… is from David Hume’s pioneering 1742 essay “Of the Balance of Trade” (here from page 310 of the 1985 Liberty Fund collection of Hume’s essays, edited by the late Eugene Miller, Essays: Moral, Political, and Literary):
It is easy to observe, that all calculations concerning the balance of trade are founded on very uncertain facts and suppositions.
DBx: This fact – which today is no less true than it was in the mid-18th century – is one reason why most of the economic conclusions drawn from balance-of-trade (or balance-of-payments) figures are unwarranted.
Among the many faulty suppositions is that the amount of capital in the world is fixed, so that if (for example) a Spaniard buys from an American $1,000,000 worth of stock in Apple, Inc., it is supposed that Americans as a group are thereby worth $1,000,000 less – and will remain so unless and until the balance of trade turns in America’s “favor.” It is supposed that the $1,000,000 worth of assets sold by an American for dollars to a non-American represent $1,000,000 worth of assets that, on net, flow out of American ownership to non-American ownership.
Yet shouldn’t we ask what the American does with the $1,000,000 she receives in exchange for her Apple shares? Suppose – not unrealistically – that the American uses the $1,000,000 to open a new restaurant in Reno, one destined to be successful. (And let’s here ignore the possibility that the value of the Apple stock will fall after it is purchased by the Spaniard.) Especially if we recognize that the value of Apple stock is made higher by the fact that foreigners are able to bid for it, and to own it, in what way has this American’s sale of Apple stock to a non-American caused America’s net asset position to fall? Contrary to standard interpretation, it hasn’t.
This example is but one of an uncountable number that can be constructed to expose the arbitrariness, artifactualness, and – ultimately – the ridiculousness of nearly all of the conclusions drawn from balance-of-trade (or balance-of-payments) figures.