The excellent economist Warren Coats and I have been having, by e-mail, a friendly disagreement over some largely esoteric matters involving the balance of trade. I’m pleased, although not surprised, to report that our e-conversation has revealed that much of what was originally thought to be disagreement is, in fact, not.
Here’s a slightly edited version of an e-mail that I sent earlier today to Warren; I’m happy to say that Warren wrote back expressing his agreement, at least in the large.
I believe it to be an error to think of countries as households or as firms. While I believe that analogies to households or firms are very often useful, I think that they aren’t always so. Here’s how I see matters; it’s a way that I take from Adam Smith, from Jim Buchanan, and, mostly, from the Austrians (for whom the following way of thinking played a central role in their demonstration that socialism is unworkable even in theory):
A household is an economic entity with a budget and with something that can sensibly be described as a well-ordered set of preferences, much like an individual. Much like a firm whose owners organize and run the firm with a plan to earn profits. Much like a club. Much like a government.
A country (or what we generally mean today by an “economy”), however, is no such entity. Unlike a household (or an individual, or a firm, or a government), it makes no sense to talk about a country’s “preferences,” “goals,” “ends,” “wants,” or “purposes.” Unlike a household – or an individual, a firm, or a government – a country doesn’t maximize anything, for a country has no set of preferences – and without a set of preferences, all talk of maximizing is meaningless.
A country – economically – is an unplanned collection of individual persons and households (and of individual firms and other organizational entities) each of which has sets of preferences and goals, each with the ability to decide how to use the means at its disposal to achieve his, her, or its ends. A country – economically – is but an aggregation of individuals (and households, firms, and other purposeful organizations) each of which attempts to maximize its utility or profits – that is, to maximize its success at achieving whatever its individual goal(s) might be. But this group of individually maximizing entities is not itself a maximizing entity. This group is simply the name – e.g., “America” or “France” or “India” – by which we call a collection of many individual, and individually purposeful, entities. Yet unlike these individual parts, this group, as such, has no birth, no death, no starting point, no ending point, no plan, no owner or owners, nothing to maximize, nothing to achieve, nothing to pay, nothing to collect. This group has no purposes and no desires. This group has no economically meaningful income or expenses, despite the fact that national-income accounting creates an illusion to the contrary. (What is called “national income” is simply an aggregate figure without any of the relevance and meaning that “income” has for individuals, households, firms, and governments.)
And this group – this collection of people called “the country” – has no budget that must be balanced over time (although, of course, each country’s government has a budget that somehow must be balanced over time). Again, each of the individual units – each of the persons, firms, clubs, households, and governments – that comprises the group, the country, has a budget that must balance over time. But the country does not. The country, as such, is not an economically meaningful entity – by which I mean here that the country, as such, has no purposes that it pursues. Unlike often for a household or a firm, it makes no sense to anthropomorphize a country.
None of the above is to say that the maximizing entities who make up a country are immune to the constraints of economic reality. Of course they aren’t immune. Not remotely so. It is, however, to say that these constraints impinge meaningfully only at the level of each individual planning, purposeful entity. To talk about these constraints impinging at the level of “the country” is, I believe, mistaken and misleading.