Friday, December 08, 2006

Don Boudreaux Precisely Right; Robert Samuelson Precisely Wrong

Robert J. Samuelson writes an Op-Ed (‘Dangers in a Dollar on the Edge’) about the US ‘trade deficit’, much along the lines of many commentators across the world. Don Boudreaux, in his Blog Café Hayek (‘where orders emerge’) reports today on his letter in reply to the Washington Post:

‘Mr. Samuelson should take to heart
Adam Smith's recognition that "Nothing, however, can be more absurd than this whole doctrine of the balance of trade."*
The Wealth of Nations, Book IV, Chapter 3, Part II.’

The ‘balance of trade’ was a live issue in mid-18th century Europe. At root it was part of the errors of Mercantile political economy that Smith conducted his ‘very violent attack on the whole commercial system’ in Book IV. If you believed that it was a serious problem if your country imported more than it exported, combined with a belief that gold and silver were coincidental with wealth, then policies to attract gold and silver by keeping what you had in the country through prohibitions on its export, and to increase exports to receive in gold and silver belonging to foreigners made sense.

The consequences from Mercantile policies to hoard gold silver bullion (handy too when the sovereign sent armies and fleets abroad in pursuit of war aims) were to severely distort the distribution of productive capital and labour away from those activities where individuals judged in their own self-interest that they would make profits and thereby maximise national output (real wealth).

Smith’s assessment of the bullion hoarding fallacy, when added to his analysis of the productive use of capital and labour (Book II), presents a rounded political economy which marks out his thinking and his contribution to public policy. Even Richard Cantillon slipped up on the balance of trade, and the French Physiocrats were wrong about ‘sterile’ labour in manufacturing.

Don Boudreaux gets it precisely right (as he so often does in his lively Blog at

Thanks to Boudreaux for drawing our attention to the exchange with Robert J. Samuelson at:


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