Monday, July 11, 2016

More thoughts on the concept of the Trade Deficit

Mainstream commentators and analysts taut how the notion of having a trade deficit hurts the economy of the nation receiving the imports. They cite stats and these stats are never given any explanation or rational support. Next, the presuppose that the stats, can provide axiomatic proof that trade deficits are harmful for the economy.  As I have previously stated, the notion of a  trade deficit is fallacious. The notion of free trade benefits all parties involved, as it is a net benefit for the participants in the trade.

Empirical Evidence is misleading

In the attempt to transfer Economcs into a "hard" science, e.g. physics, chemistry, etc, many attempt to employee stats as empirical proof to uncover new Econ "laws".  While these attempts should be applauded for an intrepid effort, the fact still reminds that economics is not a "hard" science, and it's laws are uncovered via rational analysis, as it is done in geometry. Empirical evidence is done ex post facto(after the fact).

A Priori vs A posteriori analysis

Many mistakenly state that economics is a science that is developed using math models, stats and calculus. Of course, these tools are vital in assisting economists in understanding historical outcomes, but the science is developed from a priori analysis. An a priori analysis results in the development of axioms that are universally true and necessary. These things are true, prior to our understanding, cognition and existence. On the other hand, an a posteriori analysis is based upon our personal experience. With the notion of demonstrating the benefits, or better still, the flaws of Free trade, empirical evidence falls short. Empirical evidence must be structured in such a way that it is consistent of the a priori analysis in order for that proof to be relevant.  Critics of free trade use empirical evidence to claim the flaws of free trade. As this part demonstrates, this critique by those critics of free trade falls short.

Free Trade is a Benefit

Free Trade is determined as a benefit, not based on a posteriori, or empirical evidence, is determined by a priori analysis. It is a benefit for both parties involved in the trade. As previously stated on this blog, free trade action is rooted in the law of marginal utility. Both parties improve based on this unequal exchange of value. The accounting of the exchange is equal, despite the false claims by the critics of free trade, but the items traded have varying values respective to the two parties' individual utility ranking of goods. However, since humans are constantly seeking to serve their self interest, both parties are trading for their benefit. It is not a zero sum game, or to wit: trade does not comprise a winner vs a loser in the exchange.


Critics of Free Trade are incorrect in stating that one party does not benefit from trade. This can be proven with a priori analysis. While using empirical evidence is helpful, it is limited in its use to debunk the benefits of trade. Trade, at its core, is between two parties, as both parties voluntarily seek to improve their situation with the end results of the trade. Placing restrictions, barriers, and additional regulation on that exchange, simply makes it more difficult for both parties to win. In short, trade is a win/win for all parties involved. 

No comments: