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kjr63 raised a fundamental point that was ignored:
i don't really understand what Mr. Bezemer means with "accounting model"

While the question "what is wealth and how is it created" is interesting and important, for the purposes at hand, the issue of the "accounting, or flow of funds model" as opposed to "general equilibrium models widely used in academic and Central Bank analysis" is central to any attempt to resolve the systemic blindness that led us over the cliff.  That, after all, is the point of Dirk J. Bezemer's paper.  It is a continuation of the efforts of William White, the chief economist of the Bank of International Settlements for the fifteen years prior to June, 2008, whose efforts in that regard are described in the article from Der Spiegel posted by Crazy Horse above.  

The credit crisis and ensuing recession may be viewed as a `natural experiment' in the validity of economic models. Those models that failed to foresee something this momentous may need changing in one way or another. And the change is likely to come from those models (if they exist) which did lead their users to anticipate instability. The plan of this paper, therefore, is to document such anticipations, to identify the underlying models, to compare them to models in use by official forecasters and policy makers, and to draw out the implications.

There is an immediate link to accounting, organizations and society. Previewing the results, it will be found that `accounting' (or flow-of-funds) models of the economy are the shared mindset of those analysts who worried about a credit-cum-debt crisis followed by recession, before the policy and academic establishment did. They are `accounting' models in the sense that they represent households', firms' and governments' balance sheets and their interrelations. If society's wealth and debt levels reflected in balance sheets are among the determinants of its growth
sustainability and its financial stability,such models are likely to timely signal threats of instability.

Models that do not - such as the general equilibrium models widely used in academic and Central Bank analysis - are prone to `Type II errors' of false negatives - rejecting the possibility of crisis when in reality it is just months ahead. Moreover, if balance sheets matter to the economy's macro performance, than the development of micro-level accounting rules and practices are integral to understanding broader economic development. This view shows any clear dividing line between `economics' and `accounting' to be artificial, and on the contrary implies a role for an `accounting of economics' research field. Thus this paper aims to encourage accountants to bring their professional expertise to what is traditionally seen as the domain of economists - the assessment of financial stability and forecasting of the business cycle. (My bold.)

Neo-Classical Economics is a house of cards and virtually worthless except as a rhetorical underpinning for the existing, failed system, but the way in which it has been wired into the brains of so many of us is uncanny.  Once again, just when there is the opportunity to see something important and useful as a line of attack, we veer off on an unproductive tangent.  I am equally guilty as I didn't notice until after I had taken the time to read the cited articles.

While it may wound the pride of "Mainstream Economists" to accept that they need supervision by accountants, that wound is far less significant than the wound to the body politic and the entire world economy, especially their own, that their blindness has inflicted.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jul 14th, 2009 at 08:57:39 PM EST
ARGeezer:
While it may wound the pride of "Mainstream Economists" to accept that they need supervision by accountants, that wound is far less significant than the wound to the body politic and the entire world economy, especially their own, that their blindness has inflicted.
From reading some old economists like Veblen, Keynes and Galbraith, I suspect mainstream economists before WWII actually thought of economic agents in accounting terms. When through the work of Kuznets and others the system of national accounts was developed, it was to bring the accounting models of the firm into macroeconomics.

This has also affected financial economics. Last year I was reading a book on the financial markets by a heterodox fund manager and he complained that, with the rise of mathematical finance, people had stopped learning contract law and accounting and just thought mining historical series of market data was enough to do finance.

There's something decidedly strange about the way mathematization and physics envy has led economics (and financial economics) to abandon the study of the entities and processes that make up the economy. This kind of "accounting"/"flow of funds" models of both economic agents and the economy as a whole seem intuitively appealing from a physics point of view. So you get a decidedly unphysical theoretical construction out of physics envy. And then an "engineering" built out of it, with disastrous results.

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.

by Migeru (migeru at eurotrib dot com) on Wed Jul 15th, 2009 at 04:22:47 AM EST
[ Parent ]
it was to bring the accounting models of the firm into macroeconomics

If only it did!

On the national balance sheet, there is no National Equity, only a National Debt.

The balance sheet shows the debt: but it doesn't show the productive assets it paid for - because the only "productive" assets are - by definition - in the private sector....

The whole concept of National Debt is insane. While individual countries may - through fortune or force - be able to repay their own National Debt, across the entire system, how can National Debts ever be repaid?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Jul 15th, 2009 at 05:26:32 AM EST
[ Parent ]
Can all household and firm debts be paid off at once, either?

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Wed Jul 15th, 2009 at 05:31:01 AM EST
[ Parent ]
Of course not.

Paying off debt destroys money. But in order to repay it, new credit=debt=money has to be created.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Jul 15th, 2009 at 05:34:54 AM EST
[ Parent ]
Not at one time ... they can of course be paid off over time, to the extent that net private sector assets consist of public debt.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Thu Jul 16th, 2009 at 03:38:48 PM EST
[ Parent ]

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