Economists’ perennial trouble with accounting

Comment on Steve Keen on ‘Hey Joe, banks can’t lend out reserves’

Blog-Reference

Steve Keen says: “... the useful stuff accountants know is double-entry bookkeeping. Why don’t economists know this themselves? Today’s economists simply don’t study it ... Economists of Joe’s generation often did learn accounting as undergraduates ... but very few of them ever integrated accounting concepts with their economics.”

Accounting is elementary mathematics, and, true, it is regularly beyond the capacities of economists (2012). Unfortunately, also heterodox economists. This includes Steve Keen.

The matrix is not the best tool to present the accounting interrelationships, so I present my refutation of Keen’s argument in an alternative format under the label Graphic AXEC68.

1. In the beginning, there is only the central bank that creates overdrafts and deposits uno actu out of nothing. Overdrafts stand here for all forms of direct loans to the household or the business sector. The deposits of the central bank are money and are used for transactions between the household and the business sector. Other forms of money are kept out of the picture.

2. The banking sector is now split between the central bank and commercial banks. The central bank creates 10 monetary units (million, billion, trillion, Euro, Dollar, Yuan) of overdrafts and deposits for the commercial banks only.

3. The commercial banks start their lending business and create 100 monetary units of overdrafts and deposits for the business sector. The deposits of the commercial banks are the transaction money used by the business sector to pay wages and by the household sector to buy consumption goods. The ratio of central bank deposits (= reserves) to business overdrafts is here 10 %, i.e., 10/100 units) and it is assumed that this is the maximal ratio. So, the commercial banks have here reached their limit of money creation. It is the central bank’s turn to act.

4. In the course of quantitative easing, the central bank takes over 5 monetary units of business sector overdrafts (= loans) from the commercial banks. The ratio of central bank deposits to business overdrafts is now 15.8 %, i.e., 15/95. So the commercial banks have excess reserves. With regard to the 10 % limit, they need 9.5 units of central bank deposits but have 15.

5. The commercial banks now again take up their lending business and increase overdrafts to the business sector by 55 units. Of course, the same increase takes place on the debit side (= business deposits +55). The ratio of central bank deposits to business overdrafts is now again 10 %, i.e., 15/150).

In a strict sense, it is misleading to say that commercial banks lend out reserves. In an elementary credit economy, the commercial banks create overdrafts and deposits uno actu out of nothing. The reserve ratio is not a practical but a legal limit.

So, literally, it is right to say that commercial banks do not lend out reserves. But it is obvious that between step 4 and step 5, the banks have excess reserves and therefore are in the position to create money in the form of bank deposits for the business and the household sector. Between steps 4 and 5, the credit multiplier is indeed greater than 0. Steve Keen’s conclusion, “Therefore, the $1.4 trillion of excess reserves that QE has created in the USA alone has added precisely $0 to the lending power of banks” is false.

The lending power is there, but of no use if the household and business sectors prefer to deleverage (Koo, 2009).

The real problem of QE is that the central bank takes toxic loans off the commercial/ investment banks' balance sheets and thus protects them from losses.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Koo, R. C. (2009). The Holy Grail of Macroeconomics. Lessons from Japan’s Great Recession. Singapore: Wiley.

Related 'Accounting for dummies'  and 'Accounting basics' and 'End of confusion' and 'Either stupid or duplicitous' and 'Unaccountable' and cross-references Accounting

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COMMENT on Asad Zaman and John Hermann on Feb 21

The two criteria of science are formal and material consistency (Klant, 1994, p. 31). The latter is established by empirical testing. How important this is for genuine scientists, one may glean from the fact that physicists have built ‘the world’s most expensive and complex experimental facilities to date’ (CERN, Wikipedia) in order to test a hypothesis that was put forth around 1964 by six theoretical physicists.

This vividly contrasts with the silly methodological motto of most economists, i.e., “it is better to be roughly right than precisely wrong!” (Davidson, 1984, p. 574)

The analog to the physicists’ fervor of measurement would be to install a giant facility that records every economic transaction in real-time according to the principles of accounting. This facility then delivers the exact numbers (two digits) of total income per period, consumption expenditures, saving, and so on. And these numbers are the rock-solid foundation of empirical testing.

Curiously, economists have never shown any ambition to build such a facility. Worse, economic theory is not even built upon concepts that correspond with what could actually be produced with such a gigantic bookkeeping machine. Just the contrary, economic theory has been built upon concepts like utility or equilibrium, and it should have been evident from the very start that there is no testable correspondence to these green cheese concepts in the real world. Thus, the scientific failure of economics was methodologically pre-programmed 150 years ago.

What most economists have not realized to this day is that accounting is pivotal to their discipline. Their manifest incompetence consists of not understanding the elementary mathematics that underlies accounting (2012). This is the real mathiness problem.

“Somewhere between the Political Arithmetician, alias the National Income Accountant, and the Financial Analyst, alias the Accountant, lies the task of the quantitative economist’s analytical role and none of the theoretical or applied tasks of these two pragmatic and paradigmatic figures requires anything more than arithmetic, statistics, and the rules of compound interest. These, in turn, require nothing more than an understanding of the conditions under which systems of equations can and cannot be solved. But what kind of quantities do these equations encapsulate as parameters, constants, and variables? Surely, the kind of quantities that enter the equations of the Political Arithmetician and the Accountant cannot be other than rational or natural numbers — negative and non-negative? Eminent theorists, working in core areas of economic theory — price theory and monetary theory — have made this point in interesting ways over the past half a century.” (Velupillai, 2005, pp. 866-867)

To be sure, accounting is not all of economics. But make no mistake, above the entrance to economics as a science is inscribed the phrase: “Let None But Those Who Mastered The Elementary Mathematics of Accounting Enter Here.”


References
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Velupillai, K. (2005). The Unreasonable Ineffectiveness of Mathematics in Economics. Cambridge Journal of Economics, 29: 849–872.

The common error of common sense: an essential rectification of the accounting approach {33}

Working paper at SSRN

Working paper at ARCHIVE

Abstract  The present paper takes the explanatory superiority of the integrated monetary approach for granted. It will be demonstrated that the accounting approach could do even better provided it frees itself from theoretically ill-founded notions like GDP and other artifacts of the equilibrium approach. National accounting as such does not provide a model of the economy but is the numerical reflex of the underlying theory. It is this theory that will be scrutinized, rectified, and ultimately replaced in the following. The formal point of reference is ‘the integrated approach to credit, money, income, production, and wealth’ of Godley and Lavoie.

AXEC94a Accounting balanced budget

 

Occasional X: Economists are too stupid for macro accounting (VI)

 

#MMT#BadScienceBadPolicyBadPeople

“if the federal government has lots of red ink, somebody must have lots of black ink. It's called accounting” (whispers)

Yes, the government sector's red ink is the business sector's black ink. It's called macroeconomic profit. For details see… pic.twitter.com/BKqd4pRr1Z

— AXEC (@EgmontHandtke) April 28, 2025

Related 'Stephanie Kelton: “All deficits are good for someone.” Yes, Someone=Oligarchy' and Cross-references Accounting. 

National Accounting: scientific incompetence or political fraud?

Comment on David Graeber on ‘Accounting error spells chaos for global economy’

Blog-Reference and Blog-Reference

You say “Last month I noticed what appears to be a glaring error in the UK’s Office of Budget Responsibilities’ calculations of household debt levels — one with potentially frightening implications for the stability of the financial system as a whole.”

You have indeed identified a foundational error of macroeconomics. It exists already since Keynes and relates to profit theory. In simple terms, Keynes never understood what profit is and neither pro-Keynesians nor anti-Keynesians realized the blunder in Keynes’ foundational macro equations. Thus, the blunder sneaked into National Accounting and became eventually an essential part of MMT. For details see
• Economists: just too stupid for counting
• The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
• Rectification of MMT macro accounting

Egmont Kakarot-Handtke


Related 'Some fatal flaws of MMT' and 'Economists’ perennial trouble with accounting' and 'Profit' and 'The GDP-death-blow for the economics profession'. For more details of the big picture see cross-references Accounting.

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REPLY to Tom Hickey, MRW, Matt Franko on Sep 25

(i) Compared to the entirely faulty MMT accounting#1 the UK’s Office of Budget Responsibilities graphics at least includes the business sector explicitly.

(ii) The correct balances equation for total profit reads Q_m≡Y_d+(I−S_m)+(G−T)+(X−M) [1] or rearranged (I−Q_m)+(Y_d−S_m)+(G−T)+(X−M)=0 [2] which says that the balances of the business sector, the household sector, the government sector, and the Rest of World add up to zero.#2 Hence, the sum of positive balances is always symmetrical to the sum of negative balances. This rearranged equation  (I−S_m)+(G−T)+(X−M)−(Q_m−Y_d)=0 finally compares to the false MMT equation (I−S)+(G−T)+(X−M)=0. The difference (Q_m−Y_d) denotes retained profit.

(iii) It is doubtful whether the UK’s Office of Budget Responsibilities got the balances equation [2] right.#3

(iv) That much is sure: the MMT balances equations are as false as can be. Because of this, the analytical superstructure of MMT is scientifically worthless. MMT policy has NO sound scientific foundations.

#1 MMT and the magical profit disappearance
#2 For more details see cross-references MMT
#3 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach

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REPLY to Matt Franko on Sep 26

The correct four-sector balances equation for the business sector’s total monetary profit reads Q_m≡Y_d+I−S_m+G−T+X−M. Profit is the pivotal magnitude of the market economy. This magnitude does NOT appear in the MMT balances equations. So, MMT misses the essence of economics. MMTers have not realized until this very day that their approach is lethally flawed.* MMTers have zero scientific/mathematical/accounting competence.

As a self-declared specialist in Accounting Science it should be easy for you to refute the equation above. Of course, you cannot — and nobody else of the scum of sciences called MMT can.

* For the full-spectrum refutation see cross-references MMT

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REPLY to Matt Franko on Sep 26

You say “They [MMTers] don’t see the ‘business sector’s total monetary profit’ as the ‘essence of economics’.... and they don’t have to... they are more interested in the general economic welfare ....”

If you do not know that 2+2=4 you are out as a mathematician. If you do not know what energy is you are out as a physicist. If you do not know what profit is you are out as an economist. In all cases, it does not help you much to pretend to be mainly interested in general human welfare.

Non-swimmers are not hired by Baywatch even if they assert that their highest ambition is to save fellow humans from drowning.

The fact is that MMTers do not understand the foundational concept of economics. Worse, because they do not understand that Public Deficit = Private Profit they do not realize that MMT policy is directly AGAINST general human welfare.

Macro accounting is the faithful recording of all economic transactions between the business and the household sector, the application of elementary mathematics, and the drawing of balances after the conclusion of a period of predetermined length. If done by intelligent persons, this yields the total monetary profit of the business sector in the most elementary case as Q_m≡−S_m which is identical with the auditable real quantity in the aggregate cash box. This formula is the core of profit theory and the indelible shame of economics is that economists in general and MMTers, in particular, do not understand after 200+ years what any person of average intelligence is supposed to understand in 20 minutes.*

* How the intelligent non-economist can refute every economist hands down

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REPLY to wilwon32 on Sep 26

You say “I could understand E K-H’s argument that business profitability is a prerequisite for survival in a competitive situation; I do not understand why profitability is a prerequisite for a desirable economic system to be constructed.”

The point is NOT what people think about profit or that profit is needed for survival or that the profit motive is morally good/bad. All this is the subjective side of profit. The point is to figure out the objective Profit Law and to verify it with the help of National Accounting, which is one of the most important measurement tools in economics. This is the objective side of profit.

The subjective side of profit is the proper business of psychology, sociology, and other so-called social sciences. The objective side of profit is the subject matter of economics.

The scandal of economics is that none of the main approaches, including MMT, can give you the Profit Law. Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” Economists simply do not know what profit is. And this means that the whole of economics, including MMT, is proto-scientific garbage.

You cannot construct the Good Society if you do not know how the economy works and what the economic laws are just as you cannot get three hundred coffee-sipping dullards in an aluminum box off the ground without knowing the laws of aerodynamics and thermodynamics. Psychology and sociology are not of much help.

The claim that economists in general or MMTers, in particular, contribute to the realization of the Good Society is one of the worst jokes of all time.

Accounting basics

Comment on FedUp of Oct 24 on ‘Keynes on the Theory of Interest’

Blog-Reference

The most elementary economy is the production-consumption economy, and it consists of the business and household sectors. For a start, the business sector produces and sells one consumption good.

First period: the business sector pays 100 units of wages to the household sector, and the household sector spends exactly this amount on the consumption good. There is no saving of the household sector. The business sector's profit is zero, and the price of the consumption good is equal to unit wage costs, i.e., P=W/R.

Second period: the household sector saves 10 units (S=10) and spends 90 units. Now, the business sector makes a loss (Q=−10). The market-clearing price is lower than unit wage costs.

Accounting result: saving=loss [Q≡–S]. The complementary notion of saving is not investment but loss. Because of this, I=S never holds. And because of this, the whole discussion of whether the interest rate or the income mechanism establishes the equilibrium/equality of saving and investment is pointless. There is no such thing as equilibrium.

At the Central Bank's balance sheet, we have at the end of the 2nd period 10 units of current deposits of the household sector and an equal amount of current overdrafts of the business sector. Without going further into details, it should be obvious that the rate of interest on the asset side and the rate of interest on the liability side must be such that their difference covers at least the costs of the central bank under the condition of zero profit.

This is how the accounting identity and the two rates of interest are objectively connected in the most elementary case. There is no need at all for the silly psycho-sociological filibuster about liquidity preference, animal spirits, or ‘comfort and confidence that individuals derive from holding money in the face of an uncertain and unknown future’. No way leads from behavioral storytelling to the understanding of how the monetary economy works. Standard economics — Keynesianism included — is in the woods and will be left there.

For a more detailed depiction of the accounting relationships, see The Profit Law.

Egmont Kakarot-Handtke


Related 'Interest and profit' and 'End of confusion' and 'I=S: Mark of the Incompetent'.

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ICYMI (comment on Henry of Oct 28 on Oct 29)

Total wage income Yw is 100 in period 1, and consumption expenditures C are 100. Saving S≡Yw−C is zero.

Total wage income Yw is 100 in period 2, and consumption expenditures C are 90. Saving S≡Yw−C is 10. Profit Q≡C−Yw is −10.

Accounting check: the balances of both sectors add up to zero S+Q=0.

Q.E.D

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ICYMI (comment on djb of Oct 29)

Analysis starts with the minimum number of elementary propositions. This is known since the ancient Greeks invented science: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” #1

When you come clear with saving, investment, and profit, then the growth of real and nominal wealth emerges immediately as a result. Wealth cannot be assumed as given but must be derived from the most elementary economic configuration with zero wealth.

Keynes started from faulty premises, and because of this, the conclusion I=S is provably false. History from Keynes onwards, though, has shown that proper methodology is beyond the mental capacities of the representative economist. There is no hope for the present generation of economists (in particular for Henry, JKH, djb).

Nevertheless, for the consistent derivation of wealth, see the working paper Primary and Secondary Markets


#1 Wikipedia, resume of Aristotle’s Posterior Analytics

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ICYMI (comment on MarkanKone of Oct 28)

The introduction of distributed/retained profit and the redefinition of saving cannot rescue I=S. No semantic maneuver can. I have clarified this case in Section 17 of the working paper Keynes’s Missing Axioms.

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ICYMI (comment on FedUp of Oct 29)

Keynesian economics is about the monetary production economy: “The entrepreneur economy was one of Keynes’ ways of showing how and why monetary and financial matters must be integrated with real factors from the start of the analysis of a monetary production economy. It is this insight that is missing from virtually all strands of modern mainstream theory.” (Harcourt, 2010, p. 49)

The most elementary monetary production economy consists of the business and the household sector. Your two-person exchange example is obviously no acceptable representation of Keynes’s approach.

Here is a picture of the most elementary monetary production-consumption economy (Graphic AXEC31).

References
Harcourt, G. C. (2010). The Crisis in Mainstream Economics. real-world economics review, (53): 47–51. URL.

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ICYMI (comment on Henry of Oct 29, 2:44 pm)

Sales, as seen from the business sector, are the same thing as consumption expenditures, as seen from the household sector.

In period 2, we have 90−100=−10 (not 0).

In the elementary production-consumption economy, the business sector cannot recoup its wage costs if the household sector saves. This is how loss comes into the world.

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ICYMI (comment on Henry of Oct 29, 3:29 pm)

This is not a matter of definition but of hard, cold cash. The household sector spends C=90 units as consumption expenditures, and the business sector receives exactly this amount but calls it sales. This in no way affects the definition of monetary profit Qm≡C−Yw. Together with the definition of monetary saving Sm≡Yw−C, this gives Qm≡−Sm (or simplified Q≡−S if the distinction between monetary/ nonmonetary is not an issue). Look at the formulas and forget the names. It is the formal proof that counts and nothing else.

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ICYMI (comment on Henry of Oct 29, 4:49 pm)

The accounting approach deals with variables that are the product of price and quantity, like expenditure or income. Normally, it is not necessary to deal with each component of the product individually. Here, it is indeed necessary because you fetch inventory investment out of thin air. Inventory changes occur if the quantity produced and the quantity sold are different.

So let us look closer at consumption expenditures, which are given as the product of price and quantity, i.e., C=PX. We start with the case of full market clearing, that is, quantity produced and quantity sold are equal and do not change because labor input and productivity do not change either. That is, the real part of the pure consumption economy is frozen.

Now, if consumption expenditures C drop from 100 to 90 in period 2 and the quantity X remains constant, the price P must fall in C=PX. The market-clearing price in period 2 is now below the unaltered unit wage costs, and this means that the zero profit of period 1 turns into a loss.

Note that the quantities produced and sold are equal in both periods 1 and 2. So there is no change in inventory, and therefore inventory investment does not occur. We have I=0 and S=10, so saving and investment are unequal.

Of course, the product market is normally not cleared, and there are inventory changes. I have dealt with this case in full generality in Primary and Secondary Markets.

The inclusion of inventory changes, though, does not alter the fact that saving and investment are never equal. And for this simple reason, the familiar story of the interest mechanism cannot be true.

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ICYMI  comment on Biagio Bossone of Oct 30

You say: “It is not the case that Keynes didn’t have the words to speak about inequality of ex-ante and ex-post saving. Based on his income multiplier process theory, he derived aggregate saving as a pure residual variable, strictly determined by aggregate investment in a way that S = I always and invariably, both ex-ante and ex-post.”

It is not the case that we do not know what Keynes said, but it is the case that Keynesians have not realized since the General Theory that Keynes's formal argument is provably false (2011). This has only been papered over with the ex-ante/ex-post filibuster, and this Keynesian verbiage is the very proof of deeper confusion that lasts to this very day.

“Throughout the 1920s and 1930s the focus was increasingly on the role of the equality of saving and investment, but the semantic squabbles that dominated much of the debate (the distinctions between ‘ex-ante,’ and ‘ex-post,’ ‘planned’ and ‘realized’ saving and investment, the discussion of whether the equality of saving and investment was an identity or an equilibrium condition) reflected a deeper confusion.” (Blanchard, 2000, p. 1378)

This includes Keynes, “But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system.” (Laidler, 1999, p. 281)

Beyond Keynes’s manifest confusion, the correct relationship is ‘always and invariably’ given with Graphic AXEC09

Keynes, indeed, had the words to speak about the inequality of ex-ante/ex-post saving/ investment. A lack of words had never been the problem of any economist — what has always been in short supply was logic and argumentative consistency.

“The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” (Dennis, 1982, p. 698)

The ex-ante/ex-post argument squarely falls into the category of loose verbal reasoning, a.k.a. blather. And this carries over to the theory of interest.


References
Blanchard, O. (2000). What Do We Know about Macroeconomics that Fisher and Wicksell Did Not? Quarterly Journal of Economics, 115(4): 1375–1409. URL
Dennis, K. (1982). Economic Theory and the Problem of Translation (I). Journal of Economic Issues, 16(3): 691–712. URL
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.

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ICYMI (comment on Henry of Oct 30 on Oct 31)

The accounting approach always deals with nominal magnitudes, which carry a monetary dimension like euro/dollar/yen, and never with real magnitudes. Hence, ‘unit’ invariably means ‘monetary unit’ in the given context. By not realizing that the I=S debate runs in nominal terms, your whole argumentation has been empty from the outset. Perhaps it is some comfort that you share this sad fate with djb, FedUp, and JKH.

My working paper Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist could be of some help to deconfuse yourself.

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ICYMI (comment on Henry of Oct 31 4:22)

Your definition of income (income = household income + enterprise income) is wrong. Total income Y is wage income Yw=WL plus distributed profit Yd=DN. Distributed profit Yd is different from profit Q.

For the complete and consistent set of foundational propositions, which includes the nominal accounting variables as a subset, see the overview Graphic AXEC04.

For details about the difference between profit Q and distributed profit Yd and retained profit Qre (and why Y=Yw+Q is deadly wrong), see Economics for Economists.

It's not so easy, indeed Keynes and many others got the distinction between profit and income wrong, and this is exactly why they all ended in the I=S cul-de-sac. #1 This is the correct relationship: Q≡Yd+I−S. This equation tells you how the profit of the business sector as a whole is generated and how important it is that the business sector’s investment is greater than the household sector’s saving, i.e., I>S. This equation also tells you how beneficial the dissaving (S with a negative sign) of the American consumer (= growth of private debt) is for the world economy (until it is reversed). But this advanced topic is forever beyond the horizon of those who are stuck with I=S.


#1 I=S: Mark of the Incompetent

Related 'Humpty Dumpty is back again'.

Occasional Tweets: Accounting identities ― false since Keynes

 

#MMT#BadScienceBadPolicyBadPeople

When #MMTers talk of an accounting identity one should always be aware that #Economists, in general, are too stupid for the elementary #Algebra that underlies macroeconomic accounting.

MMTers: too stupid for simple mathhttps://t.co/7qhGPGzjew pic.twitter.com/4gBpWs49Qm

— E.K-H (@AXECorg) August 28, 2021

For details of the big picture see cross-references Accounting and cross-references Math/Mathiness.

Occasional X: Economists are too stupid for macro accounting (VIII)

 

#Economics#AllYouNeedToKnow

“But without the government deficit the businesses and households would not enjoy the surplus to save and spend. Thus “national debt” is really the “national savings”. (Quarterly Balances quoted by Malcolm Reavell)

There is no such thing as the… pic.twitter.com/ovgRFA1I5l

— AXEC (@EgmontHandtke) May 26, 2025

Related 'Down with idiocy!' 

Note on Accounting for ****

Blog-Reference with AXEC comments here and here

There is a parallel discussion on mainly macro under the heading What is it with economists and accounting identities?.

See AXEC's answers Either stupid or duplicitous and Stupid or duplicitous? Both!

For the bigger picture see the cross-references Refutation of I=S.

Relates also to MMT see Modern Moronomic Theory.

AXEC211 Taxes, spending, government, accounting

 

Occasional Tweets: Economists are too stupid for macro accounting (II)

 

Since #Keynes #Economists are too stupid for the elementary #Algebra that underlies #MacroEconomics. Macro accounting tells one #PublicDeficitIsPrivateProfit.

A crash course in macro accountinghttps://t.co/ra68RI5GgM

For more on accounting see the queryhttps://t.co/sOLeafaakF pic.twitter.com/Cj5qSVdW40

— E.K-H (@AXECorg) January 25, 2022

For details of the big picture, see cross-references Accounting. 

AXEC208 Accounting, Import, Export

 

AXEC95 Accounting profit

 

Occasional Tweets: Economics is failed/fake science because economists never understood the simple math that underlies accounting

 

#Economics#FailedFakeScience#Economists#StupidOrCorruptOrBoth

Economists are too stupid for the elementary #Algebra that underlies macroeconomic #Accounting.

National Accounting: scientific incompetence or political fraud?https://t.co/0t1vz3XnEB#DefundEconomics

— E.K-H (@AXECorg) December 14, 2022

For details of the big picture see cross-references Accounting.

 

Accounting for dummies

Comment on David Ruccio/Liam on ‘Why is slow growth a problem?’

Blog-Reference

You say, “This is a cost-accounting problem. Period. End of story. Any attempt to make it more complicated than that is intellectual masturbation IMO.”

Agreed, let us treat it as an accounting problem. And let us de-complicate the economy to the bare bones. #1

The most elementary economy is the production-consumption economy, and it consists of the business and the household sectors. For a start, the business sector produces and sells one consumption good. The business sector is fully integrated from the intake of raw material to the output of the final product. With one giant firm, we have the simplest of all possible cases.

First period: the business sector pays 100 monetary units (million, billion, trillion Euro, Dollar, Yuan) to the household sector, and the household sector spends exactly this amount on consumption goods. There is no saving of the household sector. The business sector’s profit is zero, and the price of the consumption good is equal to unit wage costs. The real wage is equal to productivity.

For the economy as a whole, there is no gap. The business sector fully recovers its wage costs. This can happen at ANY level of employment, so full employment is no problem. However, problems can arise on the monetary side. If employment is doubled, for instance, then wage income doubles and this means that transaction money must double. In a well-designed economy, the central bank can provide the necessary transaction balances out of nothing.

Interim result: It is possible in principle to run the elementary production-consumption economy at any level of employment and to grow or shrink at will, provided the central bank finances the wage bill, whatever it is. The business sector makes neither profit nor loss. The economy is reproducible for an indefinite number of periods.

Second period: the household sector saves 10 monetary units (S=10) and spends 90 units. Now, the business sector makes a loss (Q=−10). The market-clearing price is lower than unit wage costs. There is no change in inventory.

Accounting result: saving = loss [Q≡−S]. The complementary notion of saving is NOT investment but loss. If the household sector dissaves 10 monetary units (S=−10), i.e., spends 110, then the business sector makes a profit (Q=10). So growing household sector debt is the ULTIMATE source of profit (NOT productivity increases, NOT risk-taking, NOT wage-cutting, NOT firing people, NOT the other brain-dead common sense explanations from the microeconomic ant-perspective).

At the central bank’s balance sheet, we have, in the case of pure credit money, at the end of the 2nd period, 10 units of current deposits of the household sector and an equal amount of current overdrafts of the business sector in the case of saving. Without going further into details, it should be obvious that the rate of interest on the asset side and the rate of interest on the liability side must be such that their difference covers the wage costs of the central bank under the condition of zero profit. Again, there is no gap or problem if the economy is well-designed. Needless to emphasize that it is actually NOT well-designed.

How to organize a well-functioning economy is a question neither orthodox nor heterodox economists have figured out in more than 200 years. No question, if there is something like a scientific hell, Walrasians, Keynesians, Marxians, and Austrians will be dammed to discuss their proto-scientific garbage in eternity with dull Econ 101 students as the sole audience.

Takeaway: You have to thoroughly rework your website. Flag-waving is not a substitute for thinking or proper accounting.

Egmont Kakarot-Handtke


#1 For the formal underpinning, see the post Economists cannot do the simple math of profit — better keep them out of politics or the SSRN working paper Economics for Economists

Related 'Have data, lack theory' and 'The common error of common sense: An essential rectification of the accounting approach' and 'A tale of three accountants'. For details of the big picture, see cross-references Accounting.

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REPLY to Liam of Feb 12 on Feb 13

First, you say, “This is a cost-accounting problem. Period. End of story. Any attempt to make it more complicated than that is intellectual masturbation IMO.”

Next, you say, “I won’t agree to your FIRST model because it is so far from reality that it is hardly worth commenting on.”

So, you first ask for a simple picture of the economy, and when you get the simplest possible picture, you complain that a lot of details are missing. This is the outworn catch-22 schizo that is endemic in economic discussions (2013).

If you had done your homework and looked into some of my working papers, you would have realized that the elementary consumption economy has already been differentiated in ALL directions. So, (i) your ‘realism vs. abstraction’ kindergarten game falls flat, and (ii), you make it quite clear that you are not aware of the basics of methodology: “There can be no doubt whatsoever that a problem which has not yet been solved in all its aspects under its simplest conditions will be still more difficult to tackle if other, ‘more realistic’ assumptions are being made.” (Morgenstern, 1941, p. 373)

With regard to your challenge, the error/mistake is already in the first line. You write “A = all cost components of price comprised of wages, earnings, or dividends.” Note that dividends are not a cost component. Better if you get your price theory right first (2011).

Advocating social credit is one thing, and claiming that it is based on sound economic theory is quite another thing — in your case, it is definitely not.

You make the same mistake as standard economics, that is, to start with an agent/firm and to go bottom-up, i.e., microfoundations, leads to nowhere, yet to start with the economy as a whole and then to go top-down, i.e., macrofoundations, yields consistent and testable propositions. Every economist could know this by now from the evident failure of Walrasianism.


References
Kakarot-Handtke, E. (2011). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–22. URL
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL

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REPLY to Liam on Feb 14

I have no problem at all with CH Douglas’s political program; I have only a problem with his underlying economic theory. The point is: right policy depends on true theory. If you intend to fly to the moon, you first have to figure out the law of gravity (and some others). If you want to improve the economy, you first have to figure out how it works.

This is an economics blog, and in my understanding, the ultimate goal is to replace standard economics, which is provably false, with the true economic theory.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

Economists do not have the true theory. Neither Walrasians, nor Keynesians, nor Marxians, nor Austrians, nor Douglasians know how the economy works. So they are in no position to promise a ‘better’ economy. Worse, with false economic theories in their scientifically incompetent micro brains, economists actually cause or worsen crises.

How convincing are economists who promise to create the Good Society but cannot do elementary accounting? To recall, the profit theory has been false since Adam Smith. Economists literally do not know what they are talking about.

So: first get economics right, then get the economy right.

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REPLY to Liam on Feb 16

“...the tens of thousands (millions over the past century) of people” who stand with you are certainly a veritable political force but they have no say in scientific matters. Science is about logical and empirical proof.

If you can refute my main point, let me know.

And this is the main point: You cannot tell the difference between profit, income, and distributed profit, and because of this, you have no idea about how the actual economy works.

AXEC68 Accounting money

 

AXEC94 Accounting balanced budget

 

Accounting matters

Comment on ‘Accounting for ****’

Blog-Reference

Since theories have an architectonic structure it is clear that if there is a fault in the formal foundations the whole superstructure is bound to collapse eventually. Accounting matters because it provides the natural reality check for economic theories; it plays the same role in economics as a sophisticated measuring instrument in physics.

The first thing to realize is that there is no such thing as a ‘real’ economy. Hence economic phenomena are only explicable as the outcome of the interaction of real and nominal variables. A good number of nominal variables reappear in national accounting.

With regard to saving this means that all ‘real’ models of intertemporal shifting of consumption are pointless. In the monetary economy, the process of saving and dissaving is independent of real output in different periods.

For the correct theory of saving/dissaving see (2013).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL

Relates to Unaccountable

A crash course in macro accounting

Comment on Peter Cooper on ‘Fiscal Policy, Sectoral Balances, and Financial Sustainability’

Blog-Reference and Blog-Reference

You say: “PRIVATE Balance + GOVT Balance + FOREIGN Balance = 0” and “This is an accounting identity, which means it always holds true.”

This is NOT the case because you messed up the elementary mathematics of accounting. #1 To see this, one has to go back to the MOST ELEMENTARY economic configuration, that is, the pure production-consumption economy, which consists of the household sector and the business sector. #2

In this elementary economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income E_c=Y_w, (ii) E_c is less than Y_w, (iii) E_c is greater than Y_w.

In case (i), the monetary saving of the household sector S_m≡Y_w−E_c is zero, and the monetary profit of the business sector Q_m≡E_c−Y_w, too, is zero.
In case (ii), monetary saving S_m is positive, and the business sector makes a loss, i.e., Q_m is negative.
In case (iii), monetary saving S_m is negative, i.e., the household sector dissaves, and the business sector makes a profit, i.e., Q_m is positive.

It always holds Q_m≡−S_m, in other words, at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving, and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law.

The balances of the business sector, the household sector, the government sector, and the rest of the world are interrelated as follows: Q_m≡−S_m+I+Y_d+(G−T)+(X−M), and THIS is the correct accounting identity for an open economy (X−M) with a government sector (G−T) and with the business investment I and distributed profit Y_d.

Your accounting blunder consists of lumping together the business sector and the household sector. This makes the crucial relation between profit, distributed profit, saving, and investment invisible #3, which amounts to an intended/unintended destruction of valuable information, which in turn is contrary to the very purpose of accounting.

Egmont Kakarot-Handtke


#1 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#2 (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) Y_w=WL wage income Y_w is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) E_c=PX consumption expenditure E_c is equal to price P times quantity bought/sold X. For a start, it holds X=O. Note that ALL variables are measurable. E_c and Y_w appear in National Accounting.
#3 How Keynes got macro wrong and Allais got it right

Related 'Rectification of MMT macro accounting' and 'Down with idiocy!' and 'Is Nick Rowe stupid or corrupt or both?' and 'A tale of three accountants'. For  details of the big picture, see cross-references Accounting

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REPLY to jrbarch on Jul 7

You say: “Therefore it makes perfect sense to sum businesses and households as the ‘private sector’ who hold these tax credits.”

It makes a real difference whether what you call tax credits are held by the households or by the firms. By lumping both together in what Peter Cooper calls the "private sector" this difference is made invisible. #1

If this is done unintentionally, it is sheer scientific incompetence; if this is done intentionally, it is what people call cooking the books. If one is not committed to science, though, it is merely brain-dead blather.

#1 For the political implications, see Austerity and the idiocy of political economists.

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REPLY to jrbarch on Jul 8

Peter Cooper argues: “For the economy to grow in a financially sustainable way, the private sector should normally be allowed to maintain a financial surplus (spending less than its income). For many countries (the majority with current account deficits), this means government needs to spend more than it taxes under normal circumstances.”

Because ‘spending less than income’ is the definition of saving, the condensed form of the argument reads: because the households should be allowed to save, the government must dissave, because from accounting follows with mathematical certainty that for any surplus there must be a deficit of equal magnitude somewhere else in the economy.

The problem with this argument is that economists in general and Peter Cooper, in particular, do not understand the elementary mathematics of accounting.

The balances of the business sector, the household sector, the government sector, and the rest of the world are interrelated as follows: Q_m≡−S_m+I+Y_d+(G−T)+(X−M). This boils down to Q_m=−S_m+(G−T) for I, Y_d, X, M = 0.

So, there are two limiting cases: (i) If the household sector’s saving S_m goes up and the government’s deficit (G−T) goes up by the same amount, the profit of the business sector Q_m remains unchanged. (ii) If the household sector’s saving S_m remains unchanged and the government’s deficit (G−T) goes up, the profit of the business sector Q_m goes up by the same amount. It holds that Public Deficit = Private Profit.

So, the counterpart of an increased public deficit is either increased saving of the households or increased profits of the firms, or some combination of the two. Therefore, to say that the counterpart of an increased public deficit is an increased surplus of the “private sector” obscures important real-world differences.

Worse. In the past decades, US households increased their debt; that is, they were dissaving. So, BOTH private and public households ran deficits. From the formula above follows that this boosts profit Q_m TWICE. And this is exactly what has been observed and criticized as a catastrophic deterioration of the income distribution.

So, by arguing for government deficits because the “private sector should normally be allowed to maintain a financial surplus,” Peter Cooper is de facto arguing for profit increases of the business sector. #1 He obscures this fact by lumping together the business sector and the household sector into the “private sector”. #2


#1 See also Keynesianism as ultimate profit machine.

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REPLY to jrbarch on Jul 9

You say: “So, to me, you are all on the same page, but with different concepts.” You are simply ill-informed. The formal foundations of MMT are logically defective, and because of this, MMT policy guidance has NO sound scientific foundations. For more details, see these comments

• Macrofounded labor market theory
• Economics is NOT about Human Nature but the economic system
• Where MMT got macro wrong
• Rectification and generalization of MMT
• Economics as poultry entrails reading
• Rethinking MMT
• Hobson got full employment policy almost right
• How to start off on the right foot
• Australian upside-down economics
• Modern Moronomic Theory

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REPLY to jrbarch on Jul 10

You say: “you have asked me to move logically from the sectoral balances framework to your own, but I can see no reason to do so?”

There is obviously a gross misunderstanding on your side.

The purpose of my post is to inform Peter Cooper that the accounting identity he starts with is defective and that, as a consequence, the rest of his intro is garbage.

The purpose of my post is NOT to educate jrbarch. And if you “can see no reason” to think logically, then simply do not. There is NO need to tell me.

Peter Cooper’s accounting identity is mathematically false. Whether you understand this or not is a matter of indifference.

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Graphic AXEC143d

AXEC96 Accounting loss