… is from page 33 of Pierre Lemieux’s excellent 2018 monograph, What’s Wrong With Protectionism? :
It is tempting to interpret the financial [or “capital”] account as the means by which a current-account balance is financed (foreigners lend to Americans in order to allow Americans to import more) or, alternatively, as a way to dispose of surplus foreign currency (Chinese investors use it to invest overseas). This interpretation is at best misleading because the two sides of the balance of international payments describe actions that are largely independent. Consumers do not import only because the US dollar is high, but basically because of comparative advantage. Foreign investors do not bring capital into the United States only because they do not know what to do with their dollars, but also because America offers good investment opportunities.
Too many discussions of the balance of payments treat international capital flows mechanically. The entrepreneurial creativity and risk-taking that drive many of these capital flows are never noticed; the flows are treated as if they occur of their own accord or according only to the logic of the accounting categories to which accountants assign them.
Ironically, the people who are least likely to treat international capital flows mechanically are protectionists. Protectionists, for example, often accuse the U.S. trade deficit as being driven by active political decision-making by foreign governments to increase U.S. imports relative to U.S. exports. This protectionist explanation, of course, is mistaken, yet at least it’s not bloodlessly mechanical. In it, goods, services, and capital don’t move across international borders of their own accord, merely in reaction to themselves and in order to satisfy accounting identities.
But as Pierre points out above, the people import not merely because the value of their country’s currency is high. And, more importantly here, people invest abroad not to merely dispose of ‘excess’ holding of foreign exchange but, very often, to put into action creative entrepreneurial ideas and plans. Capital is created by these entrepreneurial investments. The world’s capital stock increases in size.
By the way, the Foreword to Pierre’s book, written by Dan Griswold and me, is available on-line .