Thinking about Value, and the National Accounts

October 18th, 2015

The remarkable discussion on “national wealth” and the national accounts that is running over at Interfluidity (373 comments and counting…) in response to my last post prompts me to recount an anecdote that I think is germane.

I took exactly one accounting class in my life, at the NYU MBA school — essentially Accounting for Non-Accountants, teaching us to deconstruct corporate statements into cash flow.

There were two profs. (I don’t remember their names.) The lead was an old hand, a long-time member of the Financial Accounting Standards Board (FASB), and a real comedian. The young guy was the straight man and enforcer — assignments, testing, and nuts-and-bolts lectures.

The beginning of the very first lecture, given by the old guy, has stuck with me ever since. He started with an anecdote. (Here recounted from distant memory.)

When I was an undergrad (he said), I hung out with these economics types. I was thinking of buying a new car. They told me, “don’t do that! As soon as you drive it off the lot it’ll lose a third of its value!”

But anyway, I went ahead and did it. I went through all the paperwork with the salesman, signed on the dotted line, and he handed me the keys. “Here you go,” he said. “Drive it away.”

I looked at him like he was crazy. “I’m not gonna drive it away,” I said. “It’ll lose a third of its value!”

Ba dum ba.

Then he explained why he used that anecdote right up front, framing the whole (rather grueling) semester-long exercise to come: Accounting, he said, is an exercise in assigning value to things that are often (mostly?) deucedly difficult to e-value-ate. Whether it’s the value of that car (before and after it leaves the lot), or the “wealth of nations,” accounting is inherently a problematic exercise in estimation. We just do the best we can.

Based on a decade or so of wrestling with the national accounts, I’d extend that thinking further. Sure, estimating value can be very iffy, but that estimation is also, always, a function of the accounting constructs and architecture used to do that estimation. Simply put, the national accounts are an economic model of the national economy. The map is not the territory. The presentation is inevitably stylized, like a Mercatus or Peters projection — and the choice of presentation has similarly important rhetorical and political implications.

The implication: as with any economic model, to understand what you’re seeing, you need to look not only at the results presented within the model, but at the model itself. You need to (at least) consider not just potential errors within a model, but model error itself. To get very philosophical: National account structures are, ultimately, epistemological structures — systems for trying to “know” things.

The national accounts, by their very status and position, discourage examination of their model. The notion that they’re “just accounting,” adding and subtracting straightforward measures, reifies them, and the model they present. The assumptions underlying that model are rendered invisible, apotheosized as god-given truths.

National-accounting sages are very much aware of this reality. Check out Jorgenson, Hulten, Hall, etc. on the “zero-rent” economic model that lies (hidden) at the core of the national accounts as constructed. (They mostly argue: appropriately so.) Or spend some time in that Interfluidity comments thread. If you haven’t thought critically and carefully about the national accounts’ economic model, you don’t understand the national accounts. (I’m not, by the way, claiming that I do. Despite lengthy exertions. Necessary versus sufficient and all that.)

That old-hand FASBer imparted, I think, a profoundly important truth. I’ve been struggling with its implications ever since.

To put across exactly how important and profound that truth is, I’ll end by passing the baton to John Maynard Keynes in his essay on “National Self-Sufficiency”:

Once we allow ourselves to be disobedient to the test of an accountant’s profit, we have begun to change our civilization.

I only got a B+ in the course, by the way.

 

  1. October 18th, 2015 at 10:40 | #1

    Steve,

    What’s this zero-rent thing? Tried going through your links but couldn’t find anything that’s quick to see.

  2. JKH
    October 19th, 2015 at 07:45 | #2

    In quoting your back-up man John Maynard, it might have served the cause of balance to include the next two sentences:

    “And we need to do so very warily, cautiously, and self-consciously. For there is a wide field of human activity where we shall be wise to retain the usual pecuniary tests. It is the state, rather than the individual, which needs to change its criterion. It is the conception of the Secretary of the Treasury as the chairman of a sort of joint stock company which has to be discarded.”

    This is not an indictment of accounting. It is the opposite. In the full quote, he is obviously in favor of such accounting tests as private sector return on equity, but explicitly opposed to the classic “Treasury View” when it comes to government – i.e. opposed to Say’s Law as an unnecessary restriction on government policy. This has nothing to do with any alleged accounting problem. It has to do with the obtuseness of classical economics in dealing with the potential effects of economic growth as it relates to government expenditure – and the failure to follow through on the correct macro accounting to its logical end. The General Theory depends on the idea that deficits create income and saving from income – which is simple accounting logic – assuming one understands the meaning of saving.

  3. JKH
    October 19th, 2015 at 07:53 | #3

    meant “include the next four sentences” of course – the more the merrier

    P.S.

    The reason the GT is so great is that JMK anticipated and used national income accounting before it was formally invented.

    (And one of his core and ultra important ideas was the correct conceptualization of saving)

    If the mission be that of accounting voodooization – this is the wrong guy to quote for support.

  4. October 19th, 2015 at 09:31 | #4

    “The national accounts, by their very status and position, discourage examination of their model. The notion that they’re “just accounting,” adding and subtracting straightforward measures, reifies them, and the model they present. The assumptions underlying that model are rendered invisible, apotheosized as god-given truths.”

    SR,

    There’s no black box. You are free to change it and come up with your own. So I don’t know why you say they discourage examination of their model.

  5. October 20th, 2015 at 11:37 | #5

    @JKH: Great. I may take another post just to fully unpack that quote.

    Given my obsession, I hope you understand that I do not intend with all these discussions any “indictment of accounting.” Rather, exactly what you want to see out there: deep and wide understanding.

    My underestanding may be erroneous, incomplete, or just completely broken (I really don’t think so…), but it is an ongoing effort toward your same goals.

    @Ramanan: See the very first link there, Hulten, in particular:

    IX. The “Nonzero-Rent Economy”

    Not suggesting the examination of the underlying is impossible, QTC. Just that people don’t do so because they think they’re viewing some god-given construct.

  6. October 20th, 2015 at 12:28 | #6

    @Asymptosis

    The article says:

    “The accounting architecture described in the preceding sections has two levels: a foundation based on the circular flow of goods and payments, and a superstructure based on the application of economic theory. The first is rather general, but the latter employs specific assumptions about the valuation of the stocks and flows, assumptions that Hall (2001) terms the “zero-rent economy.” That economy is characterized by competitive markets, constant returns to scale, and the possibility that all factors can be freely adjusted in the long run”

    Not sure which architecture it is referring to, but you can certainly have imperfect competition, increasing returns to scale in a stock-flow consistent model.

    I don’t know why national accounts is to be blamed or that it has some hidden assumption or something.

Comments are closed.