Sunday, September 24, 2017

David Graeber — Accounting error spells chaos for global economy


The title may be alarmist but the post is worth reading. David Graeber points out that the sectoral balances don't actually balance and asks why, since it is an accounting identity.
When I first saw this diagram I was startled and confused. Was I missing something? Was there something about the math I didn’t understand? I passed the image on to two different economists and asked just that: isn’t there something wrong with the numbers here?
You’ll notice that towards the end of the graph, after 2014, the figures above and below the line are no longer equal. It’s easy to miss, but this glaring error has significant consequences for the global economy.
Both instantly got back to me, rather surprised they had not noticed it themselves, and confirmed that yes, indeed, there was something very funny going on here. One even wrote to the OBR himself, asking why the two sides didn’t match up, only to be informed it was a standard “residual error” that always occurs at first but is duly patched up later. (This clearly isn’t true: no previous OBR report contains such an imbalance; when this was pointed out to them they simply dodged the question). Here’s the link to the latest report.

This is what led to my piece in the New Statesman, calling for a public inquiry. I also asked my friend who made up the original diagram to adjust it to what it might look like corrected. This has to involve a certain amount of guess-work as we don’t actually know which part of the numbers are inaccurate. He provided me two possibilities; both extremely sobering.…
RenegadeInc
Accounting error spells chaos for global economy
David Graeber

14 comments:

AXEC / E.K-H said...

National Accounting: scientific incompetence or political fraud?
Comment on David Graeber on ‘Accounting error spells chaos for global economy’

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’s foundational macro equations. Thus, the blunder sneaked into National Accounting and became essential part of MMT. For details see:

Economists: just too stupid for counting
https://axecorg.blogspot.de/2017/07/economists-just-too-stupid-for-counting.html

The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2124415

Rectification of MMT macro accounting
https://axecorg.blogspot.de/2017/09/rectification-of-mmt-macro-accounting.html

Egmont Kakarot-Handtke

MRW said...

It's only bullshit ON THIS CHART from 2018 onward, but that's because we haven't experienced 2018 yet. The rest adds up.

Matt Franko said...

Nice burn MRW...

Tom Hickey said...

Up to around 2014, at least, the top and bottom half exactly mirror one another. This is exactly as things should be: it's an "accounting identity", as in a ledger sheet, debits and credits have to add up. The remarkable thing is that after 2014, they don't, and in the projected future, the top and bottom are actually quite different. [emphasis added]

I haven't seen the figures but Graeber says that two economists he consulted agreed.

Anyone check the figures from 2014 to see if this is correct?

AXEC / E.K-H said...

Tom Hickey, MRW, Matt Franko

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

(ii) The correct balances equation for total profit reads Qm=Yd+(I-Sm)+(G-T)+(X-M) [1] or rearranged 0=(I-Qm)+(Yd-Sm)+(G-T)+(X-M) [2] which says that the balance 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.

(iii) It is doubtful whether the UK’s Office of Budget 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.

Egmont Kakarot-Handtke

#1 MMT and the magical profit disappearance
https://axecorg.blogspot.de/2017/08/mmt-and-magical-profit-disappearance.html

#2 For more details see cross-references MMT
http://axecorg.blogspot.de/2017/07/mmt-cross-references.html

#3 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2124415

Matt Franko said...

Well if you really understood Accounting Science, you would never show a projection of an accounting identity that didn't balance in the first place...


AXEC / E.K-H said...

Matt Franko

The correct four-sector balances equation for the business sector’s total monetary profit reads Qm=Yd+I-Sm+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 of 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.

Egmont Kakarot-Handtke

* For the full-spectrum refutation see cross-references MMT
http://axecorg.blogspot.de/2017/07/mmt-cross-references.html

Matt Franko said...

"equation for the business sector’s total monetary profit reads Qm=Yd+I-Sm+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."

They 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 ....

So they are not trying to isolate some accounting results to examine profits of firms all the time...

It's not a right/wrong or true/false issue....

Matt Franko said...

Say you are running a logistics firm... it has vehicles that run on both gasoline and diesel...

So the management there does not differentiate between them in the accounting... mgmt just categorizes them both as "Fuel"...

"How much are we spending on fuel?"

This is all they need to know for what they are trying to examine...

You cant say "Hey! You're not breaking it down into the components! That is false!"

People use different accounting methodologies to isolate whatever financial component they are interested in...

I keep coming back to the foundational concept in Accounting of 'Basis'.... you can even use differing Basis of Accounting and it is perfectly acceptable ...


Matt Franko said...

You just have to disclose what Basis you are using and then apply the correct criteria for that Basis in forming your judgement about the results... which ofc the morons dont do but I digress...

You seem to be very interested in isolating business sector profits which I think is interesting too but not everybody has the same interests...

AXEC / E.K-H said...

Matt Franko

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.

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 Qm=-Sm 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.*

Egmont Kakarot-Handtke

* How the intelligent non-economist can refute every economist hands down
http://axecorg.blogspot.de/2015/12/how-intelligent-non-economist-can.html

wilwon32 said...

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.

Maybe, E K-H could explain the logic? How/why does it work? I read the axecorg.blogspot.de articles, but seem to have overlooked the obvious.

AXEC / E.K-H said...

wilwon32

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 times.

Egmont Kakarot-Handtke

Six said...

Egmont ... savings, surplus and profit are different ways of saying the same thing.