Andrew Lainton — The Definition of Capitalism – Need for an Accurate Account

Andrew Lainton responds to Ben Chu responding to Paul Mason on "capitalism," holding that the way to resolve the issue is through double-entry accounting. Short and to the point on history of economics and the meaning of "capital."

The framework for doing economics and finance is double-entry accounting. The deficiencies and failures of conventional economics generally result from failure to realize the centrality of DEB and therefore SFC modeling.

Decisions, Decisions, Decisions
The Definition of Capitalism – Need for an Accurate Account
Andrew Lainton

David Ellerman — Double-entry Bookkeeping: The Mathematical Treatment

Double-entry bookkeeping (DEB) implicitly uses a specific mathematical construction, the group of differences using pairs of unsigned numbers (“T-accounts”). That construction was only formulated abstractly in mathematics in the 19th century—even though DEB had been used in the business world for over five centuries. Yet the connection between DEB and the group of differences (here called the “Pacioli group”) is still largely unknown both in mathematics and accounting. The precise mathematical treatment of DEB allows clarity on certain conceptual questions and it immediately yields the generalization of the double-entry method to multi-dimensional vectors typically representing the different types of property involved in an enterprise or household. 

This publication represents success in a long struggle, stretching over three decades, to get the mathematical treatment of double-entry bookkeeping published in an accounting journal. Although the mathematical treatment and generalization of DEB was previously published in book form and in math and operations research journals, it seems to have been repeated blocked by the repeated refereeing of the author of the failed previous attempt at multi-dimensional DEB (see p. 493 in the paper). 

Click here to download the reprint.

David Ellerman
Double-entry Bookkeeping: The Mathematical Treatment

Nick Edmonds — If Banks Don't Lend Reserves, What Do They Lend?

Confusing money (accounting entries) with money things, like cash. Again, generalizing from a special case and a limited one at that.

The fact is that a loan does not have to a loan of anything. Some loans can easily be treated as being a loan of something, such as a loan of a car. But dollar loans are not in general a loan of something, even if we feel a desperate urge to think of them as such. They are in fact just bilateral agreements to procure accounting entries.

For many purposes, it is fine to think of dollar loans as being loans of money. But we should be careful not to fool ourselves into thinking that is what they actually are, because we need to understand how things work when that interpretation no longer fits.

Reflections on Monetary Economics
If Banks Don't Lend Reserves, What Do They Lend?
Nick Edmonds

When a bank makes a loan and credits a deposit account, it undertakes an obligation to settle in accordance with customer's wishes, by either furnishing cash at the window or clearing a draft on the customer's account, which the bank does either through intra- or inter-bank netting accounts or in the official payments system, as appropriate. Most of these transactions simply involve marking up one account and marking down another account in the accounts of both parties to the transaction.

Money is not only created "out of thin air," but it is also exchanged in thin air.

Noah Smith — Thinking out loud: Do government deficits equal private surpluses?

(Shaking head) Noah Smith is a professor of finance and he doesn't know the answer to this — although granted it is not very clearly stated as "government deficits equal private surpluses," as Jan Hatzius does, whom Noah quotes.

It is clearer to say that the government fiscal deficit equals the consolidated nongovernment fiscal surplus in aggregate, since the government balance plus the consolidated domestic private sector balance plus the external balance must sum to zero as an accounting identity. Transposing, the government balance will be the inverse of the consolidated nongovernment balance in aggregate.

If the external balance is zero, then the government balance and the domestic private sector balance must sum to zero, therefore, must be in inverse relationship. In this case, if government net spends by running a deficit, then the domestic private sector saves the same amount in aggregate wrt net financial assets. And vice versa.

If the both the external sector and the government sector are in balance, then the domestic private sector must also as an identity. There can be net savers but not net savers in aggregate, since accounts within the sector must balance, i.e., net to zero.

Hint to Noah: Read Godley and Lavoie, Monetary Economics for an explication of stock-flow consistency in sectoral balance accounting. Jan Haztius learned this from Wynne Godley, and it is the basis of MMT SFC macro modeling. This is really simple when you do the accounting properly.

While accounting identities don't say anything about the causality, they do reveal what is necessary and what is impossible in terms of stock flow consistency. Mixing up stocks and flows is a novice error.

Noahpinion
Thinking out loud: Do government deficits equal private surpluses?

Noah Smith | Assistant Professor of Finance, Stony Brook University

Winterspeak — The Myth of High Powered Money

Does the government fiscal deficit flow to savings or equity? Winterspeak says equity and denotes this as NFA (e).

There is already a spirited debate raging in the comments.

Read it at Winterspeak.com
The Myth of High Powered Money
by Winterspeak

Steve Roth — How Accounting “Constrains” Economics

Read it at Asymptosis
How Accounting “Constrains” Economics

by Steve Roth

Getting into the nitty gritty of the foundations of MMT.

Update on "An MMT Thought Experiment: The Arithmetic and Political Mechanics of Net Financial Assets"

Commenter geerussell alerts us that the conversation on Steve Roth's post has some interesting comments, mostly by JKH. These are a must-read, IMHO, or better, must-study.

Read it at Asymptosis
An MMT Thought Experiment: The Arithmetic and Political Mechanics of Net Financial Assets

by Steve Roth

Steve Keen — MMT Convergence?

Neil Wilson recently posted A Double Entry View on the Keen Circuit Model

at 3spoken.

This elicited some excellent comments, including a couple of extensive contributions by JKH.

Keven Fathi emailed me that Steve Roth just posted at angry Bear that he regards Neil's post as The Most Important Econoblog Post This Year.

Congratulations, Neil, on moving this debate significantly forward.