One of the root problems – perhaps the root problem – with the concept of the balance of trade (or the balance of payments) is that it treats countries as not only the relevant economic entities, but as entities whose economic performance should be, and can sensibly be, measured and assessed according to the same criteria that we use to measure and assess the performance of business firms. This erroneous notion would be much less prevalent if more people understood the important distinction, in F.A. Hayek’s words, between “organizations” and “orders.”
Below the fold I reprise a post from early 2006 on Jane Jacobs’s insightful criticism of mercantilism and her understanding that countries are not the relevant economic entities that nearly all discussions of international-trade theory and policy assume them to be.
Jane Jacobs Challenges the Mindlessness of Mercantilism
by DON BOUDREAUX on FEBRUARY 11, 2006
Impressed by how badly economists – especially ‘development’ economists and macroeconomists – predicted and explained post-WWII events up through the early 1980s, Jane Jacobs wrote the following on pages 29 through 31 of her 1984 book, Cities and the Wealth of Nations:
However, in the face of so many nasty surprises, arising in so many different circumstances and under so many differing regimes, we must be suspicious that some basic assumption or other is in error, most likely an assumption so much taken for granted that it escapes identification and skepticism.
Macro-economic theory does contain such an assumption. It is the idea that national economies are useful and salient entities for understanding how economic life works and what its structure may be: that national economies and not some other entity provide the fundamental data for macro-economic analysis. This assumption is about four centuries old, coming down to us from the early mercantilist economists who happened to be preoccupied with the rivalries of European powers for trade and treasure during the period when Portuguese, Spanish, French, English, and Dutch were exploring and conquering the New World and the lands and seas that lay along the trade routes around Africa to the Indies and beyond. The early mercantilists assumed that the national rivalries unfolding before them were the very keys to understanding what wealth itself is and how it arises, how it is maintained, how lost. According to the theory they propounded, wealth consists of gold, and gold is amassed as a nation manages to sell more goods than it buys….
Jacobs then goes on to praise Adam Smith for redefining wealth as the availability of consumable goods and services. But even Smith, says Jacobs, “accepted without comment the mercantilist tautology that nations are the salient entities for understanding the structure of economic life.” Jacobs continues a few paragraphs later:
Nations are political and military entities, and so are blocs of nations. But it doesn’t necessarily follow from this that they are also the basic, salient entities of economic life or that they are particularly useful for probing the mysteries of economic structure, the reasons for rise and decline of wealth.
Why don’t “progressives,” such as Sen. Charles Schumer, who oppose free trade whenever some conventional and largely meaningless statistic (such as the balance of payments) comes out one way rather than another, feel chagrined by their reliance upon a doctrine developed by many of the same people who also sincerely believed that religious heretics and witches should be burned at the stake and that slavery was part of god’s divine will?
