Russell Roberts's Blog, page 5
June 26, 2023
Bonus Quotation of the Day…
… is from pages 414-415 of my late Nobel-laureate colleague Jim Buchanan’s 1986 paper “Politics and Meddlesome Preferences,” as this paper is reprinted in James M. Buchanan, Politics as Public Choice (2000), which is volume 13 of the Collected Works of James M. Buchanan (footnote deleted):
There is no such rough matching of costs and benefits when the resolution of conflicts in social interdependence is approached through political mechanisms….
If I can resort to politics to impose my own preferences on the behavior of others, even if these preferences are not highly valued intrinsically, then it would seem that other persons, working in democratic process, can do the same to me. I may find that the political process is double-edged. If it can be used to my advantage in imposing my personal preferences over the behavior of other persons, it can be used to my disadvantage in imposing the preferences of others on my own behavior. I may gain a few pennies’ worth of utility by the regulation against leaf burning, but find that possessing a handgun in my house is politically prohibited. And it may happen that I very strongly value the liberty to possess a handgun. The political process, which is allegedly open equally to all citizens, is evenhanded here. It generates a few pennies’ worth of utility to me in restricting my neighbor’s leaf burning; it generates a few pennies’ worth of utility to my neighbor by outlawing the possession of handguns. But, in doing so, it imposes many dollars’ worth of loss on me through preventing my possession of a handgun and imposes many dollars’ worth of damage on my neighbor who highly values the liberty of burning his or her own autumn leaves.
DBx: Why is this indisputably correct point ignored by so very many people?
I understand why this point is ignored by politicians: The time span about which politicians care extends no further than the next election. I don’t, however, understand why this point, as explained here by Buchanan, is ignored by so very many people who are not running for political office. Why, for example, do non-office-holding advocates of “common good capitalism” not understand that even if the government today intervenes in ways to better serve the preferences of these advocates, the government is very likely tomorrow to intervene in ways that treat those preferences with contempt – to intervene in ways that promote the preferences of individuals whose understanding of “the common good” differs quite a lot from the understanding of advocates of “common good capitalism”?
Is This a Spoof?
I pose a serious question: Is this paper – abstract below – a spoof?
I sincerely hope that it’s a spoof, as I don’t want to believe that the economics profession has fallen so far as to have some of its members produce such nonsense. But I fear that this paper is real – that is, offered by the author seriously. (I thank Roger Meiners for alerting me to this bit of ‘research.’)
ABSTRACT: This paper presents two key points. First, nature does not need humans, but not vice versa. Second, humankind currently violates the asymmetrical value relationship between people and nature. Regrettably, it seems that economists who play an important role in devising policies have a misconception of the true value of nature/environment, which leads to their neglect and recklessness when allocating and consuming resources/environmental capital. In light of mindsponenvironment, a subset of mindsponge theory and mindspongeconomics (a new economics), nature serves not only as sources of life but also as valuable information for knowledge and innovation formation. From this view, if humans (particularly economists) learn more from nature with humility, humankind would have a greater opportunity to solve environmental issues and make our world better.
Let’s Dethrone the “Balance of Payments”
Observed straight-on and honestly, the case for protectionism as a means of increasing the nation’s prosperity is laughable. Even first graders understand the silliness of arguing that people will have greater access to goods and services if and when the government artificially restricts people’s access to goods and services. Protectionism is the economic equivalent of the argument that 10-3=15.
To hide the absurdity of protectionism, therefore, its peddlers display it to the public amidst smoke and mirrors – a deception that apparently fools not only the audience but, often enough, also even the peddlers themselves. And there’s no smoke more thick or mirrors more distorted than assertions about the balance of trade. To clear the smoke and straighten the mirrors, it’s helpful to review the origins of the concept of the so-called “balance of trade.”
The balance of trade – the ‘balance’ between the value of a country’s imports and the value of its exports – dates, as a concept, back to the era when the crown thought of itself, and people thought of the crown, as the embodiment of the nation. In that context the concept made some sense. Louis Rex had to maintain a household, a court, and, most importantly, an army. And so he needed revenues to cover these expenses. If his revenues regularly fell short of his expenses, he was doomed to become Louis Ex-Rex or, more likely, Louis the Late.
In Louis’s mind (and those of his ministers), country, government, and national economy are all synonymous. It’s a short step from this conception of the nation and its economy to the conclusion that the national economy is an organization akin to a business firm – an organization the economic performance of which can be described with accounting concepts and tools such as a balance sheet and an income statement. The owners and managers of this economy – this ‘Nation, Inc.’ – of course were Louis and his ministers. And they strived to manage the nation just as every profit-seeking business is managed: to produce goods for sale with the goal of having revenues on those sales exceed as much as possible the costs of producing those goods.
Just as a private firm profits by producing goods for sale to entities outside of itself – to consumers and to other firms and organizations – Louis’s realm profited by producing goods for sale to entities outside of itself, namely, to people in other countries. And the greater were these export sales relative to the amount of money Louis’s realm spent on imports, the higher were the ‘profits’ of Louis’s realm.
Given this notion of the nation’s economy, citizens were thought of chiefly as sources of revenue. They existed, not for themselves and their families, but for the benefit of Louis and his court. Whenever Louis’s subjects imported stuff, this stuff was paid for with money – back then, mostly gold and silver. So imports caused money to flow out of Louis’s realm, causing for Louis’s realm an unambiguous outflow of wealth. But whenever these subjects exported stuff, money flowed into Louis’s realm, increasing the realm’s wealth. Thus, the greater the excess of exports over imports, the greater the net inflow of money – of profits – into Louis’s realm. To maximize Louis’s profits, importing was discouraged while exporting was encouraged.
…..
The most confusing of all mercantilist terms, the reader will now not be surprised to learn, are “favorable balance of trade” and “unfavorable balance of trade.” Because the ultimate goal of all economic activity, including trading with foreigners, is to increase one’s ability to consume, describing as “favorable” a situation in which the people of the home country ship many real goods and services to foreigners and receive in exchange lesser amounts of real goods and services, with the difference made up in money, is indeed – as Adam Smith called it – absurd. But this language today nevertheless persists, subtly building in the minds of both speakers and listeners a bias against imports and a misunderstanding of the purpose of exporting.
The single most mistaken mercantilist presumption is that the nation is a giant productive unit the performance of which can be adequately gauged and portrayed with the same accounting tools, especially balance sheets and income statements, that are indispensable for measuring the performance of companies. But an economy’s performance cannot accurately be so gauged and portrayed. Unlike a profit-seeking company, an economy doesn’t exist to maximize the amount of money it brings in, net of its costs, on sales of its outputs. Yet the practice of nevertheless classifying international purchases, sales, and investment flows as if these are the transactions of a single, giant, profit-seeking corporation persists. The resulting confusion isn’t merely academic; it spawns attitudes towards trade – and, hence, spawns trade policies – that are economically destructive.
Some Links
Arnold Kling argues convincingly for the privatization of the regulation of banks. A slice:
The Federal Deposit Insurance Corporation (FDIC) does a poor job of dealing with moral hazard. The problem arises in part from the fact that its employees have no skin in the game; they get paid regardless of whether the FDIC manages the banking system well. SVB’s failure did not lead to the firing of a single FDIC employee, even though the event was widely viewed as a regulatory debacle. Instead, the costs of the FDIC’s missteps passed to bank shareholders in the form of higher assessments, which will be used to refill the FDIC’s insurance fund.
[Clarence] Thomas’s antipathy toward any form of discrimination by race is rooted in his own life story.
The future Supreme Court justice was born in the segregated Deep South and knew the stinging bigotry of Jim Crow at first hand. He attended the College of the Holy Cross in Worcester, which recruited him as part of a program to attract black men as undergraduates. In 1971, when Thomas entered Yale to study law, the school’s stated goal was for 10 percent of incoming students to be nonwhite. Though Thomas initially reveled in his admission to Yale, he soon felt the stigma of being there because of his race.
“I learned the hard way that a law degree from Yale meant one thing for white graduates and another for blacks,” he later wrote in his poignant autobiography, “My Grandfather’s Son.” He had done well at Yale, but the law firms he subsequently interviewed with made it plain that they applied an affirmative action discount to his Ivy League credentials and assumed he wasn’t really as smart as his grades indicated.
Conventional wisdom read the outpouring of protest against Mr. [Sebastian] Piñera’s center-right government as the end of the free-market model that made Chile the envy of the developing world.
“They thought the traditional right was dead,” says José Antonio Kast, founder of Chile’s Republican Party, which was established that same year. “We didn’t believe it,” the 57-year-old former congressman and presidential candidate told me in an interview at the offices of the party’s think tank here on Rapallo Street.
Mr. Kast and his Republican cohorts instead read the protests as an expression of widespread frustration caused by the stagnation of economic growth and wages over a decade, crony capitalism, and impunity for political elites. With that in mind the Republican Party, consisting of many disappointed refugees from other center-right parties, went to work at the grass roots. Their goal was to revive political support for the economic liberalism that had been ditched by Socialist President Michelle Bachelet and that Mr. Piñera failed to defend.
Chileans have come to expect mobility and opportunity, Mr. Kast says. But to get there they need choice in education, pensions and healthcare; flexible labor markets; property rights; and a smaller and more accountable state.
“What am I bid for this fine EdD?” (HT George Leef)
Fraser Nelson is correct that “even now, capitalism is the greatest hope for Britain and the world.” Two slices:
The most important intellectual discovery of my life came 20 years ago in the pages of Slitz, a sadly defunct lad’s magazine which wasn’t quite as risqué as it sounds. I was trying to learn Swedish and the few words that it printed were about my level. So I’d sit in a cafe with a dictionary and notebook, seeking to learn. Under such circumstances I came across an interview with Johan Norberg, an economist then in his twenties, entitled “Kapitalist? Javisst!” – (“Capitalist? Yes, sure!”). I tracked down his book, and my world changed.
I’ve since been told by far more erudite friends that Norberg’s work is nothing new, just a restatement of arguments made by Friedrich Hayek, Ludwig von Mises and Karl Popper. But they were writing about theory: Norberg had it all backed up with contemporary evidence. The collapse of communism had started a new experiment: what happens when the free market really does go global? The results were coming in by 2001 and Norberg collated them. Every day in every way, things were getting much better. We were – and still are – living in a golden age.
Since then, this thesis has been proved a thousand times over, but something strange has happened. As capitalism’s achievements piled higher, the more unpopular it seemed to become. Its wins have been taken for granted, its defects magnified as never before. The big charities, which witnessed free trade cutting poverty faster than any scheme of handouts, seemed to hate it the most. A generation has since grown up marinated in capitalism’s success, yet convinced of its failure. What’s going on?
…..
In Britain, too, capitalism remains our best hope. The free market has doubled household income in my lifetime, even after inflation, even after current woes. The young have seen post-crash incomes stagnate and Bank of England money-printing distort the economy by pushing house prices out of reach – but this was not the free market. Nor was the hundreds of billions printed to finance lockdowns.
Why is inflation so high? Because banks printed so much money to bankroll lockdowns: a result of distorting capitalism.
My former Mercatus Center colleague Bob Graboyes makes the case that economics is indeed a science. A slice:
Science is a process for accumulating, organizing, and testing knowledge—not a recipe book for controlling what is under observation. Meteorologists cannot control the weather, and yet meteorology is undeniably science. Virologists, even those empowered to micromanage civic life, could not will COVID to depart our shores; and yet, virology is undoubtedly science.
Yet it wasn’t Mr. Kennedy’s well-worn criticisms of vaccines or his calling pharmaceutical companies a “criminal enterprise” that racked up clicks. It was his claim that chemicals in the water supply—specifically the herbicide atrazine—are driving an increase in “sexual dysphoria” that is causing boys to believe they are girls. “They’re swimming through a soup of toxic chemicals today, and many of those are endocrine disruptors,” Mr. Kennedy claimed.
Journalists were quick to “fact check” him, noting that the frog study he cited as evidence wasn’t directly applicable to humans. That’s correct—but it was unusual to see the press shower a dubious environmental claim with appropriate skepticism. All too often they parrot such questionable assertions, including the notion that chemicals disrupt hormones.
Liberals deride Mr. Kennedy for his antivaccine activism, but it flows from the same fanatical font as the environmental zealotry they too have embraced. No doubt the mainstream press would deny the similarity, but Mr. Kennedy affirms it. In interviews he has traced his vaccine activism to his work on mercury pollution from coal plants, which he claims based on thin evidence cause brain damage and cancer. He also claims a tenuous link between thimerosal, a mercury-containing preservative used in some vaccines, and childhood autism.
Most of his claims about vaccine dangers aren’t any kookier than those that he and his green allies have made about fossil fuels.
As I have argued in a number of forums, the idea of “price-gouging” as an abuse of monopoly power is not just wrong, but actively harmful. It’s true that sellers may make excess profits in a period of shortage or emergency, but the profit signals that come from “high prices” are by far the best means of ending the shortage quickly.
…..
There is a strong movement in Washington, among progressive legislators and regulators, to reverse the presumption in cases of antitrust enforcement. What that means is that instead of innocent until proven guilty, any firm would be required to prove that its pricing and production decisions were not monopolistic. This is a terrible idea for many reasons, but perhaps the most important is the “damned if I do, damned if I don’t,” position in which it puts large firms. If they charge high prices, they are monopolies, if they compete on price they are colluding, and if they charge low prices they are predating. If this perspective wins the day, I see dead policies.
Prof. Freedom tweets: (HT Jay Bhattacharya)
WOW 🇸🇪: No lockdowns, No mask mandates, No school closures, hotels, shops, restaurants, bars, sports facilities always open.
Result: Lowest excess mortality in Europe. Source: BBC !!!
➡️ Covid restrictions will go down in history as a public health disaster.
Quotation of the Day…
… is from page 512 of the 1988 collection of Lord Acton’s writings and notes to himself (edited by the late J. Rufus Fears), Essays in Religion, Politics, and Morality; specifically, it’s a note drawn from Acton’s extensive papers at Cambridge University:
Men cannot be made good by the state, but they can easily be made bad. Morality depends on liberty.
June 25, 2023
Economic Reasoning Shifts the Burden of Persuasion Onto Opponents of a Policy of Unilateral Free Trade
This comment is the second – following this one from yesterday – of my responses to EconLog commenter Steve’s reasonable request that I and other supporters of a policy of unilateral free trade supply empirical evidence that justifies our support. Here I ask: Why put the burden of persuasion on proponents of unilateral free trade rather than on proponents of some other trade policy?
I genuinely understand and accept – indeed, applaud – the desire to test with empirical evidence all relevant positive claims contained in theories used to justify government policies. But because time is scarce, we can’t test every claim. We use presumptions – priors – to tell us which claims are sufficiently tentative and important to warrant testing. If we can, we test these claims. But we don’t test claims that are so ludicrous as to be dismissible out of hand. Nor do we test claims that are sufficiently credible that to test them would likely do nothing more than to confirm the obvious.
Our presumptions and priors can and should be informed and shaped by economic reasoning. Economic reasoning tells us, for example, that imposing a tariff on imported potato chips will raise the prices that consumers of potato chips confront. And we know this relationship to hold even if potato chips had never before been tariffed. We would regard as blockheaded someone who expressed doubt as to the consequences of a potato-chip tariff on the domestic prices of potato chips, and who asserted that it’s impossible to know if a potato-chip tariff will raise the domestic prices of potato chips until it’s been empirically demonstrated to do so.
So where does the case for unilateral free trade fit into the above?
I’m tempted to say only that the overwhelming empirical reality that voluntary trade is beneficial is sufficient to make the case for a policy of unilateral free trade. Sam voluntarily buys for $100 the gadget that Lily is selling. We know that Sam believes himself to be made better off by this trade, and we know also that Sam’s benefit from this exchange doesn’t vanish if Lily is in the habit of stuffing all of her dollars into a mattress from which she will never remove them. This unilateral trade redounds to Sam’s benefit even as poor misguided Lily suffers self-inflicted economic harm. Understanding this simple reality goes a long way towards empirically (although not statistically) establishing the benefits of a policy of unilateral free trade.
But I resist this temptation, for good reason. As Steve correctly notes, many people understand that bilateral free trade makes sense, but they believe also that unilateral free trade is harmful to any country that practices it.
Here’s where economic theory is even more useful, especially given that history supplies only very few instances of national governments following policies of unilateral free trade. Correct use of economic theory reveals relevant and telling similarities that often otherwise go unnoticed. Consider Bastiat’s “Petition of the Candlemakers.” This essay by Bastiat is a clever way to point out that we earthlings practice unilateral free trade with the sun despite the sun’s stubborn refusal to purchase anything that we produce.
Are we harmed by accepting sunlight and warmth from the sun free of charge? Of course not. So why would we be harmed by accepting valuable outputs from other countries at no or unusually low cost to us? If many people in Japan or Mexico wish to give us gifts, how are we harmed economically? Why should we accept their gifts only on condition that they accept from us gifts of at least an equal size?
More fundamentally, economic theory is useful in dispelling a terrible misconception that many people have about trade. Much of the hostility to unilateral free trade arises from the presumption that the gains from international trade are exports while imports are a cost. If this presumption were correct, then indeed a policy of unilateral free trade would be destructive. But once it is revealed that exports are a cost of obtaining the benefit of international trade, which is the inflow of imports, then a policy of unilateral free trade makes so much sense that to demand empirical support for the value of unilateral free trade comes no longer to make sense.
Economic theory, in short, puts the burden of persuasion solidly on those persons who oppose a policy of unilateral free trade.
Bonus Quotation of the Day…
… appears on the 177th anniversary of the repeal in Great Britain of the corn laws; specifically, this quotation is from Steve Davies’s January 16th, 2015, post (“What Cobden Has Wrought“) in a Liberty Matters discussion titled “Richard Cobden: Ideas and Strategies in Organizing the Free-Trade Movement in Britain”:
Cobden successfully brought about a radical shift in the popular perspective, from a focus on the interests of producers to those of consumers. This of course was strongly contested, and the idea that production takes place in order to create jobs rather than to produce goods for consumption is still very popular. However, polls and other tests of opinion in the United Kingdom repeatedly show that the majority of the British public continues to take the consumer-oriented position. This is a simple change of thinking and perspective that has profound and extensive consequences. The interesting contrast is with the United States, where producerist arguments continue to have enormous popular purchase and there is an entire genre of popular economic writing that calls for protection and other measures to boost production at the expense of consumption. There is no counterpart to this in the United Kingdom.
Some Links
One of the most important insights of James’s book is that severe political and economic upheavals have in many cases accelerated globalization. The second half of the nineteenth century is often seen as a type of golden age for the global integration of the world’s economies. James demonstrates, however, that the roots of this globalization are to be found in crises.
“The surge of interconnectedness in the nineteenth century,” James states, “started as a response to a shock: the harvest failures, famines, and then financial and business collapse of the mid-1840s.” These events were accompanied by the liberal-nationalist revolutions that swept Europe in 1848.
The sheer scale of these upheavals should, one might assume, have undermined the growing degree of cross-border economic integration that Karl Marx had noticed and which, he believed, enhanced society’s vulnerability during crises. The contrary, however, occurred. The experience of economic misery caused people and many governments to look not inwards but outwards.
In the face of food shortages, for example, countries sought to obtain supplies from other nations. It made little sense for buyers or sellers to be protectionists in such conditions. Likewise, many people reacted to economic hardship and political chaos by moving to the Americas and far-flung British colonies in the Southern Hemisphere. Cross-border monetary integration eventually followed as the foundations of the international gold standard were laid to re-establish monetary stability. Similarly, capital became more mobile as bankers engaged in financial innovations that helped them overcome widespread banking failures.
Jack Salmon explains that it’s unconstitutional to tax unrealized gains.
Reason interviews Adam Smith – that is, Adam C. Smith, GMU Econ alum and grandson of Bruce Yandle.
Richard Hanania correctly observes that “at the ideological core of the free market position is epistemic humility.” (HT Roger Meiners) Two slices:
Take the issue of whether a nation should have an industrial policy, which is defined as a strategic effort to develop specific parts of a national economy, or manufacturing in general. A country may decide it wants to, say, manufacture cars, rather than let the market send price signals about what its citizens should be doing.
When I hear such plans, I’m taken aback by the faith it puts in intellectuals and politicians. At most, I think the smartest human beings might be capable of being small cogs in vast machines that no one can understand or control. I trust that the guy who runs a single car factory, or the logistics manager of a major hotel chain, might know what he’s doing in his limited domain. I am, in contrast, inherently suspicious of those who think they have answers to questions like “What kinds of jobs should most people have?” or “Which goods should we manufacture at home instead of buying from China?” If you believe that you have 20 extra IQ points on proponents of industrial policy, but it would take a superhuman AI to even have the possibility of doing central planning well, is that arrogance or humility? Sounds like arrogance relative to fellow humans, but humility in the sense of understanding your limitations.
Markets take into account the information necessary to allocate goods and resources in efficient ways. Through the price system and individuals making decisions that they’re directly responsible for, they provide answers to an endless array of questions that no central planner can even begin to consider and weigh in their entirety.
Is your nation any good at making cars? Are the people culturally or temperamentally suited for that kind of work? Would forcing them to manufacture their own cars make them better off than just doing whatever produces the most value and then buying cars from other nations? Are you sure, from all the goods and labor it takes to produce a car, the market can’t figure out a better way to create wealth or make technological breakthroughs? Can the supply chains for each product that goes into making a car be put together at a reasonable cost? What are the second and third order effects of distributing resources toward what are, based on the choices of those who could risk their own money, inefficient uses?
Many conservatives who support industrial policy seem to see economic efficiency as no more than a secondary concern. They somehow think manufacturing jobs are better for people getting married, forming families, and instilling virtue. As someone with a background in the social sciences, I find the idea that one can not only plan an economy, but also predict the cultural impacts of an economic policy to be absurd. That project is way beyond any tools that we have. Just because in previous decades the US had better manufacturing jobs and higher rates of family formation does not mean one can recreate through trade policy the culture of Eisenhower’s America. This is pure cargo cultism.
When I read through the website of American Compass, I see hubris masking what is little more than a stream of non-sequiturs.
…..
Epistemic humility is not the same as epistemic nihilism. The study of history, social science, and data gives us some very clear signals. Markets are better than central planning. Free societies are better than unfree ones on a wide variety of dimensions, whether we want to measure objectively through things like GDP or subjectively based on where people want to live. Genetics determine differences in outcomes, and denying that will lead to foolish interventions. Territorial aggression is a bad thing and should be stigmatized and resisted. The naturalistic fallacy is a terrible guide for ethics or public policy. So we know quite a few big and important things.
Yet we should draw a line in the sand and be completely honest about what we don’t know: things like the net impact on national well-being of cultivating any particular industry; how different economic policies have downstream effects on culture; and how to make tradeoffs with regards to planning for different stages of life. In the case of direct externalities, of course, government intervention can be justified. The state might not be particularly good at solving the problems that the actions of individuals cause for third parties, but here it arguably at least has to try. The more indirect and theoretical the harms that a government is trying to prevent, and the more a policy requires superhuman foresight on the part of state officials, the more skeptical you should be.
Quotation of the Day…
… is from page 372 of economic historian Alexander Field’s excellent 2022 book, The Economic Consequences of U.S. Mobilization for the Second World War:
In 1948 the United States stood astride the world, both militarily and economically. Japan, having endured two atomic bombings and the earlier fire-bombing of Tokyo and most of its larger cities, lay prostrate. Germany and much of Europe were in ruins. The Soviet Union had suffered 20 million war-related deaths. England had sold off much of its remaining overseas economic empire to pay for military spending. The United States appeared relatively unscathed, and it was easy to connect the country’s success in producing hundreds of thousands of aircraft and other military hardware with the level of its potential output after the war and the large productivity gap between the United States and the rest of the world then evident. But the connection is a mirage. The economy’s postwar capabilities are almost entirely attributable to conditions already in place in 1941.
DBx: Diverting physical and human capital into the production and use of military materiel of course is necessary to wage effective war. But any such diversion will worsen rather than improve the operation of the economy at producing and distributing non-military goods and services. This reality as it played out in the United States just before, during, and after the Second World War is amply and carefully documented in Field’s book. The fact that waging war is not a source of economic growth or prosperity is shown – contrary to countless fables – by America’s experience with WWII.
June 24, 2023
Worrying About the ‘Balance of Trade’ Is Like Worrying About Witches
Here’s a letter to a long-time reader of my blog:
Mr. Z__:
Responding to this post, you write that you can no longer take me seriously because of my “dogmatic refusal to acknowledge the grave dangers of trade deficits.”
Who you do and don’t take seriously is solely up to you. In the end, such decisions are personal. But do note that Americans last ran an annual trade surplus in the year (1975) that I began my senior year of high school. Because I will in just under three months reach the conventional retirement age of 65, you’ll forgive me for being skeptical of the claim that trade deficits – which have run for every single year in the U.S. during the entirety of my adult life – pose grave dangers to ordinary Americans.
I simply do not understand why we Americans should fear foreigners’ eagerness, year after year after year, to invest on our shores more capital than we invest on their shores. Doesn’t the reality of this investment demand speak well, rather than poorly, of the American economy? Seems so to me.
Nor do I understand why anyone would suppose that the annual net inflows of investments to America are somehow dooming the American economy to destruction. Can you tell me precisely why you predict such doomnation?
My bottom line is this: Worrying about – or even paying a split-moment’s attention to – the balance of trade is foolish. The balance of trade is a pre-modern concept, the fretting about which is medieval. I leave you with this observation from nearly a century ago by the great British economist Edwin Cannan:
But even so we manage to carry on, and whether on or off the gold standard we certainly shall not benefit by reviving the three-hundred-year-old and long-ago exploded superstition that the balance of trade must be watched over and kept right by Parliament – a superstition which can only be ranked with the once equally widespread belief that witchcraft must be smelt out and witches burnt at the stake.*
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
* Edwin Cannan, “Balance of Trade Delusions,” Sidney Ball Lecture, November 13th, 1931, page 17.
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