Ramanan — Output At Home And Abroad

Accounting identities are tautologies that say nothing about the world other than that the relevant accounts balance. As identities they are not functions, in which inputs determine outputs in terms of a rule. 

However, accounting identities can be used in theoretical interpretation to arrive at causal explanation, but this requires examining relevant behaviors. For example, one entity's expenditure is a flow that increases another entity's income, which will have a cumulative influence on a stock.

Stock-flow analysis observes stock-flow consistency. Accounting identities are boundary conditions of stock-flow consistency.

It’s fairly common for economists to confuse accounting identities and behavioural relationships.

Question: What is the best way to find it?

Answer: The behaviour of output (at home and abroad) is not discussed in their analysis.

It’s not always the case that it’s true but a good way to find – check whether the economist is talking of the effect of changes in stocks or flows on output.

It’s also of course important to discern what someone is literally saying and what that person is trying to say. Economists aren’t the best communicators.…

The Case for Concerted Action
Output At Home And Abroad
V. Ramanan

John Hussman — The Coming $10 Trillion Loss in Paper Wealth

John Hussman gets it, as the following excerpts summarize.

Many of the misconceptions that investors hold about the economy and the financial markets can be clarified by understanding the relationship between the “flow” and “stock” of various quantities in the economy....

If one carefully accounts for what is spent, what is saved, and what form those savings take (securities that transfer the savings to others, or tangible real investment of output that is not consumed), one obtains a set of “stock-flow consistent” accounting identities that must be true at each point in time: 1) total real saving in the economy must equal total real investment in the economy; 2) for every investor who calls some security an “asset” there is an issuer that calls that same security a “liability”; 3) the netacquisition of all securities in the economy is always precisely zero, even though the grossissuance of securities can be many times the amount of underlying saving; and perhaps most importantly, 4) when one nets out all the assets and liabilities in the economy, the onlything that is left – the true basis of a society’s net worth – is the stock of real investment that it has accumulated as a result of prior saving, and its unused endowment of resources. Everything else cancels out because every security represents an asset of the holder and a liability of the issuer.
Conceptualizing “saved or unconsumed resources” as broadly as possible, the wealth of a nation consists of its stock of real private investment (e.g. housing, capital goods, factories), real public investment (e.g. infrastructure), intangible intellectual capital (e.g. education, inventions, organizational knowledge and systems), and its endowment of basic resources such as land, energy, and water. In an open economy, one would include the net claims on foreigners (negative, in the U.S. case). Understand that securities are not net economic wealth. They are a claim of one party in the economy – by virtue of past saving – on the future output produced by others.

Because the surplus of one economic sector must be identically equal to the sum of deficits across all other sectors, the net funds available to acquire financial assets across the economy as a whole (including net flows from abroad), will always be precisely zero. However, each sector taken separately will acquire net financial assets, or issue net financial liabilities, equal to that sector’s saving or deficit (the difference between the sector’s income and its spending). The importance of stock-flow consistent economic accounting was well-recognized by many economists sometimes dubbed the “New Cambridge” school (Godley, Cripps, Kaldor, Kalecki, and Tobin among others) but stock-flow consistency is rarely taught in economics courses, largely because the models often include additional arbitrary decision-making rules (like Keynes’ simplistic consumption function) that aren’t based on rational choice or optimization. Instead, mainstream academic models often exclude the financial sector completely, and include money as if it were simply dropped from the sky.

The failure to recognize that stock-flow consistency must hold in the economy and the financial markets is the basis for an enormous amount of misunderstanding in both fields. That omission of clear thinking about the link between economics and finance contributes to misguided policies that ignore the impact of financial distortions on the real economy, and invite speculation, malinvestment, and ultimately financial crisis.....

EconMatters
The Coming $10 Trillion Loss in Paper Wealth

John Hussman of Hussman Funds