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Bob Higgs on the Senselessness of the “Balance of Payments”

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This new post by Bob Higgs on the irrelevance of the “balance of payments” – and of the folly of worrying about a so-called “deficit” in it – should be read in full by Trumpkins and other protectionists [2]. And then read again. And again. Carefully. And then read yet again.

Here’s a large slice:

Let us define the set of all human beings whose height is greater than 170 cm and less than 180 cm. Call this set A. Now let us collect data on all the dealings between members of set A and members of set B, which consists of all human beings whose height is less than or greater than those in set A. What economic significance can we ascribe to the aggregate of monetary flows between members of set A and members of set B? Correct answer: none. This aggregation of persons who trade with persons in the complementary set has no economic meaning; the sets are arbitrary so far as economic understanding is concerned. People—individuals, firms and other organizations, and governments—trade in order to improve their economic condition. Whether they trade with shorter or taller people or with people within a certain height range or outside this range has nothing to do with economics or human well-being. To draw up a balance of inter-set payments for set A and set B, or any given subset of B would serve no purpose. It would be a nonsensical exercise.

Now let us define the set of all human beings who reside within the boundaries of a certain nation-state, say, the United States of America. Call these people the elements of set P. Now collect data on all the dealings between members of set P and members of set Q, which consists of all human beings who reside outside the USA. What economic significance can we ascribe to the aggregate of monetary flows between members of set P and members of set Q? Correct answer: none. This aggregation of persons who trade with persons in the complementary set has no economic meaning; the sets are arbitrary so far as economic understanding is concerned. People—individuals, firms and other organizations, and governments—trade in order to improve their economic condition. Whether they trade with people inside or outside the USA has nothing to do with economics or human well-being. To draw up a balance of inter-set payments for set P and set Q, or any given subset of Q (e.g., residents of China or Mexico) would serve no intellectual purpose. It would be a nonsensical exercise.

Yet exactly such a nation-based “balance of international payments” accounting system has been constructed and “analyzed” for a very long time. In centuries past, when kings needed to accumulate gold and silver to pay mercenaries to fight their wars, they had a reason to accumulate such data and to promote policies (such as customs duties on imported goods) that would discourage imports, thereby keeping gold and silver from flowing out of the country in payment for the imports. This sort of “political arithmetic” eventually grew into the modern system of international balance of payments accounts (indeed, the entire system of national income and product accounts, as well). The old monarchical logic for the collection of such data has long since evaporated, however. Modern governments have other ways to organize and finance their wars.

Meanwhile, other interested parties discovered that they might use certain conditions, such as a so-called deficit in the balance of trade (the value of national imports of goods and services exceeds the value of national exports of goods and services) as rhetorical fodder to feed their politicking for the government to place greater tariffs (import taxes) on goods and services imported into the home country that compete for domestic sales with the goods offered for sale by domestic sellers. This gambit is nothing but a means of suppressing competition, an activity in which sellers unfortunately commonly engage, employing the government’s force in their quest if they can enlist it.

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