Charles H. Carroll (1799-1890) was a Maryland and Massachusetts merchant who wrote on economics often with surprising insights. In a 1862 article reproduced in his book Organization of Debt into Currency and Other Papers, he destroyed the myth of the unfavorable balance of trade in two sentences (emphasis in original):
The balance of trade, that has occupied so extensively the thoughts of politicians, is a chimera. The balance of profit is in our favor only when our return cargoes exceed the outward in value; in other words, when our imports exceed our exports.
A protectionist might reply that “profit” means selling for more than inputs have cost and thus implies a higher value of exports than imports. But this assumes that imports are merely inputs in the production of exports and that the profits of producers, instead of consumer utility, is what counts. A reductio ad absurdum of this approach comes from realizing that exporting everything and consuming nothing would be economic nirvana.
It can be argued that the only way of escaping Carroll’s conclusion is to realize that the balance of trade is meaningless in an individualist (political or methodological) approach to society. Each individual or corporate body takes care of his own balance of trade, and whatever collective balance of trade emerges has no more economic significance than if we discovered a deficit in the trade balance of the group of individuals shorter than average vis-à-vis the taller ones.
READER COMMENTS
Benjamin Cole
Feb 25 2019 at 5:22am
A world without nations might be a better place, for many reasons, including wars. Perhaps an anarcho-capitalist world would be better. Yet to be tested in the real life. I won’t say the Mongol hordes were anarcho-capitalists….
But for now, we are stuck in nation-states, with central banks, thick law books, tax codes and the like.
Like most people, I make my way best I can, even if not strictly a “price-taker” in every circumstance, certainly powerless in the larger scheme of things.
As such, my economic fortunes (let alone relative freedoms) are bound up in the fortune of my (usually inherited) nation-state. If my nation-state prospers, then to a greater extent, so will I.
Large and chronic current-account trade deficits, given high structural impediments in place, are not good for the nation’s economy, or the labor force.
Pierre Lemieux
Feb 25 2019 at 3:02pm
Benjamin,
“Large and chronic current-account trade deficits, given high structural impediments in place, are not good for the nation’s economy, or the labor force.”
Even without nation-states, there would be trade deficits and trade surpluses between regions and groups of people. (For example, the young have trade deficits, the old trade surpluses.) You are right that trade deficits would not be caused by government deficits or surpluses as much, but then the latter are the culprit, not the former. On the contrary, trade deficits could be seen as a way for individuals to minimize the impact of budget deficits.
David Henderson
Feb 25 2019 at 10:34am
Pierre Lemieux,
I disagree with Carroll. “We,” meaning the United States, could export, say, $2 trillion in a year and import $1.8 trillion, giving us a trade surplus of $200 billion. That would mean that “we” acquired $200 billion in currency or in investments in stocks, bonds, or direct investment in other countries. If that came about due to a free market and no government distortions, it would be ideal. QED.
Don Boudreaux
Feb 25 2019 at 11:13am
David,
Unlike you, I do agree with Carroll. Ultimately any money or financial assets that we acquire from foreigners in exchange for our exports are of value to us only because they can – and presumably one day will – be converted into real goods and services supplied to us by foreigners.
You are correct that it’s incorrect to describe us as ‘losing’ if during some period (or string of periods) we happen to run a trade surplus. But the point of Carroll’s remark is to debunk the widespread and distressingly deeply held mistaken mercantilist notion that imports are costs while exports – or the piles of money they bring in as such – are benefits.
…..
At the risk of diving here too far into the weeds, I have never liked the habit of treating producer surplus equivalently with consumer surplus. Because consumption is the ultimate purpose of economic activity – and because production is only a means (albeit a necessary one) to further consumption – ultimately producer gains must be reckoned in terms of the amounts that these gains enable producers to consume.
Pierre Lemieux
Feb 25 2019 at 11:41am
“At the risk of diving here too far into the weeds, I have never liked the habit of treating producer surplus equivalently with consumer surplus.”
I think we should dive in these weeds. (Or in other terms, you have opened a real can of caviar.) I would add another reason to the one you give. Producer surplus is only good because it is used to buy goods and services on other markets. It is a product of partial-equilibrium analysis. In his 1968 AER article “What Is Producer Surplus,” E.J. Mishan argues (in a somewhat different way) that producer surplus only exists in the short run and that, even in that case, it has no clear welfare interpretation. The last two paragraphs of Chapter 10 in his Cost-Benefit Analysis (3rd edition) makes this easier to understand.
Pierre Lemieux
Feb 25 2019 at 11:34am
I would be more on Don’s side. Moreover, I find difficult to give any meaning in a statement of the sort “the United States owns foreign assets”–except if one means “the US government.”
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