Re: The Fundamental Flaw of National Accounting

["Bruce R. McFarling" <ecbm@xxxxxxxxxxxxxxxxxxx>]

On Sun, 14 Sep 1997 16:53:29 +0200, "Per Gunnar Berglund"
<pgb@xxxxxxxxxxxxxxxxxx> wrote:

>Well then, let me sum up what I have been saying:
>1) I have been defending the transactions principle underlying the SNA, on
>grounds that abandoning it would lead us into a Beckerian position, where
>any and all human activities are considered "economic", thus making the
>adjective void of content and useless.

	The transactions principle is fine for delimiting the System of
National Accounts.  The System of National Accounts is, after all,
for trying to keep track of the transactions that take place in
a nation's economy.  However, I don't see that the argument above for
taking it as the delimitation of economic is well founded.  First,
the institutionalist definition I mentioned provides an empirical
identifiable definition, and in addition includes with the study of
economics those areas that overlap with Sociology and Political
Science.  Obviously, if the boundaries between the nomothetic social
science disciplines do not overlap, there is a loss in our ability to
determine where current approaches in the different social sciences
are in accord, and where they are in conflict, and a loss in our
ability to approach the most critical economic problems, which are
interdisciplinary in character.  Examples include industrialisation
of peripheral and semi-peripheral countries, development of sustainable
economic systems, and the economics of war and peace.
	Now, the argument that the transactions principle is necessary
in order to avoid a Beckerian position does not address the question
whether it is an adequate delimitation principle.  I suspected that
you were not addressing that question -- but then you have tagged me
as a suspicious soul.  Limiting economic analysis to the delimitation
of national income accounts introduces serious problems of analysis
and verification of the information content of the national income
account.  And it has the further problems that I have gone about:
accounting fictions regarding the simultaneity of employment hire,
work, and employment payment are not objectionable for the SNA --
because the SNA is not the be all and end all of macroeconomic
reasoning.  A too-narrow and counter-empiricial delimitation of
economic activity is not a solution to a too-broad and counter-
empirical delimitation of economic activity.
	And finally the Beckerian position seems to be well-founded
in neoclassical economic reasoning.  You seem to court contradiction
in placing an arbitrary (even if not _ad hoc_) boundary line around
neoclassical analysis, while still attempting to rely on neoclassical
analysis.


>2) I have also been defending the basic notion of "volume" for the purposes
>of constant-price accounting. Unfortunately, this is not spelled out in the
>SNA, but anyone who has been working with these measures would well
>understand that the "ideal" volume index measure is a continuously
>re-weighted chain, where the weights are taken from the relative expenditure
>shares of each component making up the index. Moreover, the time continuity
>ensures convergence between Laspeyres and Paasche bounds, thus creating an
>unambiguous measure.

	What you take as understood is not what is at issue.  What is
at issue is the scientific validity of your ideal index.  And time
continuity is exactly one of the problems.  Transactions are episodic.
Your delimitation, therefore, presupposes discrete intervals between,
e.g., acquisition of various items of productive equipment.  You can
impose continuity by treating the proble as one of a flow of services
from the factor, and go from empirical transaction events to counter-
empirical transaction flows.  I take it that you do.  As I have been
saying, you are trading off accuracy for precision: you gain an
unambiguous measure by treating economic events *as if* they were
something that they are not.  Objection to this type of *as if*
reasoning as a foundation of macroeconomic reasoning is one of the
primary points that unite Post Keynesian economists.  Indeed, one
way to put it is that Post Keynesians avoid the Beckerian "model
of everything, everywhere" problem is by objecting to "as if"
modelling, because Becker cannot proceed without inventing ficitious
markets in which to model behavior.  A very serious case of "if I
have a hammer, I'm going to treat that screw as a nail".

>3) I have argued that the ordinary volume concept is compatible with
>intra-personal utility maximisation, indeed the "plutocratic" weights are
>just an aspect of Lagrange optimisation procedures, a phenomenon which has
>not been widely recognised. On the inter-personal issue, I have defended the
>"plutocratic" weighting as the only reasonable approach since it will make
>the volume measures independent of the distribution of spending power.

	The fact that the "plutocratic" weighting will make the volume
measures independent of the distribution of spending power does not
imply that the plutocratic weighting is reasonable.  Rather, *if* you
can argue that the weighting is reasonable, then you would have *shown*
that, on this question, the volume measure can be identified independent
of the distribution of spending power.  Indeed, someone can take the
logical relationship here, and on the basis of a rejection of your
weighting argue that a volume measure *cannot* be identified
independent of the distribution of spending power.  A logical
relationship that can be used by both sides of an argument is,
quite obviously I should think, *not* sufficient to settle the
argument.
	Why do you take as a premise that a valid "volume measure
as you define it" (hereafter VMAYDI) *is* independent of the
distribution of spending power?  Because that seems to be the major
premise of your argument:

	a valid volume index is independent of
the distribution of spending power;
	this is the only volume index that is independent of
the distribution of spending power;
	ergo, this is the only valid volume measure.

Now, someone with a different major premise comes along.  To wit:

	a valid volume index is dependent on
the distribution of spending power;
	this is the only volume index that is independent of
the distribution of spending power;
	ergo, this is a definitively invalid volume measure.

You can restate your minor premise until you are blue in the face,
but it does not complete the argument.

>4) I have called for an extension of the basic principle of reciprocity in
>transactions (i.e. setting the value of the services transferred in one
>direction equal to the value of the money transferred in the other
>direction) to the sphere of constant-price accounting, thus mending the
>cleavage in today's SNA between the activity and the income side of
>constant-price accounting. A critique of the present SNA thus.

	I have argued that activities are not transactions, and so
attempts to measure activities cannot automatically inherit the
characteristics of measures that are appropriate to transactions.
Again, "mending the cleavage" between the two sides is an incomplete
argument.  How are you going to establish that the analogy between
the two is an isomorphism, wrt the features in the actual income
accounts that permits us to identify the different income aggregates
as equal.

>5) I have also been criticising the current procedure of bundling together
>"goods and services" in the SNA. I have traced this procedure back to the
>extensions to the classical Malthusian system suggested by Marshall. The
>critique I have been submitting goes along the lines of Irving Fisher, who
>argued that only services should count as "income", "output" or whatever.
>All goods should be treated as capital assets and thus left out of the
>output value.

	The problem here is again the habit of rebuking the real world
for being inconvenient for your purposes, and then proceeding to treat
it *as if* it were more convenient for your purposes.  The empirical
obervable is that our economic institutions are organised so that
command over goods transfers in a chain that concludes with the
economic entity that we identify as the final consumer of the good.
Abandoning that empirical observation, you abandon the potential
empirical content of a transactions basis for NA.  I am trying to
figure out a group of macroeconomists who are more opposed to this
style of reasoning than the Post Keynesians, and I can't.  That's one
of the reasons that institutionalists find Post Keynesian economics
attractive.

>6) I have pointed out that there is a "black box" in the neoclassical
>production function notion to the economic process. This "black box" only
>mystifies the nature of economic activity (or production), which is simply
>exchange of money (or near-money substitutes) for man's work. There is no
>need for an "economic machine", transmogrifying mysterious "inputs" to
>"outputs". Needless to say, this is a critique of the present SNA.

	I agree with the critique, though not with the proffered substitute.
This is not surprising: it is, after all, harder to build than to destroy
(Second Law of Thermodynamics, and all that -- see Georgescu-Rogen).

>7) I have found that the scrapping of the neoclassical "black box", in
>conjunction with the application of volume index accounting, will make
>necessary an axiomatic specification of the "input--output" relation which
>accords to the well-known Leontief approach.

	Founded on the validity of the foundations above.  A chain of
reasoning is, of course, only as strong as its weakest link.

>8) Moreover, I have been criticising the present capital accounting
>procedures, in particular the Perpetual Inventory Method (PIM). This
>criticism is widely recognised and shared, but the use of PIM capital
>accounting has been retained simply because of the lack of better
>substitutes. Therefore, I have ventured to supply some basics for a
>substitute, which I am personally firmly convinced will be better than the
>PIM method.

	I have not been taking part in this part of the discussion.  First
on weakest link in the chain grounds; second since the critique of the
PIM is widely recognised; and third because the notion of capital introduced
seems to be flirting with the edges of a Georgescu-Rogen like notion of flow,
stocks, and funds.  If the idea of capital were not intriguing, there
wouldn't be any reason in going into the substance of the rest of the
complex.


Virtually,

Bruce McFarling, Newcastle, NSW
ecbm@xxxxxxxxxxxxxxxxxxx