TeeJaw Blog

We Would Be Better Off If The Government Didn’t Keep Statistics On The Balance of Trade

Posted in Economic Theory by TeeJaw on Monday, March 7, 2011, 8: 42 AM

We’d be better off because the “balance of trade” doesn’t matter, smart economists don’t care a whit about it, and if there were no statistics on it fools who like to talk about it would be saved from looking foolish. Whenever someone talks about trade “deficits” or “surpluses” you immediately know one of two things about that person. Either he is unschooled in economics or he’s a fool.

Here is what Adam Smith said in his magnum opus, An Inquiry Into the Nature and Causes of The Wealth of Nations (1776) at Book IV, Chapter 3, paragraphs 30-32:

In the foregoing Part of this Chapter I have endeavoured to shew,*93 even upon the principles of the commercial system, how unnecessary it is to lay extraordinary restraints upon the importation of goods from those countries with which the balance of trade is supposed to be disadvantageous.

Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded.[emphasis added] When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false. A trade which is forced by means of bounties and monopolies may be and commonly is disadvantageous to the country in whose favour it is meant to be established, as I shall endeavour to show hereafter.*94 But that trade which, without force or constraint, is naturally and regularly carried on between any two places is always advantageous, though not always equally so, to both.

By advantage or gain, I understand not the increase of the quantity of gold and silver, but that of the exchangeable value of the annual produce of the land and labour of the country, or the increase of the annual revenue of its inhabitants.


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