Thursday, 20 October 2016

A reminder that economics and accountancy are not the same thing

Too much of the debate about economics - particularly macroeconomics - is nothing of the sort. I've described it as 'national accounts arithmetic' - a form of accountancy rather than the application, assessment and testing of economic theory.

Here's Don Boudreax quoting Fritz Machlup from back in 1964:
Definitely “out,” relegated to the scrap heap, is the notion that there is such a thing as “the” balance of payments. Even if full and accurate information were available about each and every transaction, “the” balance would always be an arbitrary number. There are many ways of entering the many items into the various accounts, of organizing the accounts, of interpreting the resulting figures; and there is no way of arranging the data so that they can tell a true story of the causal interrelations.
This doesn't stop people doing just what Fritz rails against. Indeed some economists and most pundits routinely confuse accountancy with economics. But as Don points out:
Most people who fret over, say, the U.S. trade deficit don’t know what it is – and far too many of the few who do know what it is treat the conventional manner in which various economic transactions are recorded in international accounts as possessing an economic significance that they simply do not possess.
The thing is that, if we didn't spend millions gathering incomplete data, loading it into inaccurate models of the economy and claiming the resulting answer is 'truth', then the economy would poddle along just fine. What all this modelling, the act of national accountancy, is perpetuate the lie that government can "run the economy". This is the worst sort of lie - the lie of those taking on the mantle of gods, hubris.

But then, as Longfellow said - "those whom the gods wish to destroy, they first make mad."

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