The Balance of International Payments Is Economic Nonsense

by | May 30, 2018

The Balance of International Payments Is Economic Nonsense

by | May 30, 2018

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.
Read more at blog.independent.org.

About Robert Higgs

Robert Higgs is Senior Fellow in Political Economy at the Independent Institute, author or editor of over fourteen Independent books, and Editor at Large of Independent’s quarterly journal The Independent Review.

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