Quotation of the Day…

by Don Boudreaux on April 30, 2018

in Balance of Payments, Myths and Fallacies, Trade

… is from page 720 of the 1972 Nash Publishing edition of Murray Rothbard’s 1963 treatise, Man, Economy, and State:

More nonsense has been written about balances of payments than about virtually any other aspect of economics. This has been caused by the failure of economists to ground and build their analysis on individual balances of payments. Instead they have employed such cloudy, holistic concepts as the “national” balance of payment without basing them on individual actions and balances.

Balances of payments may be consolidated for many individuals, and any number of groupings may be made. In these cases, the balances of payments only record the monetary transactions between individuals of the group and other individuals, but fail to record the exchanges of individuals within the group.

DBx: Yes. And by so failing to record intra-national transactions, at least one misperception is created and one analytical error is committed.

The misperception is that there is some special significance to the collection of transactions that domestic citizens have with foreigners. Yet, in fact, there is nothing any more special or meaningful about the collections of transactions that, say, individual American consumers and firms have with non-American consumers and firms than there is about the collection of transactions that individual consumers and firms who live within 25 miles of the shores of Lake Pontchartrain have with individuals and firms who live elsewhere in the United States (or, indeed, elsewhere in the world). Fortunately for most of my relatives and other residents of south Louisiana, no such accounting data are gathered for the region surrounding Lake Pontchartrain – else any recorded “trade deficit” (such as almost surely would have occurred in the years immediately following hurricane Katrina) would be demagogued to stir up unwarranted worry and, worse, to generate support for destructive government policies.

The analytical error is the failure to recognize that economic transactions, whether they are purely domestic or not, are parts of economic plans. It is therefore illegitimate to draw conclusions from pure accounting artifacts – such as a U.S. current-account deficit – about the economic meaning and significance of those accounting artifacts.

For example, consider an American who sells all of his assets to a South Korean. Perhaps the American does so in order to throw himself a huge party, one that he’ll regret throwing soon after the party ends.* Or perhaps the American does so because such asset sales are the best means for him to get the liquidity needed to launch a new, entrepreneurial firm in St. Louis – a firm that’s destined for great success (meaning that the net present value of this new firm is greater than is the selling price of all of this American’s assets).  And regardless of the plans that led the American to sell his assets to a Korean, of no less (or more) economic significance are the plans that led the Korean to purchase these assets. Will the Korean use these assets more productively or less productively than would any alternative owner?

All such germane economic considerations of the sort featured in the previous paragraph are ignored when people draw – as they typically do – conclusions from nothing but the accounting artifact that is the balance of payments.

…..

* Note that such an action is capital consumption – dissipation! – only from the perspective of the party-throwing American. This American’s irresponsible behavior neither necessarily reduces the stock of capital in the U.S. (for the Korean buyer might simply maintain the investments in the very same form they are in when he or she bought them from the American seller) nor reduces the wealth of other Americans.

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