Mercantilism

I will have to find the article later, but China has been experiencing unprecedented growth with little inflation. There has been a recent spell of inflation over pork prices, but this seems to be an aberration result of disease and has nothing to do with general economic policies.

The argument made by the Austrian School is that mercantilism does not work. It is argued that such policies as keeping currency values low to stimulate exports and trade barriers to protect domestic markets will ultimately lead to inefficiency and inflation. I'm not entirely sure about this though and want to do more research. I do sympathize with the notion that lack of competition stifles innovation. But as far as the downside of protectionism goes, I don't think the argument is 100% accurate. For example, it could be argued that the Navigation Acts gave Britain their empire. It could also be argued that the American tariff system in the 19th century allowed the U.S. to develop its economy.

But going back to China, the Austrian School would reason that mercanitilist policy would create a glut of money in China that would result in an expansion of the money supply relative to the amount of goods available (which are themselves reduced by protectionist policies). It would seem to suggest that hyper-inflation would result almost instantaneously from mercantilist policies.

This is not the case however. With developing economies like China, such policies have not yielded any real inflation, only growth. In developed counties like Japan, the mercantilist policies have resulted in stagnation of the economy, not inflation. So in my mind, mercantlism works quite well for developing countries but causes problems once economies have developed beyond a certain point. The question though is why the prediction of inflation is not correct in place like Japan which are mercantilist and fully developed economies.

Perhaps I have been given incorrect assumptions about what the Austrian School says on such matters.