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Economics and Accounting are linked and must be consistent



June 27, 2011 – Comments (2)

This may seem like "no sh*t" statement, but there is so much economic analysis that breaks basic macroeconomic accounting.

As an engineering analogy, a stucutral engineer might have plan on the best way to design a structure (and hopefully this engineer would have some idea what they are talking about, understanding load trasfer, deflections, bending stress, buckling stress, etc.). But let's say after performing the analysis, the forces and moments don't actually sum to zero. It is not up for debate that the forces and moments don't sum to zero in actuality. You don't get to hand wave that away, their model is in error. So any advanced structural analysis theory at a basic analytical level must have forces/moments be in balance.

The same is true in economics. An economist may have some grandiose theory on how the economy works (interest rates, private spending, government deficits, unemployment, money supply growth, reserve balances, etc.). But if after performing this analysis the basic macroeconomic accounting doesn't balance, then the theory is garbage. Any advanced macroeconomic theory at a basic accounting level must have economic stocks/flows be in balance.

From a simplistic point of view a junior structural analyst must sum forces, and make sure they balance, when using a beam bending equation [Simpler]. And a PhD stuctural engineer is subject to the same requirment when looking at buckling of the main sturctual member of a highly integrated composite structure [More Complex].

By the same token, an accountant must sum income and expenses when doing a balance sheet assessment of a company [Simpler]. And a PhD economist is subject to the same requirement when looking at how money moves through the macroeconomy [More Complex].

... If it seems like I have an axe to grind, it's because I do. I will be discussing this in more depth shortly.

2 Comments – Post Your Own

#1) On June 28, 2011 at 2:08 AM, awallejr (32.64) wrote:

 I will be discussing this in more depth shortly.

I am looking forward to it ;)

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#2) On June 28, 2011 at 10:05 AM, lemoneater (57.21) wrote:

Economics is the poetry behind the math. Human behavior + hard numbers. Politicians are often woefully ignorant of economics: possibly their self-absorption prohibits their powers of observation of human patterns--on any scale much less macro--and their self-deception dramatically hinders their ability to measure reality with anything so definite as mathematics.

In my own defense, I'm extremely weak in math, but at least I'm aware of my numerical challenges and benefit from the expertise and skill of others. I like the human factors aspect of investing. The emotional side intrigues me. I consider stock picking an exercise in empathy and figures.

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