Home > Memes, Monetary Realism > If you can’t get the accounting right, you can’t get the economics right

If you can’t get the accounting right, you can’t get the economics right

January 27, 2012

TC reader Greg had a good idea about a meme for our new Monetary Realism movement.  The idea:

“If you can’t get the accounting right, you can’t get the economics right”

I’d put this right up with:

“Businesses hire when they are swamped with demand”

Nice one, Greg!  I used this exact phrase today in what turned out to be an elevator pitch on Monetary Realism and MMT! We need thinking like this.

Nothing happens until you sell it…

  1. January 27, 2012 at 2:18 pm

    I’m extremely pleased to hear of the Monetary Realism initiative! I’m a big fan of the Founding Fathers, but it’s healthy to have the descriptive even more clearly distinguished from the prescriptive…

  2. January 27, 2012 at 7:29 pm

    I would also add “If there’s no transmission mechanism, there’s no credible causation.”

    • January 27, 2012 at 9:23 pm

      I like that too rogue!

    • TC
      January 28, 2012 at 10:02 am

      Very much agreed. I think MP has a horribly convoluted transmission mechanism. It works, but it has a list of major flaws that make it generally inferior to using fiscal policy. I am writing a post right now for MR about this.

      Most of the flaws of monetary policy can be traced to the fact the major transmission mechanism is through real estate borrowing. MP works because it works through real estate.

      Real estate is a slow-to-execute, massive, huge opportunity cost, high fee, low liquidity, geographically dependent, semi-price insensitive transaction. If you’re looking to fine tune the economy, why would you choose this kind of transmission mechanism for your actions?

      Then, add in Fed signalling. If the fed cuts rates today to stimulate real estate, why jump into a transaction? There is a payoff to waiting for more stimulus, and a penalty for delaying during rate hike periods. This acts against the feds intention.

      I haven’t written that piece on the natural rate of interest, but then you have to try and guess just what the hell that number is. the NRoI:

      Impossible to observe in real time
      Low level of measurement precision even years after the fact
      Probably unstable during business cycle turns (thx JKH from over at Ronglies)
      Probably different for different geographic locations
      Misspecified: Fetishizes inflation over real growth

      Then if you take the NRoI seriously, using MP causes some sectors of the economy to demand bubbles.

      It’s a mess of epic proportions, and I haven’t even started on how MP is anti-democratic, or how business lending and mortgage lending don’t sync up very well and sometimes work against each other and sometimes reinforce each other.

      Then, If the unfortunate monetarist arithemetic is true, well, its true all the time, and not just when the fiscal authority decides to ignore the wishes of the CB and do what it wants. It’s just true and should be used as a policy tool when it’s more effective than MP.

      I think I lay out a good case MP sucks overall if we just take current conventional wisdom as truth.

      Then, add in the wealth effect, the dominance it gives banks over every community in the U.S., the fact it chooses winners and losers as much as even the most directed fiscal policy, and it’s a slam dunk.

      So yeah, I think MR is going to have lots of good stuff coming down the pipe for everyone.

      We’re going to staple the operational realities to the forehead of every economist on the planet. So when they talk to each other, they remember to take them into account first, and not as an afterthought.

      The operational reality of MP is that it works first and foremost through real estate, and real estate is a horrible transmission mechanism. We’re going to staple things like this to their heads.

    • Dunce Cap Aficionado
      January 30, 2012 at 9:11 am

      Cough, (nGDP TARGETING!) cough-cough.

  3. January 27, 2012 at 9:22 pm

    Thanks for the “callout” TC!

    Its really something that has become clearer and clearer to me over time. When you work from a model where money is created in the private sector and then “lent” to the government you are destined to get the accounting wrong. You can never get it right from that starting point.

  4. January 28, 2012 at 2:11 pm

    “Businesses hire when they are swamped with demand”

    Or more broadly:

    People spend more when their future looks bright. Full stop.

    This is true whether they’re spending on housing, wages, drill presses, or bananas.

    It’s the velocity, stupid.

    • TC
      January 28, 2012 at 8:04 pm

      Exactly. I just look for phrases that might stick in peoples minds. Think “elevator pitch” and you’re on the right track.

      “People spend more when their future looks bright.” it’s self-evident. Say this to someone and they *must* agree. That’s a good one, and useful for some very distinct questions. I can easily imagine saying this next time I am on TV. Or make that the first time I am on TV. 😉

    • TC
      January 28, 2012 at 8:06 pm

      This particular phrase will be very useful when in a conversation about consumer or business spending, whereas the “businesses hire when they are swamped with demand” is for jobs oriented conversations.

      Or link them together to for extra fun.

      • January 28, 2012 at 8:13 pm

        I notice that “optimism” and “recovery” are prominent in your word cloud…

        • TC
          January 30, 2012 at 9:15 am

          🙂 Yep.

  5. January 29, 2012 at 10:39 pm

    I think these are very marketable phrases. Not sure about Rogue’s being marketable but it is correct.

  6. TC
    January 30, 2012 at 9:15 am

    Thx Senexx. We’re trying!

  7. January 30, 2012 at 10:56 am

    Just came across this beaut from Scott Fullwiler, article linked by wh10 at shewingthefly…

    “if the hypothesized supply and demand relations are not consistent with the actual changes occurring within the financial statements of the relevant agents, then the hypothesized model is irrelevant. ”


  8. vimothy
    February 1, 2012 at 6:48 am

    I’m not sure–it seems to me that the phrase is wrong in one sense and misleading in another.

    It’s wrong in the sense that it’s fairly easy to think of areas where the accounting is irrelevant: theoretical IO, labour, microeconometrics, information economics, economic growth, health economics, etc, etc, etc.

    It’s misleading in the sense that, even if you get the accounting right, it doesn’t help you to get the economics right–it just prevents you from getting them wrong in one very specific way, i.e., along the dimension of accounting. That doesn’t imply that if you get the accounting right then the economic theory follows naturally. The economic theory doesn’t follow at all. If it did, then we wouldn’t need it!

    • February 1, 2012 at 8:11 am

      @vimothy: “it just prevents you from getting them wrong in one very specific way, i.e., along the dimension of accounting.”

      Very Good Point. Accounting does, but is not *guaranteed* to, show wrongness.

      There is plenty of economic reasoning that is not belied by the accounting, but that is still wrong.

      “That doesn’t imply that if you get the accounting right then the economic theory follows naturally.”

      Right: again, the accounting can’t demonstrate rightness.

    • February 1, 2012 at 8:14 am

      IOW, conformance with the accounting is a necessary but not sufficient condition for rightness.

      • vimothy
        February 1, 2012 at 10:20 am

        conformance with the accounting is a necessary but not sufficient condition for rightness.

        Right, conditional on you being in a relevant domain.

        For example, say that you’re looking at dynamic current account models in international macro. It’s easy to see that the accounting is very important here, which is why we spend so long constructing large consistency accounting and social accounting matrices. The same is true for computable GE models, and so on.

        Here’s a quote that you might appreciate:

        By organizing our data in the form of accounts we can obtain a coherent picture of the stocks and flows, incomings and outgoings of whatever variables we are interested in . . . Given [a coherent set of accounts], we can formulate some hypotheses, or theories, about the technical and behavioural relationships that connect them. By combining facts and theories we can construct a model which when translated into quantitative terms will give us an idea of how the system under investigation actually works.

        J. Richard N. Stone, The Accounts of Society, Nobel Memorial Lecture, 1984.

        • TC
          February 1, 2012 at 10:29 am

          Very much agree with this line of thinking – it’s a necessary but not sufficient condition for good thinking about macro. You still need good thinking about how it all relates.

  9. February 10, 2012 at 9:46 pm

    This is the type of post i have been looking for well written and very informative, Thanks for sharing.

  1. February 1, 2012 at 1:17 pm
  2. February 1, 2012 at 5:58 pm
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