Why Economists Don’t Know How to Think about Wealth (or Profits)

Until 2006, they quite literally weren’t playing with a full (accounting) deck. Most still aren’t.

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By Steve Roth

In the next evolution of economics taking shape around us and among us, perhaps no school has been so transformational over recent decades as a loose, worldwide group best described as “accounting-based” economists. Modern Monetary Theory (MMT), with its central tenet of “stock-flow consistency” (or stock-flow coherence) is at the center and forefront of this group.

These accounting-based economists more than any others managed to accurately predict our recent Global Great Whatever. And Wynne Godley, rather the pater familias of MMT, predicted the current Euro crisis in amazingly precise and accurate detail — in 1992, before the project was even launched. These economists’ nerdy and businesslike, green-eyeshade and steel-tipped-pen approach gives them unique and accurate insights into the state of the economy, and its likely futures.

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Given these decades of focus on national accounts, it’s amazing that almost no economists are aware of a pretty remarkable fact:

Before 2006, the U. S. didn’t even have complete, stock-flow-consistent national accounts. That was the year that the BEA and the Fed released the Integrated Macroeconomic Accounts (IMAs; also presented as the “S” tables at the end of the Fed’s quarterly Z.1 report). They provided annual tables extending back to 1960, based on the latest international System of National Accounts (SNAs). Think: Generally Accepted Accounting Practices (GAAP), but for countries. We didn’t get quarterly tables in these accounts until 2012, only four years ago. And even today, we don’t have quarterly tables for subsectors of the financial sector.

In June 2013, the Z.1 report was renamed, from the Flow of Funds Accounts of the United States to the Financial Accounts of the United States, and the IMAs’ comprehensive data has been steadily more fully incorporated throughout the report — notably in the up-front Page i table, “Growth of Domestic Nonfinancial Debt,” which is now “Household Net Worth and Growth of Domestic Nonfinancial Debt.” See also Table B.1, “Net National Wealth,” which was added in the September 2015 release.

Before 2006, and even before 2012 or 2013, empirical economists didn’t have a full set of accounting books to work with.

And it’s not just the data. The national accounts’ earlier, incomplete accounting structures, and the terms defined based on those structures, made it impossible to even think coherently about some fundamental economic measures. Wealth, for instance. National wealth is, after all, a rather important economic measure. Adam Smith wrote a whole book about it. But until 2006 there was no coherent national accounting to depict it, or explain its accrual. So it’s been largely invisible and inexplicable to economists.

“Wealth” is just the beginning. As Noah Smith has said so aptly, economics terminology is a dumpster fire. The carnage extends right down to (necessarily accounting-based) definitions of income, saving, and investment. The national accounts and the terminology therein have both embodied and promulgated an incomplete (and deeply regressive) economic world view. Even accounting-based adepts often find themselves conceptually trapped inside these incomplete, inconsistent, jumbled, and muddled concepts and definitions.

Incomplete Accounts

Say what? “Not stock-flow-consistent?” The BEA’s National Income and Product Accounts (NIPAs) and the Fed’s Flow of Funds matrix (FFAs) — certainly seem to be internally consistent. Flows and stocks all add up and balance very nicely to zero. (That is, precisely, the problem. Read on.)

The NIPAs and the FFAs aren’t stock-flow-consistent in the sense that you expect of business financial statements — where all the flows in the income statement for a period fully explain the changes in the balance sheet from period-start to period-end (assets, liabilities, and their residual, net worth for households and shareholder’s equity/book value for firms). They’re not even close.

To be fair, the NIPAs have no pretensions or aspirations to full stock-flow consistency. Their purpose is to depict the within-period flows in the markets for newly-produced goods and services — with GDP/value-added at the tippy-top of an immense data pyramid. That’s all they do (admirably, if imperfectly). All those flows “balance.” But existing balance-sheet assets are almost completely outside their purview. They don’t even have balance sheets or tallies of total assets and net worth, nor do they tally asset swaps in the existing-asset markets (eg cash exchanged for stocks or bonds or land titles) — or lending and borrowing.

The FFAs — which are heavily based on NIPA data — have much greater ambitions, and achievements. They have consistent and mutually coherent flow and level tables for seven sectors; and they do tally flows and levels of financial assets, and lending and borrowing.

But take a look the Flow of Funds Matrix in the Z.1 report, on pages 1 (flows) and 2 (stocks). You’ll notice that three things are missing:

1. “Real,” or nonfinancial assets (notably, titles to real estate). The FFA matrix only tallies “financial” assets — those that have offsetting liabilities on other balance sheets. That is the sine qua non of “financial assets”: they represent claims on other balance sheets’ assets; it’s why the offsetting liabilities, claims, appear on those other balance sheets. Righthand-side liabilities are external claims on lefthand-side assets. (All liabilities are, by their very nature, “financial”; they represent claims from other balance sheets. Liability claims on Balance Sheet A are reflected as assets on lefthand side of Balance Sheets B, C, and D.)

2. Revaluation of existing assets. Capital gains and losses. The FFA matrix only tallies net issuance/retirement of financial instruments within a period. It doesn’t tally changes in market prices of instruments issued in previous periods.

3. Net worth. It’s just not there. Absent tallies of real assets, and revaluation, there’s no way this matrix can balance to changes in total assets or net worth, the bottom line of balance sheets. It can’t be stock-flow consistent.

By the standards of business financial statements, the sectoral accounting in the FFA matrix is radically incomplete.

Move to the detailed sectoral accounting tables underlying the FFA matrix — the levels (L) and flow (F) tables for each sector — and you’ll find the same thing. These sectoral “levels” tables are not balance sheets; they’re incomplete. The flow tables balance with the levels tables, but none of it balances to the righthand-side residual balancing item that makes balance sheets balance: net worth.

The Z.1 did add some balance sheets over time, but for only a few sectors (B tables), with necessary “reconciliation” (R) tables (flows, notably including asset revaluation/cap gains) to make them consistent with the F and L tables:


But these are rather bolt-on appendages, external and supplementary to the FFA matrix.

Given that accounting (and finance, and business) classes don’t even qualify as electives for undergraduate econ majors at Harvard and University of Chicago (to choose just two prominent schools), it’s unlikely that many economists can follow the tortuous paths from flows to balance sheets in all these tables — where those paths even exist. They’re completely untrained to do so. MMTers merit full props for putting this kind of accounting front and center in their pedagogy. But even their thinking frequently gets “stuck inside the FFAs.”

The Monetary Circuit

Why are things this way? The FFA matrix’s closed-loop, sum-to-zero accounting is a somewhat-expanded embodiment and expression of that old picture that everyone sees on Day One of Econ 101: the “circular flow” or “monetary circuit” diagram.


In this representation of economies (roughly what’s presented in the NIPAs), money just flows around in a circle — inevitably, one person’s spending is another person’s income. How could it be otherwise?

Of course (almost) all economists, and certainly accounting-based economists, know that this diagram is a simplified, stylized representation of only two economic sectors: households and nonfinancial businesses. They know that:

1. Governments create new private-sector assets (so-called “outside money”) out of thin air by deficit spending. (Since no new private-sector liabilities arise, this increases private-sector net worth.)

2. Banks, licensed and chartered as “money-printing” subsidiaries by government, also create new nonfinancial-sector assets (“inside money”) — and simultaneous, matching, sectoral liabilities — through lending. (Because these new assets and liabilities net out, the action of bank lending in and of itself does not, in accounting terms, increase private-sector net worth — even though it does create new assets.)

Everyone agrees that government deficit spending and bank lending create “money” (much better: “assets”) in ways that are impossible in the simplified spending-equals-expenditures circuit diagram.

Nevertheless, a huge amount of economic thinking quietly operates inside that simple circular model. It’s the model most economists unconsciously run in “native mode” in their heads when they engage in their ubiquitous thought experiments. It’s the core heuristic that’s trained into their System 1 thinking, invoked instantly and invisibly when they bring System 2 into play.

The FFA matrix does account for the “inside” (banks) and “outside” (government) creation of new private-sector balance-sheet assets — the net issuance/retirement of financial instruments (dollar bills, checking-account deposits, bonds, equity shares, Fed reserves…). This includes corporate IPOs and company dissolutions. Its closed loop is more comprehensive than the NIPAs’. And many economists do think inside that larger circuit model. But that model, likewise, is not fully comprehensive. It ignores real assets, and changes in existing-asset prices/values — both real and financial.

Because: Including revaluation/cap gains would explode the closed-loop, balance-to-zero matrix. They would break the “monetary circuit.”

Because: The existing-asset markets “print money” — at least in the sense of your new financial advisor asking you, “How much money do you have?” This is the third, and overwhelmingly the largest, way that aggregate asset balances are added to the private-sector balance sheet. Runups in the stock or real-estate markets increase private-sector assets — and net worth, because those runups have no effect on private-sector liabilities.

The Conservation of Money Fallacy

The new assets created by market runups don’t “come” from anywhere. The don’t “flow into” the aggregate asset pool (so can’t exist in the “flow of funds”). They just sort of appear via the mechanics of order books, with market-makers matching bids and asks. No sector “issues” those new assets the way banks and governments do.*

But absent accounting for that asset revaluation, the “inside money” and “outside money” mechanisms are completely inadequate to explain changes in bottom-line balance-sheet measures. The FFA matrix — even with its inclusion of inside and outside money creation — is subject to a “conservation of money” fallacy, as embodied in that hoary old monetary circuit diagram. The FFA matrix captures some of the money (read: asset) creation in the total economy, but by no means all of it.

How incomplete are the FFAs? Here’s a picture of the three “asset creators,” purely to visualize relative magnitude — these measures are in no way “summable” as they’re not sector-equivalent:


Capital gains dominate changes in private-sector balance sheets, always and everywhere.

(Note that firms’ market value all ends up as assets on household balance sheets, is ultimately “owned” by households** at zero or more removes. That’s what the possessive apostrophe in “shareholder’s equity” means. The household sector “owns” the firms sector. So household assets include the asset-market value of all firms, their market capitalization. This is why the Z.1 now reports household net worth right up front.)

If your empirical work is operating “inside the FFA matrix,” that revaluation of real and financial assets is completely invisible to you, and to your economic modeling. Ditto total assets and net worth.

Yet the balance-to-zero conservation of money fallacy prevails ubiquitously, even frequently among leading accounting-based economists: “the economy’s financial flows are a closed system, so one sector’s deficit is another’s surplus, and vice versa.” (It’s perhaps significant that MMT has often been referred to as the “circuitist” school. It sometimes feels like watching Copernicans trying to justify the sun-centered model using Ptolemaic epicycles.)

An important aside: the ultimate source and cause of wealth creation is surplus from production — combining natural resources with human effort plus skills, abilities, knowledge, and know-how, so that more-valuable stuff (tangible and intangible, valuable to humans) comes out than goes in. This is the within-period “value added” that the NIPAs try to tally up. But government deficit spending, bank lending, and asset revaluation are the three proximate mechanisms whereby that “real” aggregate accumulation of new stuff is reflected on balance sheets as new unit-of-account denominated assets — designated monetary claims on all that new real stuff (a.k.a. “wealth”).

The IMAs’ Complete Accounting Construct

Returning to the IMAs: they are (can be) stock-flow consistent because each sector has 1. a complete balance sheet tallying both financial and nonfinancial assets, and 2. a “revaluation” (flow) account (plus an Other Changes in Volume account tallying disaster losses, measurement changes, etc.). Here’s what the Revaluation account looks like, for the household sector for 2005 and 2006:

screen-shot-2016-09-21-at-9-42-28-amThis is, necessarily, mark-t0-market or “Haig-Simons” accounting (see Godley and Lavoie pp. 137–41 and 290–94). If you don’t mark up existing-asset values based on market prices, there’s no way you can tally a sector’s total assets and net worth. Our national accountants use various market indexes, with corrections based on survey data, to achieve this marking to market and keep it consistent from period to period.

Mark-to-market accounting is perfectly familiar from business accounting. If Apple or GE owns a portfolio of stocks and the stock market goes up, they post those increases to their financial statements. Otherwise they couldn’t tally their total assets at the end of the period. (Please: the policy of taxing capital gains when “realized” is a completely separate issue.) It’s also what households of any means do, though much less frequently: when first visiting a retirement advisor, they tally up their assets at market value, their liabilities, and their net worth.

The IMA’s accounting lets you assemble a complete and coherent, condensed accounting statement like firms provide, but for economic sectors:


The “comprehensive” measures here (discussion and graphs) are all based on Haig-Simons income, which includes capital gains. The “primary” usages are derived from IMA terminology: “Balance of Primary Incomes.” The “ownership income” usage — instead of “property income” — is arguably only a rhetorical change. But it’s an important piece of rhetoric, revealing what recipients are actually being compensated for: simply…owning things.

Here’s a matrix to help understand how the income measures relate to each other:

Perhaps the most significant usage here is Comprehensive “Saving” — saving being the most vexed and ubiquitously misunderstood of economic terms. It simply equals…change in net worth. The FFA’s definitions of “saving” have no accounting relationship to total assets or net worth. The relationship is, perforce, completely undefined. While “saving” and “net investment” do sum cumulatively to something we might call “book value” (see: perpetual inventory method), that measure’s relationship to market value and total assets is unaccounted for in the FFA matrix. Note that comprehensive saving here is often an order of magnitude larger than primary saving.

The terms used here — like the terms used in the NIPAs, FFAs, and IMAs — are not just incidental to the accounting presentation. They impart, in small, the economic model, assumptions, and defining accounting identities that are implicit but often dangerously invisible in this or any other accounting presentation. They make clear that this is a rhetorical presentation, rather than hiding that rhetoric behind a facade of it’s-just-accounting truthiness.

For one robust example of similar thinking on this re-jiggering of the national accounts and their presentation, see Robert Eisner’s 1989 The Total Incomes System of Accounts.

What a Complete Accounting Construct Means for Economics

The implications of this complete accounting are not just mechanical. They’re transformative to how we (can) think about economics, and economies. Prior to the publication of the IMAs, economists were quite literally not playing with a full deck. (Excepting some pioneering economists over the decades — notably Edward Wolff and of course Thomas Piketty and company, who have painstakingly assembled such accounts themselves, using disparate sources and methods. But there’s no way they could deliver the massive pyramid of necessary accounting understructure; that requires thousands of government accountants and economists.) The huge majority of economists are still working, and trying to think, within incomplete accounting structures.

Here are just a few of the Big Economic Questions whose answers appear very differently within a complete accounting structure:

Sectoral balances. The “sectoral-balances” equation and its accompanying graph are arguably the poster exhibits for much MMT thinking. Wynne Godley and Marc Lavoie explicate them (though not by that name) in Appendix 12.1 to Monetary Economics. The graph looks like this, in a three-sector presentation:


The common takeaway: government deficit spending (plus/minus trade imbalances) equals private-sector “surplus.” Government deficit spending is the “source” of that private-sector surplus or “financial saving.”

But: this identity and graph are purely constructs of the FFA matrix, with all the incompleteness detailed above. They correctly suggest that deficits deliver net worth onto private-sector balance sheets (in a way that bank lending, with its simultaneously-issued private-sector liabilities, does not). But they very much do not explain changes in net worth. As we saw above, capital gains overwhelmingly dominate those changes. Deficits deliver a surplus onto private-sector balance sheets. They do not deliver the surplus — depending on how “surplus” is defined.

It’s worth noting that “surplus” is not a term used in the national accounts. So its commonly-bruited MMT meaning is essentially tautological: “that portion of the change in private-sector assets and net worth that results from government deficit spending.”

Because the sectoral balances are based on the incomplete FFAs, a core measure in the sectoral balances discussion — net acquisition of financial assets (NAFA) — does not equal change in net financial assets. NAFA ≠ ∆NFA. Or ∆FA. Or ∆A. Or ∆NW. The sectoral balances graph only depicts net new issuance/retirement of financial assets, not the change in value of existing assets, real and financial.

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It’s also worth noting that the NFA measure is a rather arbitrary posting of all liabilities against financial assets only — not against total assets. This even though a large portion of those liabilities consists of mortgage debt, which is rather explicitly related to real assets.

Godley and Lavoie are very much aware of this conundrum. They state it explicitly in their appendix:

NAFA is different from the increase in the wealth of households, ∆V, since it does not incorporate capital gains.

But they leave that statement hanging, don’t discuss its implications in that appendix. Tymoigne and Wray also mention it, but only in a parenthetical that may leave students confused:


Confused because: FFA “saving” measures do not equal change in net worth — even if you include the bolt-on B and R tables (external to the FFA matrix) as being part the flow of funds. Revaluation is not included in FFA “saving” measures. A saving measure that does equal change in net worth is eminently sensible, even obvious (see Comprehensive Saving, above). But saving as defined in the FFAs is not that measure.

None of this is to demean the importance of sectoral-balances thinking. It has profound implications — economic, rhetorical, and political. (See especially Steve Randy Waldman, including the 408 meaty comments there if you dare.) It’s simply to impart a clear understanding of that identity in the context of a complete accounting construct.

The Paradox of Monetary Profits. Closed-loop monetary-circuit thinking makes monetary profits impossible. Amazingly, most economists don’t even know about this enigma, despite two centuries’ of anguished discussion by many of the leading practitioners in the field: Marx, Kalecki, Keynes, Schumpeter, Samuelson, and others, plus some very insightful recent accounting-based economists. You’ll find an able rundown of that thinking and history, plus important contributions, in Dirk Bezemer’s great paper here. (See also.) Professors don’t even mention this little problem to impressionable young Econ 101 students.

Monetary profits simply can’t exist if one person’s spending equals another person’s income. “Inside/outside money” thinking does little or nothing to solve this.

Without going into the details, we can say that the problem is deeply related to questions of capital gains as “income,” perhaps best represented today in “the Amazon conundrum”:



Even with more than half a trillion dollars in revenues, Amazon has “earned” almost zero “profits” in its history. But over that period it has delivered more three hundred billion dollars onto the asset side of household-sector balance sheets. Absent an aggregate accounting that includes capital gains, and economic theory incorporating those measures, the economics of this conundrum are conceptually inexplicable.

Just one clue to such theory: if the accounting period is short enough, all “profits” are capital gains — stuff bought/created in one period is sold at a higher price in the next. (Hell: buying lunch is an “investment” in the afternoon’s work.) If the accounting period is long enough, all capital gains are profits from within-period production. (This raises grave issues with the whole “factors of production” construct, and its assumption that each factor is compensated relative to its inputs.)

Saving and Investment. There is no measure labeled “Investment” in the IMAs. So one side of the much-ballyhooed Saving = Investment accounting identity…simply doesn’t exist. The IMA’s “Capital Formation” is very similar, but the change in terminology is significant.

To quote Simon Kuznets, the man who led the creation of the NIPAs in the 1930s, “capital formation…represents the real savings of the nation.” (Capital in the American Economy, page 391.) Ultimately, our national “savings” (the stock) consists of our accumulated stuff. But the money-designated value of that stuff — our wealth — is another matter entirely. As detailed in the next section, the new-goods and existing-assets markets yield wildly different estimates of that value.

So while you could mimic S = I by saying that Saving = Capital Creation, doing so basically just reveals that identity for the rather facile truism that it is: our accumulated savings consists of the cumulative sum of our capital creation (net of capital consumption). Facile because: that measure (basically “book value”) is wildly different from our tally of monetary wealth.

There are clearly defined accounting-identity relationships between saving measures and capital creation/investment (and lending/borrowing). But they’re kind of complex. Spend some quality time in the FFAs; you’ll never find a saving measure that equals an investment measure. Saying that Saving equals either Investment or Capital Creation does very little to clarify those relationships. Quite the contrary. (This especially as the IMAs include two “saving” measures for each sector — one for the Financial Account, one for the Capital Account.)

The Wealth of Nations. How much is all our stuff — I hesitate to say our “capital” — worth? This necessarily must include our skills, knowledge, and abilities, in addition to more tangible things — all the stuff we can consume, sure, but also everything that gives us capacity to produce hence consume in the future.

Until 2006, our national accounts only tallied up “book value” — the cumulative sum of “net investment” (net of capital “consumption” through use, decay, obsolescence, etc.). And that mostly of tangible stuff — very 19th century. But vast swaths of our “investment” are untallied: knowledge, skills, and other human capital to start with. Any firm would certainly consider its educated, trained, capable workforce to be a prime “asset,” even if its value wasn’t, couldn’t be, tallied numerically. This is certainly true for nations as well. No economist would deny the massive real value of an almost-universally literate populace. Book value doesn’t and can’t tally most of that stuff. (Though recent revisions to the national accounts have incorporated much intellectual property — even “brand value” — into measures of capital.)

Which leads us to a different measure of our stuff’s value: total assets or net worth (for the household sector, which includes the market value of equity shares in the firms sector, the household sector’s wholly-“owned” subsidiary). These totals are the asset markets’ best estimate of what all our stuff, and our future production capacity, is worth. This necessarily includes all that impossible-to-measure stuff. The total market value of assets in a country with a healthy, educated, skilled workforce will necessarily be higher than in one without those things. The value of our “good government” has to be in there somehow as well; really bad government would (does?) make our total assets less valuable.

This is to suggest that Hayek was basically right: only the markets can calculate any reasonably valid estimate of all our stuff’s total value. But this market estimate still requires several pounds of salt. Median household net worth in prosperous Germany, for instance, is among the lowest in Europe, because households don’t need to individually accumulate assets to lead secure, thriving lives. Much of their future consumption spending will be done for them by the state. That future spending is not capitalized onto the asset side of household balance sheets. So: apparently low household assets, and net worth.

Nevertheless, tallied assets and net worth are arguably at least good indexes of countries’ changing prosperity — the wealth of nations.

We now have two estimates of that total: the NIPAs’ perpetual-inventory/cumulative-sum-of-investment/book-value estimate, and the IMAs mark-to-market estimate. Both are based on market prices (Hayek would be pleased). The first is based on what people paid for stuff in the market for newly-produced goods and services. But then in ensuing periods the existing-asset markets second-guess that estimate, and decide that all the previously produced stuff is worth much more than it was sold for.

The implications of this? The existing-asset markets are constantly telling us that GDP is (was) wildly underestimated. We actually produced more value than we thought in earlier periods, but we paid less than it turned out to be worth. (Human risk aversion as revealed in Prospect Theory could explain this nicely.) The difference is perhaps 15–25% of GDP — the portion of household income derived from capital gains, unaccounted for in the NIPAs (and the FFAs) because those gains by definition happen “outside the period,” the NIPAs’ field of view.

Money and Velocity. Monetarists’ “money times velocity” construct has been a core concept in economists’ mental and formal models, across the spectrum, for decades. There’s a pool of money, and it turns over X times a year in spending. That’s GDP, or Y. M*V=Y. It’s a seductively intuitive idea.

But dig a little, and you find that “money” is a decidedly shifty concept therein (as it is throughout economics). Practitioners refer to various monetary “aggregates” to denote the “stock of money” — MB or monetary base, M0, M1, MZM, “divisia” measures, etc., plus the incoherent and undefined “money supply” — all seeking to define the stock of money as a particular circumscribed set of financial instruments that are “currency-like,” whose prices are somehow pegged to the unit of account (e.g. “the dollar”). You’ll frequently see economists silently shift between these measures within a discussion, sometimes even within a sentence. It’s a dumpster fire.

With the tallies of assets and net worth in the IMAs, it’s possible to replace that problematic “pool” of “money” (M) with a more solid measure: wealth. The “velocity of wealth” at least provides some alluring long-term correlations with other economic measures. Here for instance, the velocity of wealth, interest rates, and inflation over the last half century:


Likewise, if the “quantity of money” measure (the “money stock”) is an important causal driver or predictor, wealth is a promising measure of that quantity. Since the late sixties, for instance, every time you saw a year-over-year decline in real household wealth (assets or net worth), you were in or about to be in a recession. (Roger Farmer’s research program may be especially pertinent to this.)

Economists: Define Your Terms

The biggest takeaway from all this is economists’ need to precisely define their terms, in accounting terms — something they’ve been abysmal at. Dumpster fire? It’s more like the sub-basement of Fukushima Three.

Accounting is economic modeling. And economic modeling is inevitably rhetorical, hence political. To quote Michael Hudson and Dirk Bezemer:

“Capital” gains do not even appear in the NIPAs, nor is any meaningful measure provided by the Federal Reserve’s flow-of-funds statistics. Economists thus are operating “blindly.” This is no accident, given the interest of FIRE sector lobbyists in making such gains and unearned income invisible, and hence not discussed as a major political issue.

If you don’t deeply understand the model you’re thinking within, and its defined terms, you can’t use it to understand the (inevitably political) economy.

How often have you heard “it’s an accounting identity!” as if that meant “it’s inevitably true”? That doesn’t follow. Accounting identities are nothing more than definitions of terms — actually complexes of interrelated definitions. And the terms very much matter. (See the “comprehensive” and “primary” income and saving usages above, for instance.) Absent a deep, coherent understanding of those accounting identities, metabolized into System 1 heuristics, you simply don’t know what the terms mean. When you say “it’s an accounting identity,” you’re simply saying “it’s true by definition.” Or more saliently: “it’s true by this definition.” The logic of these arguments can get very circular, very quickly.

If I were designing an Econ 101 curriculum based on my fifteen years trying to untangle and understand this whole conceptual mess, I’d start with a week or two of top-level empiricism: learning to deeply understand the national accounts — what they say, and especially what they mean. They’re the necessary, big-picture vehicle for understanding a whole raft of economic concepts and terms — income, saving, wealth, assets, debt, financial instruments, prices, money, utility, and perhaps most importantly, value*** Or at least they’re an excellent avenue into all those ultimately philosophical subjects.

In keeping with the liberal-arts approach to critical thinking that arguably makes American-style universities the best in the world, start with the philosophy of accounting — instead of actively excluding it from the curriculum as econ programs do today.

To quote David Glasner, “as much as macroeconomics may require microfoundations, microeconomics requires macrofoundations.” (Hat tip and excellent further reading: Steve Randy Waldman.) Those foundations are the technical economic terms used — because words are what we use to think together — and the mutually coherent and interrelated accounting identities that define those terms.

Absent those definitions, economists quite literally don’t know what they’re talking about.


* A note for MMT devotees: In Monetary EconomicsGodley and Lavoie provide two matrixes that incorporate capital gains — Tables 2.7 and 11.2. They are the only matrixes in the book that do not sum to zero across the bottom. That is exactly as it should be; they shouldn’t and can’t, for the reasons detailed here. G&L also include capital gains in Table 5.2, but as “only as a memo…capital gains have not been included within the definition of disposable income, but this of course is a matter of convention.” (Emphasis mine.) Capital gains are not part of the Model LP being discussed in that section.

** A very important qualification here, with full props and thanks to J. W. Mason: households don’t “own” firms in the sense that you own your car, can control it and do what you want with it. The “ownership” described here is purely an accounting statement: all firms’ market-cap value is reflected and revealed, via equity-share ownership, on the asset side of the household-sector balance sheet. A further aside, rather eye-popping to me when I discovered it: hedge funds and private-equity firms are all accounted for, pretty much invisibly, inside the household sector. (See also Note 1 to Table F.101.) They’re treated basically like households. This is because like households but unlike other firms, they (or at least their participants) “own” their own righthand-side balancing item — net worth/equity value.

*** Crucially, there would be perhaps a day or two on inflation measures, hedonics, and purchasing-power parities.

2016 December 3

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  • Lev Shakhmundes

    I have a suggestion to make. Let’s submit this article for peer reviews. Its title makes it clear the article is in economics. So, for peer-economists’ reviews.

    • I guess we should suggest that for every blog post on economics?

      • mohinderkumar

        “Peer-economists” themselves have mostly done harm to economic issues, concepts, definitions and terminologies by creating more confusion. Still more “peer-economists”!

      • Lev Shakhmundes

        No. Only for those blogs, in any science, the writers of which think they are saying something important. To put it differently, if you think you are saying something important, say where it matters. Uh?

        • mohinderkumar

          Under the impact of capital, economic science like everything is a divided affair: Mainstream vs. others. This “other” economists include Marxist, evolutionary, behavioral, complexity theorists et al. Do you mean Steve should invite Arrow & Debreau mathematical economists for comments? Debreau himself gets banged by mathematicians for posing himself as “mathematical” economist who shows little basic understanding of economic problems when they ask him. Or should Steve send (“submit”) his piece to them for comments? With internet, website and web world, are these pieces not visible to these so-called “peer economists” many of whom are teachers and have destroyed the learnings and careers of many bright young budding economists by their mugged-up theories? I think efforts of Evonomics etc. should be organized and pose a challenge to the authority of mainstream “peer economists” (mostly situated in the West who have followers standing in queue in “submission” mode in the East) . Already WEA is doing good job with pluralistic approach to economic science. Let all these efforts be united. Perhaps Lev did not suggest that Steve’s essay (far far better than so-called hard core research papers of pseudo economists and experts) should be submitted to the IMF and World Bank economists. Let there be no arrogance but it’s fact that mainstream economists (Lev’s peer economists) are a bunch of jokers with little “value” but great success to their credit & claim.

          • Lev Shakhmundes

            Do you recognize how low is the scientific quality of writings on Evonomics, LinkedIn and such? To prove yourself as a scientist one has got to have publications in scientific literature. This is an imperfect world, there could be obstacles even for a worthy individual, but I don’t think there is any other way.

          • Dr. Mohinder Kumar

            Pseudo science imposing statistical regression equations, statistical tests and mathematical equations without proper conceptualization is zero; its efficacy and usefulness has no meaning. I’m one of those many millions who are unfortunately taught and trained in mainstream economics whose principles were written by stalwarts in economic “science”. Steve or other contributors, I think, have no intent to “prove” themselves as a “scientist”. Kindly see his Asymptotis blog of past 3-4 years. Why not you invite one of your economic expert friends to share his/her views on Evonomics? Is evonomics not worthy of being a part of scientific literature? Is there some “caste system” applied therein? Career-centric economic scientific literature embodied in peer journals cannot match the quality of stuff at evonomics (barring 4-5% articles). Twenty four years ago as I was exposed to Marx, I raised this fundamental question in my synopsis for Ph.D. work: what is “value”; who creates “value”; how value is created? I found tremendous problem with concepts and notions in economics when I started thinking critically. I could not handle them and/or I was not allowed to think/act that way. But I see today Steve & others e.g. in Evolution Institute raising same questions of flawed categories/terms/concepts and method. Professors and researchers toe mainstream status-quoist approach. Today thanks to internet we’ve access to WEA, EI, evonomics, proSocial, etc. and exposure to highly readable and truly scientific writers like Fritzkof Capra, Naseem Nicholas Taleb, etc. with their approaches of complexity theory, evolutionary perspectives, non-linearity, which remind us of Marx’s later forays into Asiatic Mode of Production (AMoP) in his ethnological notes explored by Krader, deviating from European linearity of progress. Lev, take a print out of Steve’s article, “submit” it to your economist(s), have his/her comments and post the same at this forum. I think that will be better.

        • I guess this would mean we should ignore Zucman & Co’s recent magisterial contribution for a year or so, until a couple of journal-assigned referees have passed judgment on it, and it’s gotten into print?

          Think: open-source peer-review. It’s a big wide world out there these days…

          This article will get thousands or tens of thousands of readers, including many/most of the cognoscenti in the subject. A journal article will get a couple of hundred, maybe a few thousand. Though yes: those will also comprise many of the cognoscenti.

          • Lev Shakhmundes

            Steve, I don’t quite understand the Zucman example. He has published in scientific literature everything he has intended to make public. Also, could you please point to something, most notable in your opinion, re the open-source peer-review. Thanks, Lev

          • This latest release, the DINAs — magisterial, once-in-a-century level of work — is published as…a working paper.

            Should we have waited a year for two journal-assigned referees to deem it worthy for us to see?

  • Dick Burkhart

    You state that using asset market prices would greatly increase GDP. But these prices often reflect speculative bubbles or crashes, not true value. So how do you take that into account?

    Also, Amazon’s huge market value is obviously based on speculation as to its future ability to achieve enormous profits via monopoly power. I didn’t see you mention this, or that the extended underpricing by Amazon is a form of dumping, an illegal way to drive others out of business.

    • Dick Burkhart:

      >”You state that using asset market prices would greatly increase GDP. But these prices often reflect speculative bubbles or crashes, not true value. So how do you take that into account?”

      Right, existing-asset markets are super volatile. Animal spirits shift quickly. Take a look at the graphs in the linked “Graphics and Discussion” article,

      And you’ll see that I had to use ten-year rolling averages to give a general sense of things. Otherwise the graphs are hopelessly messy to the human eye. The takeaway from that is probably that this way of describing and presenting the economy is arguably most useful for considering the long-term view. (Ditto with the remarkable data sets from Pikkety/Saez/Zucman et al.)

      OTOH, the right analytical tools — beyond hold-up-your-thumb-and-squint — might yield shorter-term insights. cf the linked article on changes in real household net worth vis a vis recesssions.

      >Also, Amazon’s huge market value is obviously based on speculation as to its future ability to achieve enormous profits via monopoly power. I didn’t see you mention this, or that the extended underpricing by Amazon is a form of dumping, an illegal way to drive others out of business.

      Right. Again, many other issues arise from these data pictures — empirical, rhetorical, political, financial, etc. I didn’t manage to hit all of them.

  • Patrick cardiff

    I’ve worked with BEA for 15 + years now, but on the Regional side, so while I noticed the attempt to integrate I have rather ignored the progress 1) to concentrate on lower level estimation and also 2) because finance is esoteric, highly dependent on definition, matching, and imputation (consider, for example, how the perpetual inventory method is applied in aggregation to amortize capital stock). Accounting is lock-step deterministic compared with the model admitting error of Economics. The IRS doesn’t like estimates; it like totals. Accounting in general emphasizes less on variance and error, but the real world is real messy. It is therefore not enough, sometimes it is not right, to put a collection of things together and call them a “credenza.” It is even less compelling to base your definition of “speckled family credenza” on the assumptions you make to total data, however convenient. Apologies to Dr. Seuss.
    I’m willing to say we are not prepared to calculate the importance of financial institutions like Wall Street, the banks, the insurance companies etc., on the “growth” of our economy as measured by GDP. But that’s GDP with its other problems as well. If there were a simple index that could capture at least the majority of important effects so as to ease the burden on a bureaucracy having to produce the same output with fewer federal dollars, it may be considered. Or it may be taken up by default. Or even adopted by necessity. Finance isn’t everything, and Economics has to “flexible” with inclusion when it comes to modeling because the interpretation is rarely “determined.” But more importantly, where do financial effects fall? It’s easy for me to value capital gains and interest payments over a three month period. But samplers have to statistically represent the USA overall, and how would you design the sample to make sure you have the exact, deterministic target variables and administrative data? We’ve been thinking about this for at least 30 years.
    We are all different, each of us. For example, I do not want to be associated with the phrase “purchasing power parity” because I worked with interarea price deflation. Some think the two basically the same. The former has a bad connotation of averaging for a number of reasons, but basically it has more “external trade” comparison in it, so the deflators are cruder, more bureaucratic, for the assemblies of goods and areas examined, and more frequent.

    • Patrick:

      Great comments. So much to say. I’ll start with:

      >”We’ve been thinking about this for at least 30 years.”

      Yes. Even further, back to Kuznets’ earliest days in the 30s. I didn’t put across strongly enough, perhaps, my incredible admiration for the work that national accountants do. Yeomanlike, deeply challenging, analytically complex, and utterly essential. I hope this piece imparts how important it is to understand the work they (you) do, and direct economists to the deep body of literature on “how to think about national accounting” that’s out there to be read and understood.

      A piece I’ve been meaning to write, here in small:

      Accounting statements are like eyeballs. As soon as a photon hits the retina, modeling begins. Without a model, we quite literally can’t “see” anything. People tend to give accounting statements a “truthiness” status that needs to be constantly, carefully, and rigorously interrogated. “What you can see with your own two eyes” seems like truth, but it’s missing most of the electromagnetic spectrum, and is subject to a plethora of modeling errors, perhaps best revealed in optical illusions. If you don’t know what’s missing, and what’s potentially misconstrued, in important cases you don’t actually know what you’re seeing.

      As for the economic “effects” of finance-related behaviors, what a great and difficult topic. I’ll just say that households’ vague mental tallies of their own assets and net worth (they rarely tally them formally) are important drivers of their behavior. If the house you bought twenty years ago for $100K is now worth $500K (versus 200 or 300K), you’re gonna make very different spending and life decisions.

      Or to put it in economic/Keynesian terms, net worth should be a term in the consumption function. (I prefer “spending function.”)

      Sorry if I’m addressing your comments with a broad brush… So much to think about… Thx.

  • Steve Roth,
    MMT has got it right.

    1) Real assets are not “money” no more than goods and services are “money”.
    GDP is a flow, not a stock. National accounts do take account of capital gains and revaluations, but only at the point those assets are sold in exchange for the government’s unit of account.
    This is consistent with the fact that the national accounts are based on actual transactions, not hypothetical ones.

    2) Private sector financial assets are not “money”. either as they are a product being sold in exchange for the government’s unit of account (again like goods and services). So revaluations etc are only taken into account when those products are bought or sold.

    3) Think what would happen to the estimated value of real assets if everyone were to put their assets up for sale at the same time. The actual value of those assets that are sold would fall dramatically to the amount of money available to service those transactions. And to a lesser extent banks might increase lending a bit, or governments might increase their deficits a bit to increase the amount of money in order to service these transaction.

    Kind Regards.

    • Ian Tompkins

      While I mostly agree with what you stated,

      in response to point 2, part of the purpose of actively accounting for gains may be to account for an individual’s net power, if we’re not accounting for this now, then the comparative wealth of the 1% must be even more disparate than we currently account for. This has implications in what would happen if we were to disperse the assets.

      In response to 3, if everything were up for sale simultaneously, then there would technically have to be buyers, unless there were only a single buyer buying the whole market and instantly having universal ownership, but nobody would let them buy everything at a cost of almost nothing, unless nobody else had units of currency, except that buyer. Essentially this is a situation where only 1 person has dollars/currency, and everyone decides dollars are infinitely valuable at that time (even though only 1 person has them so they’re actually useless). I suppose this is something that could happen if a universal government were constructed and it bought everything with a new type of currency that everyone agreed was valuable, but that’s homologous to handing a universal monopoly with essentially unlimited power over to a single entity, which ultimately doesn’t make sense.

      Perhaps a critical thing that the article is getting at is that we’re turning valuations into “dollars” when they’re not dollars. If instead we sum the “value” of the real dollars, and the “value” of assets in terms relative to dollars, then sum would be equivalent to the sum of the economy in terms of “value.” Which is what we need to look at, as we can’t attack a target if we’re only looking at a portion of it. Since dollars were created as a currency tool to allow value to be created, collectively dollars have a legal asset “value” to society (as a tool) separate from and in addition to the actual dollar value, which can be gauged by the relative value of currencies as useful tools (including non goverment issued currencies like bitcoin, which have usefulness in their own way)

      Anyway, the main point of my comment was that we can’t progressively tax the excess value/power/wealth/money of the wealthy, if we cannot properly identify what makes them wealthy beyond direct accounting.

      • Ian Tompkins:

        >”In response to 3, if everything were up for sale simultaneously”

        Just to say, I’ve gone through EXACTLY that thought experiment myself. Actually wrote it up at one point, somewhere, I seem to remember some vigorous discussion ensuing… Fascinating way to think your way into this stuff.

    • CharlesJ:

      >”National accounts do take account of capital gains and revaluations, but only at the point those assets are sold in exchange for the government’s unit of account.”

      Actually the NIPAs — the pyramid of accounting underneath GDP — don’t take account of them at all. I think you’re confusing the national accounts with the tax system.

      > “MMT has got it right. 1) Real assets are not ‘money'”

      Saying “that’s not ‘money'” cuts right to the quick of the biggest and most crippling confusion in economics. I — like many an internet econocrank — might suggest that I have a coherent and useful definition of that term. Take it for what you will. (But: understand it.) But we can say unequivocally: economists do not have a coherent and mutually-agreed-upon definition of the term. (Search for “pegged” herein for my somewhat passing discussion of that definitional issue.)

      Just to add: some leading MMTers are finding some real Aha! value in this piece.

  • Ishi Crew

    I notice in the definitions of national accounts, and such , ‘natural capital’ was not mentioned. (Herman Daly popularized this idea). Others tried to include into national accounts ‘unmeasured’ things like ‘home work’ (often more often done by womyn —eg stay at home moms, but now more diversified), volunteering, sometimes taking care of elders for no pay, etc.

    I mostly study econophysics and related areas, and the ‘alternative economy’ (eg though i am not sure it is different than this system—meet the new boss, same as the old boss. ) . These have their own vocabulary, definitions, and empirical data—some as equally detailed (and confusing to people unfamiliar with the dialect) as the above. (I have read alot of NIPA data, and related data sources on GDP, income (eg Piketty) and one thing I have noted is that often the data sets are inconsistant, though one can see same trends—and actually most of these trends were visible in the data going back to 1980 or before, though since 2000 or so they are increasingly visible).

    (My view is the entire discussion above should be rephrased in econophysics language. And, research programs should be funded by a UBI (universal basic income) for those who want to do research. There is actually a fair amount of good economic research around, but alot of it is not in AER, JPE, EcJ, etc. so alot of it is ignored. Also, the ‘intangible economy’ and related ventures are basically not discussed, except now maybe things like Uber and airBnBs).

    Since I’m unemployed, operating on the edge, I look at basic economic issues like how you survive day to day while trying to plan for the future. My view is most professional economists have solved this problem—they know what they are talking about, even if it doesn’t neccesarily make alot of sense—they have an income and social status too.


    • Ishi Crew

      postscript—i note Eisner’s “Total Income Accounts’ is mentioned—that book was on the right track. I read most of this stuff in public libraries for basically free, as opposed to for student debt, so any knowledge i gained from this is not in national accounts. (Same is true for free online courses—eg Coursera–i took a few to see what they were like and how they differed from the same courses i had taken in college—not much for things like math logic, quantum theory, etc. If you pass these they still don’t count as anything unlike if you pay for them at a college. Like courses i took in college, the ones i took on-line for free leave out as much as they include.)

    • Ishi:

      >”I notice in the definitions of national accounts, and such , ‘natural capital’ was not mentioned.”

      Totally true. I’ve touched on this before discussing the “evolution of ownership,” and the nature of financial vs real assets:

      “A truly comprehensive and coherent accounting would require first assembling such a pre-human or pan-human world balance sheet. Practically, that’s utterly quixotic. Conceptually, it’s utterly essential.”

      >’unmeasured’ things like ‘home work’ (often more often done by womyn —eg stay at home moms, but now more diversified), volunteering, sometimes taking care of elders for no pay, etc.

      Also a hugely important issue. I actually went after the numbers on this in a couple of pieces:

      > often the data sets are inconsistent

      Certainly true. But: almost necessarily so, because different account structures and terminologies are used. Accounting is not handed down on stone tablets. It’s a deeply human and imperfect effort the describe the world.

      If this piece achieves nothing else, hopefully it clarifies how the structures and terminologies compare for the NIPAs, the FFAs, and the IMAs. And hence helps clarify some discussions that frequently go in definitional circles.

      So yeah: there are various huge issues with the national accounts that economists need to understand, and many/most don’t. This piece doesn’t even touch on many of them.

      I’m also self-taught, by the way, so I’m very much in empathy with your efforts to figure this stuff out at a fundamental level.

      • Ishi Crew

        i jst saw this reply, for what its worth (not much, just like any economic knowledge i have is not worth much or antying since its non-credentialed—i got into it because my father went to UChicago econ (everything but the thesis, and not a fan of chicago free market schools ) and because many people i did study formally in theoretical biology and physics got into ‘econophysics). so i looked at my father’s old books along with current econophyscis—it goes back to r goodwin, and even paul samuelson —papers 40 or more years old, and even before that.

        that approach has its problems but its on right track—unfortyunately its turning into alot of excercizes in math pyrotehnics with increasingly distant relations to the real world.its just fun for physicists. Just as alot of theoretical econ is fun for economists—get a salary and status. This is standard in acaemia—it reminds of psycholgoists and social workes who deal with drug addiction and pverty—they get paid in many ways doing little–i knew many people who went to rehab, and social workers work hard, clean em up, and send em out on the street. they are back in 6 months (often all paid for by taxes).

        people dot like ‘big govt’ and beurocracy because you are paying all these people to collect data down at BEA or census, etc. But they dont do much analyses.

        you did some. (data is not my area tho i look at it.) It looks as good or better than what professional economists do.

        I happen to think MMT is ‘half a theory’. Randall Wray etc have tenure so they dont have to do any more. Their idea that govt can just print money is in a way correct–give the poor jobs or a payceck and social services, give Lockheed martin a contract to build weapons—-no problem. If you have tenure its popular to argue ‘let them eat cake’ –because you got yours, and ‘them’ arent going to really get much cake. maybe a soup kicthen.

        also we are supposed to worry about student debt used to fund half baked research and education, so the profs can have mcmansions and travel.

        the articles on evonomics are often inconsistant, and some are on track but really not well thought outrather than get a whole or better theory, people just write books for their CV rather than do any more difficult analyses. If people cooperated to create better sets of theories one might get one—but current incentives are survival of the fittest.

  • Shaun Johnston

    “the (inevitably political) economy”–When excess money flows into finance I assume the quality of opportunities for investing it declines, leading eventually to a loss of confidence in the value of past investments and loss of trust leading to a crash. Excess money flowing into demand (government and consumers) I assume leads to frivolous spending on items of increasingly diminished value. Shouldn’t politicians control the flow of money through taxes and spending on behalf of the public so as to maintain an optimal balance between investment and demand? This wouldn’t be a left-right issue, more an optimizing of the value of items in the “money circuit loop,” to everyone’s benefit, and maximizing the velocity of money.

    • Shaun Johnson:

      By my intuition you’re addressing (the?) crucial, core economic issues. But it’s a messy tangle of theory, modeling, and accounting.

      I’ll just say that I think far more important is the concentration/distribution of the flows and stocks. And the stocks, at least, are rendered invisible in the pre-IMA accounts. The whole issue is rendered invisible by most mainstream economic models; there simply can’t be any concentration/distribution when there’s only one “representative agent.”

      I worked through some of the arithmetic of this in the following post (you’ll notice it took me a few posts/iterations to make the model internally coherent):

      Discussed further here:



  • mohinderkumar

    Charles and Ian, the objective of the essay is also (implicitly) to suggest that we need to transcend market and market-exchange based money evaluation/valuation. It aims to go beyond “money value” of things while simultaneously emphasizing that there are certain assets whose money value is not accounted for in GDP/GVA. Why should value of every thing be measured in terms of money? Steve Roth proposes a comprehensive and complete understanding of different facets of “value”. In this respect, his concern is clearly for “real” and non-measurable qualitative aspects of assets (including skills, HRD, talents, etc.). Of course, it will include services of housewives, and even family labor (on-farm jobs). The list would be quite long. That way, GDP may be an underestimation to the extent of even 50%. “Value” is a multifarious trait. When this is accepted, our outlook towards economy and society changes. Then value of each being becomes a reality. Second, Steve never equates “value” with price kind of phenomenon. This is very important. It’s another way of taking the system away from markets, market exchanges, transactions and huckstering. This solves the hypothetical yet maddening dilemma of “everyone ready to sell everything at the same time”. Why to sell? And, what to sell? It implicitly questions: Why markets (though quoting Hayek’s love for markets in context of his deserved disdain for USSR type despotic state’s interference in human affairs). Except that, article doesn’t eulogize society pervaded by “market” exchanges. It only says what are the real missing things in asset valuations. Consider how would capitalist corporate firms think of hiding their profit income? By under-estimation. How under-estimation is done? By under-reporting of “capital gains” despite that capital gains are a larger part of balance sheet of firms! Such is the secret of corporate firms to hide “wealth”. Suppose if national economy also resorts to such a practice! The result is under-estimation of GDP which Steve Roth says is to the extent of 15-20% in case of USA. The question is who benefits by under-reporting of assets in GDP or GVA of national economy? And why it’s done?’s profit = zero but revenue/turnover skyrocketing implies capital gains. Even a small grocer in street shop engages in such practice since ages. He sells (mostly sugar, “biri” i.e. local cigarette bundle) at cost price but saves assets like jute bag, cardboard, bonus-prize like free steel utensil inside the bag, etc., which is his “profit” but NEVER accounted for as such). Today’s corporate firm also follows this method. Otherwise, with 10% profit rate or even declining/fluctuating profits, capitalist corporates can NEVER ensure sustenance, perpetuation and multiplication of this profit oriented system where capital multiplies: leave aside if poor farmer dies, That’s why Steve says: Capital Gain = Profit.

    • mohinderkumar:

      >”the objective of the essay is also (implicitly) to suggest that we need to transcend market and market-exchange based money evaluation/valuation.”

      While that’s something I agree with (cf eg David Graeber’s work), it’s not quite what I say here. Not so much “transcend” as…to describe how different measures in the national accounts might be representative (in dollars) of those bloody-difficult-to-measure things.

      As soon as you try to represent “value” in a unit of account, you face really difficult conceptual, rhetorical, and political issues. (See the link from “Value” in the article.) And you could argue that privileging that $-based representation, in and of itself, is pernicious. I wouldn’t argue with you.

      But I’m kind of an accounting dweeb, so I tend to think inside that method, while always trying to bear in mind its deep limitations.

      See my response to Ishi above for links to my previous thinking on what’s measured in the national accounts.

      • mohinderkumar

        Steve’s other essay on, I think, money or ownership is to be linked here. Plus Marx’s notion of “value” (totally missed) to take the central problem of “accounting” forward, towards its resolution. Real goods’s production precedes creation of money, “value” etc., just as man precedes the notion and idea of “God” through emotional belief. It’s different altogether that at certain stage money becomes a ruthless “determinant” factor of production to “cause” real goods’ production to come into being. It gets reversed. Otherwise real goods are always primary. Naturally MMT has to say that real goods are not money. Money is any way exotic imposition, first as an idea (born out of necessity of counting) then appearing as “independent” entity/good in itself with autonomous existence. Steve in one of those essays beautifully says money as “unit of account” is sheer absurdity, absolutely alien thing. There also he talks about need arising in history of counting (in mind and in spread sheet). Primitive societies and historical societies needed to count what they produced, possessed and shared. Somewhere down the line, I understand, money became “store [house] of value” or warehouse of “value”. We have managed to live with absurdities of our own creation for thousands of years; that’s the tragedy of mankind. When money became a “store” (house) or warehouse, what was stored in it? It was “value” which is autonomous independent “something” or “common something” (precisely to use Marx’s notion). Value is common something and runs through commonly (as a ghostly/spectral trait) in all capitalist production processes/relations. I find it highly “abstract”. Mind cannot understand it (value) so easily like, e.g. “probability” concept is too abstract for mind to understand.

        When there is a stock and flow of real goods, its useful and has use-value to the mankind (as it enhances satisfaction, welfare). Why it ought to have “exchange value” in normative sense? We may have a system wherein exchange value (and hence money value) is a non-entity. Why “value” be tagged to a good from outside/exogeneously? All goods have essential value that derives from its inside, in the sense of subjective importance, significance, assertion, satisfaction, healing, emancipation, etc. Having physical measure (count) of goods is entirely different from having monetary measure, the former being normal and the latter being absurdity.

        It’s in this sense I said “transcending” market/money exchanges. Now reverting to the problem of national accounts. Why after all total goods, assets, equipment, things, apparatus, physical entities in existence and in flow need to be counted in monetary terms? Here appears the compulsion of money as “store” (house) of value. This becomes the powerhouse of hegemony, suppression, exploitation in sophisticated way through control/concentration of money power. Then it becomes systemic and systematic. Constituents of GDP/GVA could very well be counted and stocked at any point in time in terms of physical units. Mankind is approaching that stage sans money. Even digitized money (as store of value) shall ultimately fade away.

        • For me, it’s easiest and most fruitful to think about money as claims, or credit. A Target gift card represents credit at Target, and you can claim goods from Target in exchange for that credit.

          Some claims are very specific. A title to land lets you claim usage of that piece of land, and claim the right to exclude others from that land (by force if necessary, or by calling the police to outsource that force). A pension account lets you claim an income flow from a particular pension fund. Others are generalized claims against “the world” — eg dollar bills or checking-account credit balances. Even with these generalized claims, somebody who owns lots of them can claim more of our collective stuff than somebody who owns few.

          Many thousands of years ago, humans started inscribing those claims on tallies of who owns what and who owes what, to whom. When some clever soul invented the arbitrary unit of account to tally the “value” of diverse items, money was born.

          The around 800 BC somebody invented coins — physical tokens representing those tallied claims, designated in a unit of account. We started calling those physical tokens “money,” and conflating the physical items with 1. the balance-sheet tallies, and 2. the unit of account itself.

          I think of money as the value of balance-sheet assets (tallied ownership claims), designated in a unit of account. In this thinking, currency and currency-like things (eg financial instruments that are pegged to the unit of account) are embodiments of money. But so are titles to land.

          Perversely, this means that in this term-of-art definition, dollar bills are not money. Compared to tallies, they’re an extra step remove from money. They are conveniently exchangeable physical tokens representing transferable balance-sheet assets — ownership claims that have a value designated in the unit of account.

          Much confusion arises by talking about designated claim value, vs physical currency and currency-like financial instruments, using the same word.


  • ICFubar

    To a lay person with an interest in economics this was a lot to take in. However, anything applied ,like GAAP, that gives a clearer and more truthful grasp of what actually is occurring can only be a step forward. Now the reporting of those results may differ widely, depending on those results and any political interference for self interests. Perhaps reports of this kind should be done through a public non governmental agency that is completely independent of any interference and solely subservient to a public body overseeing such an institution? Now that I would pay a surcharge for.

  • Darah

    Good article Thank you Steve Roth.
    1. How do we avoid valuing assets based on herd behavior run-ups in value that do not reflect “real value” ? Avoiding the Tulip Bulb Mania, and the housing run-up from 2000 to 2007 ? I didn’t see an “accounting” for this issue.
    2. How do we separate asset valuation based on an increase in “real” value versus perceived value ?
    3. How do we distinguish financial wealth versus wealth held in real assets ?
    4. If we need to improve infrastructure, invest in power grids, invest in food production and distribution, invest in education and skills training, invest scientific and technical research, etc, etc, then how do we distinguish between long-term investment is real assets versus investment in price fluctuations from short-term investment in financial assets ? In other words, how much of our national wealth is dedicated to financial assets not connected to building for a future ?

  • mlouis

    Great article. Would Wealth/Primary Ownership Income be a P/E ratio of sorts? Seems like a lot of people want to chalk these trends up to a “rentier economy” but might it be as simple as a fall in interest rates (and rise in P/E)?

  • Florian Conrady

    Hi Steve,

    thanks for the article! Do you know if anybody has tried to construct IMAs between sectors, analogous to bilateral current accounts between countries? Could one define, for example, the compensation account between business and households or government and households?