Monday, 13 February 2017

The Utter Irrelevance of the "Balance of Trade"

 

No concept in international economics – indeed, perhaps no concept in all of economics – is as prodigious a source of confusion and plunderous policy as is that of the so-called “trade deficit,” observes Don Boudreaux in this guest post. Or as irrelevant…

In Chapter 6 of Frédéric Bastiat‘s indispensable collection entitled Economic Sophisms, Bastiat takes on the fascination with the balance of trade – and the lunacy of the person or politician who believes “if France gives ten in order to receive fifteen, it loses five; and it is quite plain that [the politician] would draft laws accordingly.”

The truth is that we should reverse the principle of the balance of trade and calculate the national profit from foreign trade in terms of the excess of imports over exports.  This excess, minus expenses, constitutes the real profit.  But this theory, which is the correct one, leads directly to the principle of free trade.  I present this theory to you, gentlemen, just as I do all the others that have been the subjects of the preceding chapters.  Exaggerate it as much as you wish; it has nothing to fear from that test.  Assume, if it amuses you, that foreigners flood our shores with all kinds of useful goods, without asking anything from us; even if our imports are infinite and our exports nothing, I defy you to prove to me that we should be the poorer for it.

No concept in international economics – indeed, perhaps no concept in all of economics – is as prodigious a source of confusion and plunderous policy as is that of the so-called “trade deficit.”  As regular and careful readers of this blog know, this concept is encrusted with countless myths and half-truths.  I’m convinced that humankind would be far better off had no one ever thought to carry over to modern times the absurd mercantilist notion of the “balance of trade.”

 


Don Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, a professor of economics and former economics-department chair at George Mason University.
This post appeared previously at Cafe Hayek and FEE.
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4 comments:

  1. Assume, if it amuses you, that foreigners flood our shores with all kinds of useful goods, without asking anything from us; even if our imports are infinite and our exports nothing, I defy you to prove to me that we should be the poorer for it.

    If our imports ( spending ) are infinite and our exports nothing ( income ).... that would mean we are borrowing to consume...
    Just like a household.... over time we will be the poorer for it as we will have to repay those loans... or go broke..??

    Warren Buffet used the analogy of selling the family silverware to maintain a certain lifestyle.... OR...selling parts of the family Farm to maintain a certain lifestyle.

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  2. Assume, if it amuses you, that foreigners flood our shores with all kinds of useful goods, without asking anything from us; even if our imports are infinite and our exports nothing, I defy you to prove to me that we should be the poorer for it.

    I don't think anyone is going to allow uas to import infinite goods without paying for it. Too libertarian.
    Charles Dickens Income 2 shillings
    Outgoings 2 shillings and sixpence
    Result unhappiness

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  3. Libertarians like to talk about "Opportunity costs "
    When you sell your Nation's trading souk to the overseas junk market, someone goes out of business, like your next door neighbour in the rust belt.
    Misery and pain. That may not be an opportunity cost to a libertarian but it is too many of us.

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  4. If our imports are infinite and our exports are zero, our income is infinite and our expenditures are zero. If we ship out money to pay for the goods, that's an export, even if most people don't realize it. Money represents goods left unconsumed, after all, and is always, in the end, based on physical property. This isn't new; this was discussed back in Rome, and reached the same conclusion. Plus, you forgot to include the fact that the country importing goods isn't idle; it's developing its own resources.

    As for people going out of business, that was dealt with in the 1700s. First, yes, they would. Life is hard; grow up. You are not entitled to a job, and any job carries with it inherent risks, including being obviated by some innovation. I've often said that I'm shocked humans still do my job--the Mars Rovers do it just fine! Second, if our imports are infinite the price of imports would drop to such a level that anyone could afford them, so even those with menial jobs would be enriched. How many poor people lack refrigerators these days? Or microwaves? Or telephones?

    ReplyDelete

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