Thinking about Value, and the National Accounts
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.