truth, his much vaunted skepticism suddenly vanishing: in what Ludwig von Mises was later to call the "Montaigne fallacy" he insisted, as in the title of his famous Essay Number 22, that "The Plight of One Man is the Benefit of Another." There is the essence of mercantilist theory, in so far as mercantilism has a theory at all; in contrast to the fundamental truth well known to the scholastics that both parties benefit from an exchange, Montaigne opined that in a trade, one man can only benefit at the expense of another. By analogy, in international trade, one nation must benefit at the expense of another. The implication is that the market is a ravening jungle, so why should not a Frenchman urge the French state to grab as much from others as it can?

Ellen Brown is a mercantilist.

For a detailed critique of Ellen Brown's economics, go here:

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