I delayed starting work this morning by re-reading my hero David Hume’s ‘Of the Balance of Trade’ from Essays, Moral, Political and Literary.
“How is the balance kept in the provinces of every kingdom among themselves, but by the force of this principle, which makes it impossible for money to lose its level, and either to rise or sink beyond the proportion of the labour and the commodities which are in every province? Did not long experience make people easy on this head, what a fund of gloomy reflections might calculations afford to a melancholy Yorkshireman ……. Any man who travels over Europe at this day may see, by the prices of commodities, that money, in spite of the absurd jealousy of princes and states, has brought itself nearly to a level; and that the difference between one kingdom and another is not greater in this respect than it is often between the different provinces of the same kingdom.”
Think northern vs southern Italy, and Milan vs Munich.
What matters, Hume argues here, is the “art and industry” of every nation – or province. The equilibrating flows can be blocked – “as any body of water may be raised above the level of the surrounding element” – but real is real and balances balance. If there is a large and persistent trade surplus in one area, and no exchange rate adjustments, the capital account consequence is inevitable.
Still, we are in for a deal more “absurd jealousy” before the Eurozone saga is over.
I have this Hume essay in the Essays volume but also in one of those fantastic old Penguin modern economics readings collections, International Finance edited by R.N.Cooper, published in 1969. The collection runs from Hume’s 1752 essay to 1967. There are tons of handbooks these days that aim to encapsulate the state of knowledge at the frontier (I say encapsulate but they are usually large tomes). It would be great to have the concise historical progressions once again – perhaps as web portals. Income distribution from Ricardo and Marx to Atkinson and Piketty. Financial bubbles from Jevons through Minsky to Farmer?