I return to a theme that apparently only I ever talk about: the economic meaning of the phrase, “international capital flows.”
You may think I’m exaggerating. You may think that what I am about to write is widely understood. You would be wrong. Either I’m dead wrong about what I’m saying, or virtually the entire economics profession in the financial press is confused about this topic. You be the judge.
PHYSICAL CAPITAL FLOWS
Let’s talk about physical capital flow. I got this example from Arthur Robinson. He has a research institute in southern Oregon. He built this facility out of spare parts and scrap metal. It is self-funded. There is no government money involved. Robinson is better informed about scrap metal than anyone I know.
A few years ago, he told me this story. An American company that was involved in manufacturing went bankrupt. It offered its plant for sale. Its price was based on scrap metal prices. The company sold the entire plant to a group of Chinese businessmen. The Chinese businessmen sent a crew to the USA to take apart the plant. The crew disassembled the plant, shipped the parts to the West Coast, loaded them onto ships, sent the ships to China, transported the parts to a new location, and reassembled the plant.
This is capital flow. It is capital flow on a scale that we can barely comprehend. It is a real-world example of the transformation of the modern economy. A growing economy moves more and more to the provision of services, especially financial services. Manufacturing is transferred to underdeveloped nations. In this example, it was literally transferred. This process is easy to understand, but it is not often that we see something like this. In fact, we don’t see it. At most, we hear about it. It gets virtually no attention. But there is no question that this is capital flow.
DIGITAL CAPITAL FLOWS
What is called capital flow is not capital flow. We have in our minds some kind of mental image of physical capital flow. Our image is something like that plant that was sold, disassembled, transported, and reassembled. But something like this is exceedingly rare. In other words, we are analyzing the modern world, and especially capital investments, in terms of a mental model that we have never actually seen. So, something is wrong with our conceptual model. When your conceptual model of what happens 24×7 is built on the image of a transaction that almost never happens, you had better start rethinking your conceptual model. Does this make sense so far?
As I have repeatedly written, digital money doesn’t flow across borders. Money flows when we are talking about immigrants in the United States who send hundred-dollar bills back to the folks back home. But that is not what we are talking about when we discuss international flows of financial capital.
(For the rest of my article, click the link.)