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An Economy Is an Order, Not an Organization

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Here’s a letter to a new Cafe Hayek reader, Ben Walker:

Mr. Walker:

In response to my quoting Bob Higgs on politicians’ misunderstanding and misuse of the accounting artifact known as the international balance of payments [2] you ask: “Without this accounting how can we know how much we buy [from] and sell to foreigners? How would we know if we are net debtors or creditors?”

My answer is simple: there is no “we” who buys from or sells to foreigners, or who borrows from or lends to foreigners. You buy from, and sell to, foreigners. I buy from, and sell to, foreigners. The shareholders of Apple buy from, and sell to, foreigners. But beyond what the U.S. government does in our name, we Americans as a unitary group do not buy or borrow from, sell or lend to, or otherwise engage commercially with foreigners.

Unlike you, unlike your household, unlike the business that employs you, unlike your community swimming pool, unlike the S.P.C.A., unlike the U.S. government, the American economy is not an economic entity with a budget or a bottom line. The American economy buys nothing and sells nothing. The American economy borrows no money; it lends no money. The American economy does not invest or disinvest. The American economy does not earn profits or suffer losses. The American economy cannot go bankrupt.

Unlike individuals, firms, clubs, nonprofit organizations, and governments, the American economy is neither a flesh-and-blood person nor a legal entity. It neither acts nor has a net worth.

The American economy is simply the name that we give to the unplanned order that is constantly emerging and changing from the trillions of different decisions made daily by individuals and firms and other organizations – not all of which are American – as each of these agents pursues its own independently chosen goals within a price system and mix of social and legal institutions that prompt each to adjust to the otherwise independently made decisions of others.

And because the American economy – unlike your household or your employer – is an unplanned, emergent order, it has nothing that can be described as a goal or ‘purpose.’

A huge problem caused by international commercial accounting is that it conveys the mistaken impression that the American economy is, like a corporation, a purpose-driven organization with a budget. It is not. It is an emergent order without purpose. It has no budget and, hence, any ‘accounting’ made of it as if it is a purpose-driven organization with a budget is hogwash.

Not only do the numbers in these accounts not mean what most people take them to mean, they are largely without any meaning at all – a fact that causes almost all meanings that are imputed to them to be mischievous.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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